On October 21, Judge Victor Marrero of the Southern District of New York entered a final order in a clash between federal and state financial-services regulators, Lacewell v. OCC. The order sets the stage for what could be one of financial services’ most significant courtroom disputes in 2020. In Lacewell, the New York Department of Financial Services (DFS) challenges a federal Office of the Comptroller of the Currency’s regulation under which the OCC can charter financial technology (“fintech”) companies as special purpose national banks. The case will turn on statutory interpretation and Chevron deference, but it has broader implications for the dual banking system, fintech businesses’ growth, and the sustainability of federal banking laws in the 21st century.
OCC and Fintech Chartering
The National Bank Act (NBA) authorizes OCC to issue national bank charters. In 2003, OCC amended one of the regulations it promulgated for NBA implementation, 12 C.F.R. § 520, to allow chartering of “special purpose national banks.” That type of entity, according to § 520(e)(1), “conducts activities other than fiduciary activities,” and in order to be nationally chartered, it must receive deposits, pay checks, or lend money.
In March 2016, an OCC white paper initiated a discussion over whether fintech companies that pays checks or lends money, but didn’t accept deposits, could obtain a special purpose national bank charter. On July 31, 2018, OCC issued a press release announcing that it would be accepting applications from non-depository fintech companies.
New York Department of Financial Services’ (DFS) Suit
DFS filed suit in the Southern District of New York on September 14, 2018, alleging that OCC’s fintech charter decision exceeds its authority under the Administrative Procedure Act (APA) and violates the Tenth Amendment. The plaintiff agency argues that OCC’s decision to issue national charters poses an imminent threat of harm to DFS and New York citizens. OCC’s award of a national charter to a fintech company would preempt state regulation, an outcome DFS asserts will deprive state citizens of “critical financial protections.” The state regulators informed the court that OCC’s fintech charter decision would nullify regulations for over 600 non-bank financial services firms. DFS also claims that because its operating expenses are funded by fines lodged on entities like fintech companies, it will suffer financial harm if its authority is curtailed.
May 2, 2019 District Court Ruling
On May 2, the court granted OCC’s motion to dismiss DFS’s Tenth Amendment claim, but denied the federal agency’s motion to dismiss the APA claim. Vullo v. OCC. In his analysis of the APA claim, Judge Marrero first rejected OCC’s argument that DFS lacked Article III standing to sue, and that its claim was unripe and untimely. He next turned to whether the OCC’s interpretation of the National Banking Act merits deference under Chevron U.S.A. v. NRDC.
DFS argues that OCC’s actions to nationally charter fintech entities exceeds the agency’s authority under NBA § 27(a), which limits the agency’s award of national bank charters to entities that are “lawfully entitled to commence the business of banking.” In order to be in the “business of banking,” DFS argues, the NBA unambiguously requires the charter-seeking entity to accept deposits. OCC argues that the statute is ambiguous, in part because the NBA does not explicitly mandate deposit acceptance as a condition precedent for lawful national banking.
Judge Marrero pointedly rejected OCC’s assertion that § 27(a)’s failure to specifically reference deposit acceptance rendered the “business of banking” term ambiguous. “The relevant inquiry here,” he explained, “is not whether the NBA explicitly expresses such a definition but whether it unambiguously does so.” Judge Marrero concluded that Congress clearly meant that for an entity to be lawfully engaged in the “business of banking,” it must accept deposits. He reached that conclusion after examining predecessor statutes, dictionary definitions, § 27(a) in the broader context of the overall NBA, and OCC’s history of chartering non-depository entities.
Congress’s reliance on New York’s experiences in defining and regulating the “business of banking” factored heavily in the court’s statutory analysis and conclusion on the question of ambiguity. We’d be remiss if we didn’t note that this blog’s Featured Expert Contributor on digital-asset legal issues, Daniel Alter, made some of the same points that Judge Marrero did on New York’s influence in a Yale Journal on Regulation blog post published two years ago. In drafting NBA § 27(a), Alter wrote, Congress “incorporated the phrase ‘business of banking’ into the NBA from the  New York law as a term of art.” Alter goes on to explain that the meaning of that term, through its common usage and New York state judicial interpretation, embraced acceptance of deposits as an essential banking activity.
Two other points in the court’s statutory analysis are worth noting. First, OCC has never relied upon the NBA’s general “business of banking” clause to nationally charter a non-depository institution. In past years, OCC had twice chartered non-depository institutions, but only after Congress amended the NBA to formally provide that authority.
Second, Judge Marrero applied “the cannon of construction under which the plausibility of an agency’s interpretation of statutory text that would confer new power upon that agency bears inverse relation to the size of that putative power and the belatedness of the putative discovery.” Congress first adopted § 27(a) in 1863 and 140 years later, OCC announces through a regulatory amendment that the NBA’s general chartering language empowers it to charter non-depository institutions. That delay “casts doubt on OCC’s interpretation.” The size of that power—OCC’s preemption of state laws and that action’s impact on the dual-banking system—lends further weight to the court’s conclusion. As Judge Marrero put it,
“OCC’s reading [of § 27(a)] is not so much an ‘interpretation’ as ‘a fundamental revision’ of the NBA — essentially exercise of a legislative function by administrative fiat.”
Because the court concluded that “business of banking” unambiguously includes acceptance of deposits, OCC’s contrary interpretation merits no deference under Chevron. Judge Marrero left the question of remedy, however, for later consideration.
October 21 Final Order and Judgment
The court’s final order in Lacewell followed a period of intense negotiation between OCC and DFS. The parties agreed that the order should stipulate final judgment in DFS’s favor, but they disagreed on the remedy. OCC asked Judge Marrero to set aside the 2003 regulation only as it applies to fintech applicants that are seeking a national bank charter and that have a nexus to New York. DFS sought invalidation of the rule for all non-depository fintech institutions.
Judge Marrero entered judgment for DFS and vacated OCC’s regulation in its entirety. OCC made no compelling arguments, he explained, supporting the court’s deviation from the normal remedy when a plaintiff prevails on its APA abuse-of-authority claim. While OCC accepted the decision, the final judgment stipulates that the agency reserves its right to appeal.
On to the Second Circuit?
OCC must decide within the next week whether to appeal. The importance of the fintech chartering plan and the larger implications of the district court’s interpretation of § 27(a) arguably compel an appeal. The district court’s analysis was thorough and well reasoned. But Chevron deference is a fickle legal doctrine, one open to disparate interpretation and application.
It’s possible that a Second Circuit panel could find “business of banking” to be an ambiguous term in the context of DFS’s suit, which focuses on an activity—deposit acceptance—on which § 27(a) is silent. The appeals court, under Chevron, would then assess whether OCC’s interpretation is “reasonable.” The Supreme Court has indicated that “ambiguity constitute an implicit delegation from Congress” for agencies to fill in the gaps. With that in mind, courts generally lower the government’s burden of persuasion and leave the plaintiff trying to show that the government acted unreasonably. DFS, then, could have more of an uphill battle on appeal winning a Chevron “step 2” argument than it did at the district court on the question of ambiguity.
The broader policy stakes in this case are very high. State bank regulators like New York’s DFS likely consider OCC’s action as a targeted erosion of states’ role in America’s dual banking system. On the other hand, fintech companies would much prefer the efficiency and predictability a national charter system provides. OCC, for its part, has stated that its approach can help modernize the financial system and improve consumers’ access to financial services. The agency, of course, wouldn’t mind expanding its regulatory turf in the process.
For now, all eyes will be on the Office of the Comptroller of the Currency as it determines its next move.
Also published by Forbes.com on WLF’s contributor page.