Stepping down as the leader of the Office of the Comptroller of the Currency (OCC), Thomas J. Curry highlighted the efforts of the agency to encourage financial innovation, particularly the agency's decision to grant fintech charters, as another lawsuit was filed challenging those charters.

What happened

With his five-year term as comptroller of the OCC ending May 5, Curry spoke at the Fintech and the Future of Finance Conference at Northwestern University about financial innovation. Calling it "an exciting time to be in banking," Curry hailed the ways in which fintech has changed how consumers relate to financial service providers and take charge of their finances.

"For me, one of the most exciting parts of this wave of innovation is the potential for technology to expand access to the unbanked and underserved, in the same way that the Internet helped democratize information," Curry told attendees. "Data from the [Federal Deposit Insurance Corporation] and others show that minorities and other traditionally underserved populations may embrace fintech at even higher rates than the general population."

Innovation is also changing the back end of banking, payments processing and even regulation, he noted, describing his approach as one of "responsible innovation" that fits within a company's business plan, with risks understood and managed and consumers treated fairly.

The OCC has engaged in multiple efforts to support responsible innovation both within banks and among fintech companies, Curry explained, which has resulted in "a debate about the appropriate way to license a fintech company and supervise its activities on a national scale."

He walked through the agency's publications and requests for comment culminating in the March publication of draft licensing standards for fintech charters.

"At the heart of the issue is the fundamental nature of the business of banking—the business of banking is dynamic and I would urge caution to anyone who wants to define banking as a static state," Curry said. "Such a view risks choking off growth and innovation. The federal banking system has served as a common source of strength for communities across the country and for the broader national economy for more than 150 years because it was allowed to adapt to meet the evolving need of consumers, business and communities."

The OCC's efforts are a result of a shift in regulatory perspective, he added. "Early on in this process, we recognized that our regulatory instinct has been to say no and to be too risk averse," he acknowledged. "Over the last two years, we've worked very hard to take a more open approach, while still maintaining appropriate caution to prevent reckless and bad behavior."

Curry's advocacy did little to quell concerns, as a few days later the New York Department of Financial Services (DFS) filed a suit challenging the OCC's decision to grant special-purpose bank charters "to a boundless class of undefined financial technology companies."

The federal court complaint—which largely tracks the allegations in a similar suit filed by the Conference of State Bank Supervisors (CSBS) last month but is more robust in scope—did not hold back in its criticism of the OCC's plans.

"The Fintech Charter Decision is lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York State," the DFS argued. "It also puts New York financial consumers—and often the most vulnerable ones—at great risk of exploitation by federally chartered entities improperly insulated from New York law. The OCC's reckless folly should be stopped."

Numerous risks result from the OCC's decision, including "weakening regulatory controls on usury, payday loans, and other predatory lending practices" and "creating competitive advantages for large, well-capitalized 'fintech' firms, which can overwhelm smaller market players and thereby stunt rather than foster innovation in financial products and services," the DFS alleged.

The OCC's action is "legally indefensible" because it "grossly exceeds" the agency's statutory authority in violation of a fundamental premise of federal banking law, the complaint stated, and that the "business of banking" necessarily includes deposit taking. Noting that the agency has attempted to exceed the bounds of its statutory authority before, only to be struck down by the courts, the DFS said the OCC self-regulated its power to establish fintech charters in a 2003 regulation that created a new category of nationally chartered institutions described as "special purpose" banks.

"If validated by the courts, this agency sleight of hand, practiced on the barest of administrative records, plus a 'whitepaper' and a manual … would upend almost one and a half centuries of established federal banking law and displace a nation of 50 state financial regulators that annually supervise hundreds of billions of dollars in non-bank transactions," according to the complaint. "There is absolutely no evidence that Congress ever intended, much less expressly authorized, any such seismic shift in the allocation of established regulatory responsibility. For over 150 years, there has been dual authority, split between the federal and state governments, but the business of non-depository, non-bank institutions has been entirely regulated by states."

The DFS cited two examples of concrete harm to New York's financial market stability and consumer protection controls. State-licensed money transmitters using technologically innovative operating platforms could qualify for an OCC charter and "escape" New York's regulatory requirements, stripping "customers of non-depository money transmitters of critical financial protections otherwise guaranteed by New York law," the DFS told the court. "This result is especially troubling when you consider that a disproportionate number of consumers who use money transmitters are often the most economically vulnerable."

Second, the OCC's charter decision "effectively negates New York's strict interest-rate caps and anti-usury laws," the regulator alleged. "This perverse regulatory outcome … could realistically lead in New York to the proliferation of prohibited payday lending by out-of-state OCC-chartered entities seeking to import their usurious trade into the state to exploit financially vulnerable consumers."

The DFS asked for a declaration that the OCC exceeded its statutory authority under the National Bank Act and that the fintech charters are null and void.

To read Comptroller Curry's prepared remarks, click here.

To read the complaint in Vullo v. OCC, click here.

Why it matters

Although former comptroller Curry clearly hoped that financial innovation—including the fintech charters—would be his legacy at the OCC, the DFS's complaint, following on the heels of the CSBS lawsuit, as well as other pushback, leaves that legacy uncertain. Also unclear: how the new Acting Comptroller Keith Noreika will handle the issue. He has yet to take a position on the fintech charters, leaving the industry in a holding pattern to wait and see if the OCC will move forward. At the very least, states are flexing their regulatory muscles against the national agency in an effort to assert control over these critical issues. We expect to see more efforts by states to challenge the OCC's efforts to consolidate power over financial services businesses, including renewed emphasis on rolling out the previously announced statewide integrated licensing and supervisory system.