A Push-Pull Fight Over Fintech Charters

By Dawn Causey, Thomas Pinder and Andrew Doersam

Remember Dr. Dolittle? He was a vet who could talk to animals. One of the rarest was the “pushmi-pullyu,” a llama with two heads at opposite ends of its body. The pushmi-pullyu experienced great frustration when it tried to move because each head wanted to trot the creature off in a different direction. Most of the time they got along fine, but occasionally their wills clashed, and the result was stalemate.

In some ways, the mythical “pushmi-pullyu” reminds us of the “dual banking” battle between the OCC and the New York State Department of Financial Services over the agency’s special-purpose national bank charter, sometimes called the “fintech charter.” In Vullo v. OCC, Judge Victor Marrero ruled that OCC lacks authority under the National Bank Act’s “business of banking” provision to offer a fintech charter.

In 2016, OCC investigated the possibility of a fintech charter for non-depository fintech firms, but NYDFS filed a lawsuit to challenge the proposal. However, OCC was successful in its motion to dismiss when the court determined that the claims were not ripe for review. The clash continued last July, when OCC announced that it would begin accepting applications for fintech charters, and NYDFS again sued.

Like the struggle of the pushmi-pullyu, OCC and NYDFS each want to trot fintech off in different directions. On one head, NYDFS claimed that OCC’s decision to grant fintech charters upsets the balance of the dual banking system because it intrudes into New York’s home turf. NYDFS complained that New York citizens will suffer by losing “critical financial protections” that New York banking law and regulatory oversight currently provides. NYDFS also claimed it will suffer direct economic harm, because its operating expenses are funded by assessments levied on New York State licensed institutions. On the other head, OCC proposed a fintech charter to address the rapid technological changes taking place in the financial services industry so that federal banking system can remain vibrant and relevant.

OCC again filed a motion to dismiss, asserting that NYDFS lacked standing, the dispute was unripe and time-barred, and NYDFS failed to state a claim for relief under the Administrative Procedure Act. But this time, Judge Marrero denied OCC’s motion. The ruling permits NYDFS to proceed with its claims that the fintech charter exceeds the OCC’s authority under the NBA.

After praising to the dual banking system, the court ruled that the term “business of banking,” as used in the NBA, “unambiguously requires receiving deposits as an aspect of the business.” The OCC argued that the term “business of banking” was ambiguous and a reasonable interpretation would provide the OCC with chartering authority for nonbanks that do not accept deposits. However, according to the court, the fintech charter would enable a “dramatic disruption of federal-state relationships.” As a result, the court held that only depository institutions are eligible to receive national bank charters from the OCC.

Additionally, the court explained that because New York already provides a comprehensive regulatory system for nearly 600 non-depository fintech companies, those regulations “are all at risk of becoming null and void” by the fintech charter. The court noted that fintech firms may leave New York altogether, which will force NYDFS to incur costs now to avoid such harm. As a result, the court found that NYDFS established standing to pursue its statutory and constitutional challenges against the OCC.

But not all was lost for OCC. The court dismissed NYDFS’ Tenth Amendment claim. The court found that NYDFS’ claim did not trigger the Tenth Amendment because it related only to whether Congress had clearly chosen to preempt state chartering authority, rather than whether Congress had exceeded its enumerated powers.

The legal battle simmering in New York is the latest iteration of the pushmi-pullyu battle of wills in the dual banking system.

Dawn Causey is general counsel at ABA, where Thomas Pinder is deputy general counsel and Andrew Doersam is a paralegal.