The Conference of State Bank Supervisors this week filed a complaint in the U.S. District Court for the District of Columbia against the Office of the Comptroller of the Currency. It seeks to prevent the agency from granting special national bank charters to non-banks, specifically FinTech firms, arguing that such charters exceed the authority granted by Congress.
The CSBS is the national organization of bank regulators from all 50 states and U.S. territories. “Common sense and the law tell us that a non-bank is not a bank,” says John Ryan, its president and CEO, adding that his organization “is calling on the courts to stop the unlawful, unwarranted expansion of powers by the OCC.”
In December 2016, the OCC announced it was considering applications from financial technology (FinTech) companies to become special-purpose national banks. Companies that seek a charter would be evaluated to ensure they have a reasonable chance of success, appropriate risk management, effective consumer protection, and strong capital and liquidity.
The CSBS previously filed suit against the regulator in 2017. After that suit was filed, the OCC announced that it had not yet determined whether it would move forward with the new charter. A ruling from the U.S. District Court for the District of Columbia subsequently said the lawsuit was not ready for consideration because the plan had yet to be implemented.
The group is now, once again, taking legal action based on both the OCC’s announcement this summer that it is now accepting applications for the new bank charter for FinTechs and the publication of a Licensing Manual Supplement that explains the policies and procedures governing the Nonbank Charter Program
Among the key arguments made in the complaint:
The National Bank Act and other federal banking laws authorize the OCC to charter only institutions that engage in the “business of banking,” which requires an institution to receive deposits.
The OCC has said the new charter is for FinTechs that do not take deposits. Many such companies operate as non-banks licensed at the state level.
Congress has not granted the OCC authority to award bank charters to non-banks.
“The OCC is playing the role of an industrial planner that picks winners and losers, makes consumers vulnerable to predatory actors who do not have to follow state consumer protections, and creates a new risk to taxpayers: failed FinTechs seeking bailouts,” Ryan added. “Lest we forget, in the early 2000s the OCC enabled national banks to ignore state predatory lending laws, a move that contributed to the U.S. financial crisis and the largest number of home foreclosures since the Great Depression. History cannot be allowed to repeat itself.”
State authorities (including CSBS’s members) “have been successfully overseeing and regulating non-bank institutions—including those viewed as FinTech in nature—for more than a century,” the complaint says, arguing to maintain the regulatory status quo. In addition to supervising state-chartered banks, most state banking departments regulate a variety of non-bank financial services providers, including money transmitters, mortgage lenders, consumer lenders, and debt collectors.
The lawsuit cites OCC research showing that the number of FinTech companies in the U.S. and United Kingdom has reached more than 4,000, with investment in the sector growing from $1.8 billion to $24 billion worldwide in the last five years.
“The explosive growth of the non-bank financial services industry has drawn the OCC’s attention, leading to the creation of its Nonbank Charter Program … thereby preempting and displacing the licensing, regulation, and supervision responsibilities of state authorities over these institutions,” the complaint adds.
“It is therefore without question that the OCC’s actions to remove these non-bank companies from state oversight will have significant economic consequences,” the complaint says. “For example, the largest 10 money transmitters alone transferred more than $685 billion in 2017.”
The CSBS alleges “the OCC established the Nonbank Charter Program without adequately considering and addressing the myriad policy implications and concerns raised by the public or conducting an adequate cost-benefit analysis.”
“Because the OCC has not offered a reasoned explanation for its decision, its actions should be deemed not only contrary to law, but also arbitrary, capricious, and an abuse of discretion,” it wrote.