Comptroller of the Currency Thomas Curry was perhaps speaking tongue in cheek, or with deliberate understatement, when he told an audience at Northwestern University on April 28 that “I am sure some of you who have been following our work on special purpose national bank charters saw that it has sparked some opposition.”
Two days earlier, the Conference of State Bank Supervisors had sued the Comptroller’s Office over its fintech charter proposal.
In its complaint filed in the U.S. District Court for the District of Columbia the organization, which represents state banking regulators, seeks to stop OCC from granting any fintech charters.
CSBS suit attacks national fintech charter
The lawsuit continues a decades-long pattern of legal tension between the state bank regulatory system and the national bank regulatory system. The tension involves many facets including preemption of state laws, “wild card” statutes that permit federal powers to state banks automatically, federal adoption of state-level legal innovations, and much more.
During a session concerning the fintech charter concept at the LendIt USA Conference in New York this March, former Massachusetts’s Commissioner of Banks David Cotney had predicted that the fintech issue would wind up in court. [See “Is fintech charter courageous or outrageous?”]
“I don’t think it was too tough a call,” said Cotney. “The writing was pretty much on the wall.” He said he has wondered why the OCC has followed a less-formal route to advancing the charter, rather than using the stages prescribed by the federal Administrative Procedures Act.
He called the fintech charter “a big deal. It represents a big shift in federal chartering and licensing of financial services.”
The proposal for the charter, which has advanced as far as a draft chartering manual section released earlier this year, is part of a multi-faceted OCC effort to adapt its policies and procedures to be more innovation-friendly. The suit was all but promised by CSBS in public statements and comments filed with OCC.
All through the process of proposing and commenting, OCC has asserted its ability to create special purpose charters under national banking law; CSBS and other groups have stated with equal vigor that OCC has no such power. OCC by policy does not comment on pending lawsuits.
“OCC’s action is an unprecedented, unlawful expansion of the chartering authority given to it by Congress for national banks,” stated John Ryan, CSBS president and CEO, and the son of a California community banker. “If Congress had intended it to be used for another purpose, it would have explicitly authorized the OCC to do so.”
Ryan further stated that permitting OCC to go ahead with such charters would “set a dangerous precedent that any federal agency can act beyond the legal limits of its authority. We are confident that we will prevail on the merits.”
CSBS charges that OCC’s proposal “ignores Congress; seeks to preempt state consumer protection laws; harms markets and innovation; and puts taxpayers at risk of inevitable fintech failures.”
One argument for a national fintech charter is the inconvenience and delay that a national provider would face if it wanted to be licensed in every state. CSBS has been working to streamline licensing through model regulations.
“State regulators already supervise a vibrant financial services marketplace that includes non-banks and banks,” said Ryan. “Tens of thousands of mortgage, money transmission, debt collection, and consumer finance companies—not to mention over 75% of this nation’s banks—already operate under the state system.”
Chiming in for attack on fintech charters
Among supporters of the CSBS stance were the Independent Community Bankers of America and the New York State Department of Financial Services.
“The [OCC] proposal threatens to create an entirely new federal regulatory regime,” stated Maria Vullo, N.Y.’s financial services superintendent, “threatening state sovereignty and strong state consumer protection laws, including New York’s usury laws and prohibitions on payday lending.”
Vullo said that states were “cradles of innovation” and that a national fintech charter would actually stifle innovation.
The proposed charter “would be an avenue for large, dominant firms to control the development of technology solutions in the financial services industry, thereby harming existing community banks and small businesses seeking to serve local communities,” said Vullo. She also said that the concept would create “too big to fail institutions.”
ICBA, in supporting CSBS, called on the Comptroller’s Office to seek specific congressional authorization for fintech charters; propose rules for public comment; consult with other federal regulators; define more precisely what types of companies would be eligible; and subject any such new players to a level regulatory field.
OCC has said that discussions with other regulators have taken place, though it wants to see more of the same on a more formalized level. And Comptroller Curry has resisted any suggestion of creating an American “sandbox” that would exempt fintech innovators from responsibility for any impact from their efforts.
Perspective on the latest news
Since the first rumors of its possible introduction, the idea of a national fintech charter has stirred both strong support and strong opposition among bankers, fintech executives, and others who see financial services as being in a transition phase.
Thus far the fintech fraternity itself has hung back, publicly, from indicating too much interest or enthusiasm since the draft chartering manual was published.
One factor has been the rapid evolution of fintech from outright competitor to banking to a growing sense of fintech as a potential partner to banking. Another factor has been the sense that OCC’s documentation, thus far, leaves many questions unanswered to the satisfaction of potential charter seekers.
Consultant Jo Ann Barefoot has supported the fintech charter as an opportunity for federal regulators to begin developing greater familiarity with fintech issues.
“The suit will have an unfortunate chilling effect on companies being willing to step up and apply,” said Barefoot. She suggested that the suit—which she did not address on its legal merits—might make OCC hold off on finalizing its draft and accepting any applications, until the matter is resolved. Barefoot believes that the potential negative risks of a national fintech charter have been overstated.
“Even if the OCC charter went forward,” Barefoot said, “the states would still regulate most of the innovative activity here.”
Barefoot also pointed out that she has attended and often spoken at eight different international gatherings on financial services issues in the last two months. A consistent theme has emerged.
She said that she has found that the American financial regulatory system’s fragmentation appears to be increasingly putting the country at a disadvantage as other nations with more centralized approaches move ahead on fintech matters.
Some states don’t appear to be up to proactive activity in fintech, she continued. While Barefoot acknowledged that CSBS has been trying to strengthen the state system in this regard, “that’s still going to be a drag on U.S. innovation.”
One positive about the federal charter, she said, is that it gets the federal regulatory apparatus some experience with fintech companies.
David Cotney has become a director of New Jersey’s Cross River Bank, an institution that works closely with a number of fintech firms. Cross River played a major role in the regulatory track at the LendIt USA meeting.
Cotney suggested that the CSBS suit, likely to be appealed by whichever side loses the first round, would go on for several years. He expects the matter to wind up vying for the attention of the Supreme Court.
He did not feel that the lawsuit’s impact on chartering in the short term would have much effect on fintech’s momentum. He noted that the charter was not the agency’s only dog in the innovation hunt.
OCC moves ahead with meetings
Indeed, Curry, in his speech at Northwestern, noted that the OCC’s fledgling Office of Innovation was beginning to hold “office hours” by appointment in various cities. The first round was set for mid-May in San Francisco. The purpose of this “road show” approach is to “make candid regulatory advice more accessible,” said Curry.
“One of the primary purposes of the office is to support banks, particularly community banks, but we are also seeing a great deal of interest from fintech companies that want to learn more about doing business and collaborating with national banks and federal savings associations,” Curry said.