2nd Circuit reverses win for NY in fintech regulatory dispute

3 minute read

An empty courtroom is seen at the New York State Supreme Court in Manhattan, New York City, U.S., August 21, 2020. REUTERS/Andrew Kelly

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  • New York banking regulator had no standing to challenge federal fintech charters
  • State's claim the charters would encroach on its authority too speculative
  • Federal regulator reviewing charter application standards

(Reuters) - The 2nd U.S. Circuit Court of Appeals said New York’s banking regulator cannot block the U.S. Office of the Comptroller from allowing non-depository fintechs to apply for special purpose national bank charters, calling the challenge premature.

The New York State Department of Financial Services' (DFS)argument that the OCC's decision undermined the state's jurisdiction over consumer financial services was too speculative since no fintechs had applied for or been granted charters, U.S. Circuit Court Judge Joseph Bianco wrote for a three-judge panel.

The court ordered DFS' lawsuit dismissed without prejudice, which would allow the regulator to reassert its challenge if any fintech applications are made or granted.

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DFS Superintendent Linda Lacewell said on Thursday that states are "the vanguards of consumer protection" and that her office would continue to fight "encroachment" by federal regulators.

"With new leadership at the OCC, we urge them to reconsider this ill-advised program," she said. "It is incumbent upon us to work together."

OCC spokesman Bryan Hubbard said in a statement on Thursday that the regulator appreciates the decision.

Acting Comptroller Michael Hsu is looking at standards used "to evaluate charter applications and to ensure such decisions are carefully weighed in the broader context of our interconnected financial system," Hubbard said.

DFS did not immediately reply to a request for comment.

Lacewell sued the OCC in 2018 after the regulator announced it would accept charter applications from fintechs. Lacewell had argued the regulation would let non-bank lenders avoid state laws, including interest-rate caps.

The OCC has said federal regulation will protect consumers and promote consistency.

U.S. District Judge Victor Marrero in Manhattan ruled in 2019 that granting charters to companies that are only lending money did not comply with the National Bank Act, which he said requires an institution to receive deposits to be considered a bank.

The judge found that DFS had standing to sue because the OCC had threatened to supersede its authority over hundreds of companies.

The OCC appealed to the 2nd Circuit.

Bianco and U.S. Circuit Judges Pierre Leval and Gerard Lynch did not rule on the core question of whether the term "business of banking" in the law requires an institution to take deposits.

A similar lawsuit brought by state financial regulators over the OCC's grant of a charter to Figure Technologies Inc is pending in Washington, D.C., federal court.

The case is Lacewell v. Office of The Comptroller et al., 2nd U.S. Circuit Court of Appeals, No. 19-4271.

For the OCC: Christopher Connolly of the U.S. Attorney's Office for the Southern District of New York

For Lacewell: Barbara Underwood of the Office of the Attorney General of the State of New York

Read More:

2nd Circuit questions N.Y. regulator's win in battle with feds over fintech

New York sues U.S. to stop fintech bank charters

U.S. state banking regulators sue government to stop fintech charters

U.S. bank regulator allows fintech firms to seek federal charter

5th Circuit rules MoneyGram not a bank

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Jody Godoy reports on banking and securities law. Reach her at jody.godoy@thomsonreuters.com