Beneath all the excitement surrounding the fast-growing “fintech” industry has been a more practical question: who, exactly, is going to regulate this new breed of enterprise?
The U.S. Office of the Comptroller of the Currency offered one answer recently, announcing its intention to grant national bank charters to fintech companies. The OCC action would allow companies that gain charters to operate nationwide. Equally significant, it would result in state-level preemption. Chartered fintech companies could be free of capital requirements imposed by states, for instance, as well as state consumer protection laws such as those prohibiting usury, capping interest rates, and outlawing payday loans.
That has not gone over well in New York. The state’s Department of Financial Services reacted swiftly to the OCC action, filing a lawsuit to invalidate the OCC’s decision to issue national charters. The essence of New York’s argument is that the OCC, in attempting to regulate financial institutions that don’t accept deposits, is exceeding its authority under the National Bank Act. The OCC’s action, the complaint says, “would upend almost one and a half centuries of established federal banking law and displace a nation of 50 state financial regulators that annually supervise hundreds of billions of dollars in non-bank transactions.”
Turf battles among regulators are nothing new, and it is no surprise that New York, which has a history of regulating global financial institutions, is not eager to cede its authority over fintech firms. And it may not be too late for the state to take back ground. With the comment period for the national charter having closed in April, the regulatory proceedings are inching ever-closer to being finalized. But in its lawsuit, DFS articulates a coherent legal argument, backed by its public policy interest in enforcing its anti-usury laws and other consumer protections. The validity of those state policy interests have been recognized by the Second Circuit in Madden v. Midland Funding (2d Cir. 2015), which denied preemptive effect to the National Bank Act against class claims under New York’s usury law. Given that DFS’s suit must be taken seriously, the effectiveness of OCC’s decision in New York may remain in limbo as long as the case and any appeals are pending. In the meantime, investors may prefer deals in which loans to NY borrowers are excluded — at least until this particular turf war is settled.