The Office of the Comptroller of the Currency (OCC) is considering allowing financial technology (fintech) companies to be chartered as special-purpose national banks. Although the planning is still at a preliminary stage, the OCC’s December 2, 2016 white paper makes clear that chartered companies would face the same regulatory scrutiny, and enjoy the same preemption privileges, as full-service national banks.¹ The December white paper follows a March 2016 white paper² published by the OCC on the same subject and, in October 2016, the OCC announced the establishment of an Office of Innovation to serve as a “clearinghouse for requests and information related to innovation.”³ The OCC did not specify when it would start accepting applications for fintech charters except to say that it would be after the agency publishes a formal application evaluation policy, which is still forthcoming.

As technology companies have entered parts of a financial services landscape traditionally occupied by banks, US regulators are positioning themselves to play an integral role in regulating and supervising fintech companies. The OCC has, for example, framed its fintech charter proposal as a modernizing move made necessary by the changing financial services market. The OCC claims in the December white paper that “there is no legal limitation on the type of ‘special purpose’ for which a national bank charter may be granted, so long as the entity engages in fiduciary activities or in activities that include receiving deposits, paying checks, or lending money.”⁴

On the other hand, some state banking regulators as well as the Conference of State Bank Supervisors (CSBS) see the OCC’s initiative as a direct threat to their existing regulatory and supervisory authority with respect to certain non-depository fintech companies. These regulators have responded by challenging the OCC’s statutory authority to issue a fintech charter and claiming that the preemptive effect of the charter would nullify the ability of states to protect consumers. 

In the current evolving regulatory environment, the optimal structure for a payments or non-depository business has become a complex question for many fintech companies. There may be opportunities for non-depository fintech companies to take advantage of the new fintech charter and operate under national rules across state lines. However, if a non-depository fintech firm is successful in obtaining a fintech charter from the OCC, 

• The firm might as a result of the Dodd-Frank Act need to take into account state consumer protection laws if the firm’s business involves consumers, and
• The firm will need to take into account other state laws that the OCC acknowledges are not preempted by the National Banking Act (NBA) or the rules thereunder.

Litigation challenging the preemptive effect of the fintech charter would likely involve an interpretation of the limitations on the OCC’s statutory preemptive power imposed by the Dodd-Frank Act (so long as those limitations are not repealed or amended). This legal alert will focus briefly on two approaches that states might take to challenge the OCC’s statutory authority to charter non-depository banks under the NBA. Some states may assert that: 

1. The minimum banking activities necessary to serve as the basis for the OCC’s chartering authority must include deposit-taking, or
2. The OCC’s interpretation of its statutory preemption power is inconsistent with the authority retained by the states with respect to state consumer protection laws.

The OCC derives its chartering authority from the NBA, which describes that authority in the following broad terms: 

If, upon a careful examination of the facts . . . it appears that [the applicant] is lawfully entitled to commence the business of banking, the Comptroller shall give to such association a certificate . . . But the Comptroller may withhold [the charter] whenever he has reason to suppose that the shareholders have formed the same for any other than the legitimate objects contemplated by [the NBA].⁵

The statute does not define the “business of banking” or “legitimate objects,” nor does it otherwise expressly prohibit the OCC from granting a charter to any particular type of institution. The NBA was amended in 1978 and 1982 to give the OCC express authority to charter trust banks and bankers’ banks, respectively.⁶

The OCC articulated the current formulation of its chartering authority for the first time in 2003 with a rule that interpreted the NBA to allow issuance of a special-purpose charter to any bank engaged either in fiduciary activities or any activity comprising “the business of banking,” provided that a bank not engaged in fiduciary activities must engage in deposit-taking, lending or “paying checks.”⁷ The OCC did not receive significant public comment on the new rule, and prior to the OCC’s fintech charter proposal the OCC did not use it as a basis for any significant expansion of its chartering activities. It is unclear how the OCC will interpret the operative language of the rule, including the phrase of particular interest to payments businesses— “paying checks.” In the white paper, the OCC indicated that it views “facilitating payments electronically” as the “modern equivalent of paying checks” and that the scope of qualifying activities would be determined on a case-by-case basis.⁸

Two judicial decisions address the minimum “banking” activities required to confer chartering authority on the OCC with respect to non-depository institutions. Although the cases predate significant federal banking law developments, including the current OCC regulations on the issuance of special-purpose charters (discussed above), they provide useful textual analysis of the NBA provisions on which the OCC is basing its current proposal. In both cases, a district court held that the OCC had exceeded its authority in chartering a non-depository institution. 

In the 1977 case of National State Bank of Elizabeth, N.J. v. Smith, a New Jersey district court held that the OCC lacked chartering authority with respect to a bank that would engage solely in trust activities because such activities were not a “legitimate object” contemplated by the NBA.⁹ The decision was appealed, but the U.S. Court of Appeals for the Third Circuit declined to issue a ruling after Congress retroactively validated the charter in question by passing the Financial Institutions Regulatory and Interest Rate Control Act of 1978.¹⁰ The OCC referred to the Smith case in a 1996 interpretive ruling, noting that it was “uncertain how much weight should be accorded the decision” but that, in any case, the charter applications before it would meet the district court’s standards because they were to “have full charters and be full service institutions.”¹¹ The 1996 ruling suggests that the Smith decision, though mooted by intervening legislation, caused some uncertainty among OCC lawyers on whether the agency had authority to charter a limited-service bank organized to engage solely in activities contemplated by the NBA. 
    
In the 1985 case of Conover v. Independent Bankers’ Association, a Florida district court held that the NBA did not confer chartering authority on the OCC with respect to institutions that were not “banks” as defined in the Bank Holding Company Act (BHCA).¹² To be classified as a “bank” under the BHCA, an institution must both accept demand deposits and make commercial loans. Much of the criticism of the current fintech charter proposal has been based on the same argument—often couched as the observation that deposit-taking is the defining characteristic of a bank.¹³

The Conover court’s starting point was a determination that the NBA and the BHCA were interdependent and should be read consistently as part of a “joint regulatory scheme.”¹⁴ From there, the court reasoned that the BHCA’s definition of “bank” served to establish not only the entities subject to the BHCA, but also the minimum activities required for an institution to be engaged in “the business of banking” under the NBA. Thus, an entity that was not a “bank” under the BHCA was not engaged in the “business of banking” under the NBA and did not fall within the NBA’s grant of chartering authority to the OCC. As some commentators observed at the time¹⁵, it was not clear whether Congress intended the BHCA’s “bank” definition to so limit the OCC’s chartering authority. The NBA and the BHCA were enacted, and developed over time, to address different concerns. 

The Conover plaintiffs argued, and the court agreed, that the fact that Congress thought it necessary to expand the OCC’s chartering authority to trust banks and bankers’ banks by specific amendment to the NBA meant that the statute had not granted that authority previously. That argument is based on a fundamental principle of statutory construction. The granting phrase of the NBA, however, is permissive rather that prescriptive, providing that national banks “shall have power” to engage in certain activities.¹⁶

In a January 13, 2017 letter, the CSBS pressed the same argument—that the OCC’s chartering authority is limited to national banks engaged in deposit-taking and special-purpose banks expressly authorized by Congress, namely, trust banks, bankers’ banks and credit card banks. The New York Department of Financial Services (NYDFS) took a similar position in its January 17, 2017 letter: to propose disrupting the existing state regulatory scheme “without clear and concrete legislative authorization would risk significant disruption to the regulatory oversight of financial institutions and tread on state sovereignty.”¹⁷ 
    
The CSBS opposed the issuance of a fintech charter for other reasons as well. First, according to the CSBS and some of its members, the OCC’s chartering regime would likely favor large incumbent actors, a result contrary to the OCC’s stated goal of fostering responsible innovation. According to the NYDFS, it would not be in the public interest “to have a small number of technology-savvy firms dominate different types of financial services because they were able to get a national charter.” Second, according to the CSBS, the issuance of such a charter creates uncertainty and risks pertaining to access to the payments system and the federal safety net. Finally, the CSBS argued that the preemptive effect of the charter would nullify the ability of states to protect consumers, since the issuance of a fintech charter would result in broad preemption with respect to state consumer protection laws. 

If the relevant Dodd-Frank amendments to the NBA remain intact, the OCC’s power to preempt state consumer protection laws is limited. Under the Dodd-Frank Act, such laws may be preempted only if: (1) application of the law would have a “discriminatory effect” on national banks compared with state-chartered banks in the relevant state; (2) “in accordance with the legal standard for preemption in the decision of the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson,” the state law “prevents or significantly interferes with the exercise by the national bank of its powers”; or (3) the state law is preempted by a provision of federal law outside of the Dodd-Frank Act.¹⁸ According to the OCC’s 2011 rule implementing the Dodd-Frank Act (2011 Preemption Rule), the Act incorporates both the conflict preemption legal standard and the reasoning that supports it in Barnett Bank and preserves “precedents consistent with that analysis – which may include regulations adopted consistent with such a conflict preemption justification . . .”¹⁹

If a state challenges the preemptive effect of a fintech charter, the state may assert claims similar to those raised by some states that opposed the 2011 Preemption Rule. Some states claimed, for example, that the Dodd-Frank Act adopted a new preemption standard, narrower than the Barnett decision’s “conflict” preemption analysis. Some states also argued that since “obstruct, impair, or condition” language used in the OCC’s pre-Dodd-Frank preemption rule is inconsistent with Barnett and with the “prevent or significantly interfere” preemption standard, pre-Dodd-Frank rules and precedents based on those rules should not apply.
                        

¹See OCC, Exploring Special Purpose National Bank Charters (Dec. 2016) (December Paper).
  
² OCC, Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective. 
  
³See OCC, Exploring Special Purpose National Bank Charters (Dec. 2016) at 2.
  
⁴Id. at 3-4.

⁵ 12 U.S.C. § 27(a) (2012).

⁶See Financial Institutions Regulatory and Interest Rate Control Act of 1978, Pub. L. No. 95-630, § 1504, 92 Stat. 3641 (1978) (codified at 12 U.S.C. § 27(a) (national trust banks); Garn-St. Germain Depository Institutions Act of 1982, Pub. L. No. 97-320, § 404, 96 Stat. 1511 (1982) (codified at 12 U.S.C. § 27(b)(1)) (bankers’ banks).
  
⁷ 12 C.F.R. § 5.20(e)(1).
  
⁸See OCC, Exploring Special Purpose National Bank Charters (Dec. 2016) at 4.

⁹National State Bank of Elizabeth v. Smith, No. 76-1479 (D.N.J. September 16, 1977), rev’d on other grounds, 591 F.2d 223 (3d Cir. 1979). The provision under which the bank was to provide fiduciary services, 12 U.S.C. § 92a, was not part of the National Bank Act at the time of the decision.
  
¹⁰Id. 
  
¹¹ OCC, Corporate Decision 96-37 (July 18, 1996).
  
¹²Independent Bankers Ass’n of America v. Conover, [1984-1985 Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 86,178 at 90,537 (M.D. Fla. Feb. 15, 1985).
  
¹³See, e.g. Letter from Conference of State Bank Supervisors to Thomas J. Curry, Comptroller of the Currency (Jan. 13, 2017).
  
¹⁴See Independent Bankers Ass’n of America v. Conover at 90,536.
  
¹⁵See, e.g., Carol Conjura, Independent Bankers Association v. Conover: Nonbank Banks Are Not in the Business of Banking, 35 AM. U. L. REV. 429 (1986).

¹⁶ 12 U.S.C. 24 (seventh) (2012).
  
¹⁷ Letter, New York Department of Financial Services to Thomas J. Curry, Comptroller of the Currency (Jan. 17, 2017).
 
¹⁸ 12 U.S.C. § 5136C (2012).
  
¹⁹ Office of Thrift Supervision Integration; Dodd Frank Act Implementation, 76 Fed. Reg. 43,549, 43,556 (July 21, 2011) (codified at 12 C.F.R. Parts 4, 5, 7, 8, 28 and 34).