OCC, states declare ceasefire in fintech charter case. Will it hold?

WASHINGTON — State regulators and the Office of the Comptroller of the Currency have agreed to a temporary truce in their court battle over a controversial charter application, but analysts caution that the underlying conflict over fintechs’ pursuit of banking powers is far from resolved.

Judge Dabney L. Friedrich, of the U.S. District Court for the District of Columbia, approved a motion this week by the Conference of State Bank Supervisors outlining the group’s agreement with the OCC to pause for 90 days CSBS’s litigation over Figure Technologies’ specialized charter application.

The stay comes amid signs that the OCC under acting Comptroller Michael Hsu could pump the brakes on plans developed in prior administrations to offer fintechs a special-purpose national bank charter. Those plans have drawn sharp objections from state regulators.

But analysts say the ceasefire could be just another momentary calm before the courts issue a more definitive judgment in the future on the OCC’s powers. Other cases brought by state regulators against the fintech charter reached a stalemate when judges said they could not rule because the OCC has not yet granted the charter to any firm.

“The clouds have not yet parted, as the cases have stalled on issues of standing, not on interpretation of the National Bank Act,” said Cliff Stanford, a partner at Alston & Bird.

Figure, a San Francisco-based fintech, applied to the OCC in November 2020. Because of the states’ looming lawsuits over the special-purpose fintech charter, the company’s application was structured differently to avoid legal challenges. But CSBS sued the following month, with the group’s CEO, John Ryan, saying Figure was “essentially the first applicant for the OCC’s fintech charter.”

In congressional testimony last month, acting Comptroller of the Currency Michael Hsu pointed to benefits of providing charters to fintech firms, but also expressed concerns about nonbanks being allowed into the banking system without meeting sufficient regulatory criteria.

Yet Hsu, a former official at the Federal Reserve, has called for an agency review of OCC charter applications submitted before his appointment. In congressional testimony last month, he pointed to benefits of providing charters to fintech firms, but also expressed concerns about nonbanks being allowed into the banking system without meeting sufficient regulatory criteria.

“Notwithstanding the strong oversight and enhanced provisions the OCC requires, some are concerned that providing charters to fintechs will convey the benefits of banking without its responsibilities,” Hsu said. “Others are concerned that refusing to charter fintechs will encourage growth of another shadow banking system outside the reach of regulators. I share both of these concerns.”

In CSBS’s motion seeking a stay of its litigation, the group said both parties had agreed to provide the court with a status report on the OCC’s fintech charter policy by Sept. 27.

“A 90-day stay would conserve the Parties’ and the Court’s resources by avoiding potentially unnecessary briefing and oral argument,” the state bank supervisor group said in its motion. “Following the conclusion of the 90-day stay, the Parties agree to confer and submit to the Court a Joint Case Status Report addressing the status of the OCC’s plans with respect to processing applications for uninsured national bank charters, including the Figure Bank, N.A. charter application, and the Parties’ proposed schedule for proceeding with or resolving the present case.”

In a statement, a spokesperson for the conference, Catherine Pickels, made clear that if the OCC does ultimately resume its efforts to promote the fintech charter, the group would quickly resume its suit.

“CSBS is prepared to pursue the case until it is ultimately decided on the merits if necessary,” Pickels said.

Representatives for Figure did not respond to requests for comment.

The CSBS’s original complaint argued that the OCC lacked the authority to issue a charter that would authorize certain fintech firms to do some but not all bank activities, such as payment processing, without deposit insurance.

A number of bank trade associations, including the Bank Policy Institute and the American Bankers Association, have also condemned Figure’s application. In a joint letter from December, the bank advocates said “the precedent-shattering approach of granting a national bank charter to an institution that accepts only uninsured deposits would violate the Federal law, the consistently expressed intent of Congress, and public policy considerations essential to the functioning of the nation’s financial system.”

Earlier this month, a federal appeals court threw out a separate challenge brought against the OCC by the New York State Department of Financial Services to block the special-purpose fintech charter. Judges on the 2nd Circuit Court of Appeals found that NYDFS lacked standing because no firm has technically applied for or received the fintech charter.

Yet the judges declined to weigh the case’s central question: whether the National Bank Act actually permits the OCC to offer its special purpose fintech charter.

“My view has long been that clarity is unlikely to come unless this issue reaches the Supreme Court,” Stanford of Alston & Bird said.

Although the OCC’s special-purpose fintech charter first emerged during the Obama administration under former Comptroller Thomas Curry, some observers say political sentiment around bank chartering has shifted significantly for Democrats.

“The current administration’s concern is focused much more on the consumer protection side,” said Scott Pearson, a partner at Manatt. “It’s a lot more concerned about federal charters being used as a vehicle to overcome state usury laws.”

That political reality may make it difficult for the OCC to continue its yearslong push to grant fintech firms partial access to the national bank charter, he added. “I just don’t see anyone applying for the fintech charter, or the fintech charter going anywhere, unless there’s new political leadership,” Pearson said.

Pearson also argued that the questions surrounding the OCC’s fintech chartering authority under National Bank Act are ultimately “something that only Congress can resolve.” While Democrats have shown little interest in such a law, a future Republican government may be more likely to act, he said.

“There’s an expectation that Congress may flip in 2022, and in 2024, if we end up with a Republican Congress and president, I could see new laws trying to adapt to the technological changes happening in the financial services industry to accommodate something like the fintech charter, or addressing crypto,” Pearson said.

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