Second Circuit Rejects New York State Department of Financial Services’ Lawsuit Against the Office of the Comptroller of the Currency

On June 3, 2021, in Lacewell v. OCC, the United States Court of Appeals for the Second Circuit (the “Second Circuit”) dismissed the New York State Department of Financial Services’ (“DFS”) lawsuit against the Office of the Comptroller of the Currency (“OCC”). DFS challenged the OCC’s decision to commence accepting applications for special-purpose national bank (“SPNB”) charters from financial technology companies (“fintechs”) that do not accept deposits. The Second Circuit ultimately decided the case on justiciability grounds, holding that DFS lacked standing and that its claims were constitutionally unripe without reaching the merits of DFS’s claims.

Under § 27(a) of the National Bank Act (the “Act”), the OCC has the authority to grant charters for national banks if it determines that the entity “is lawfully entitled to commence the business of banking.” The “business of banking” is not defined in § 27(a), but § 24 (Seventh) of the Act authorizes national banks to engage in certain enumerated powers, including receiving deposits, as well as “all such incidental powers as shall be necessary to carry on the business of banking.”

The OCC has construed these provisions to permit, but not to require, deposit-taking for institutions applying for a national bank charter. According to its regulations, the OCC may issue SPNB charters with limited powers, as long as the bank either “limits its activities to fiduciary activities” or “conduct[s] at least one of the following three core banking functions: [r]eceiving deposits; paying checks; or lending money.” 12 C.F.R. § 5.20(e)(1)(i). Under the regulation, a national bank does not need to receive deposits in order to be granted such a charter.

In July 2018, the OCC announced that it would accept charter applications from, and in appropriate cases grant SPNB charters to, fintech companies, including those that did not accept or receive deposits. Soon thereafter, DFS brought suit against the OCC in federal district court challenging the OCC’s authority to grant such charters. DFS alleged that the Act required that the OCC grant charters only to institutions that accept deposits. The OCC argued that DFS lacked standing to bring the action and that DFS’s claims were not ripe for adjudication. The district court agreed with DFS, denied the OCC’s justiciability defenses, and “set aside Section 5.20(e)(1)(i) with respect to all fintech applicants seeking a national bank charter that do not accept deposits.” The OCC’s appeal followed.

On appeal to the Second Circuit, the OCC again argued the justiciability points, that is, that DFS lacked standing to challenge the OCC’s decision and that DFS’s claims were constitutionally unripe. On the merits of the case, the OCC argued (as it had in the district court below) that the term “business of banking” is ambiguous, and therefore, as an administrative agency charged with authority under the Act, it was entitled to deference under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. (U.S. 1984), in its interpretation that the Act did not require an institution to take deposits in order to be eligible for a national bank charter.

The Second Circuit agreed with the OCC on its justiciability arguments. The court held that because a non-depository fintech had not yet filed a formal SPNB charter application, and the OCC had not yet granted such an application, DFS failed to allege that it suffered any actual harm, or that any alleged harm was imminent. Similarly, because the OCC had not yet received or granted a SPNB charter for a non-depository fintech, the court held that DFS’s claims were constitutionally unripe. Having decided the case on justiciability grounds, the court concluded that it lacked jurisdiction to address the merits question of the meaning of the “business of banking.” The Second Circuit reversed the lower court’s judgment and directed the district court to dismiss the lawsuit without prejudice.

By vacating the lower court’s decision, and ordering the case dismissed, the Second Circuit returns this case to the starting gate. The OCC could decide—again—to begin accepting SPNB charter applications, but a live application or the agency’s decision to charter an SPNB could remove the impediments to justiciability that the Second Circuit upheld and result in further litigation that leads to a decision on the merits.

The Conference of State Bank Supervisors (“CSBS”) filed a similar lawsuit against the OCC in December 2020 asserting similar arguments as those made by DFS. The pendency of the CSBS lawsuit and the prospect of additional litigation should the OCC grant an SPNB charter make the future of that charter uncertain.