Why nobody likes Vullo v. OCC

Nobody likes Vullo v. OCC, New York's challenge to the nondepository national fintech charter half a decade ago.

For most people in the industry, the case stands for the idea that the OCC can’t charter national banks that don’t take deposits, unless the bank is restricted to trust company activities.

The OCC dislikes this for a few reasons, but mostly because it isn’t true. The lower court’s decision against the OCC was reversed on procedural grounds, and the case went away after the applicant at issue applied for deposit insurance.

Had the lower court’s substantive reasoning been put to the test, it wouldn’t have done any better. Although there are plausible arguments in favor of the court's conclusion, the court didn't make any of them. Its reasoning was riddled with factual errors and rhetorical sleight of hand. It falls apart under serious scrutiny and was almost certainly wrong under the law at the time. (Though it might do better today, now that the OCC's legal interpretation gets no deference.)

The fact is, the permissibility of a nondepository national bank charter remains an open issue. But all most people remember is that the OCC lost.

Ironically, the last fact irks the state regulators who ultimately lost the case to the OCC. For them, Vullo (later called Lacewell) is a loss whose impact extends beyond the fintech charter.

In reversing the lower court, the appeals court ruled against the regulators’ right to challenge the OCC, as did a DC lower court in a parallel case. These decisions could make it harder for states to challenge all types of OCC charter approvals, including today's growing queue of national trust bank applications.

Faced with these procedural hurdles, state regulators worry that questionably chartered banks will be approved and open before anyone has the chance to challenge their legality. They fear that, even if challenges later prevail, Congress will step in and bless the charters retroactively to avoid disrupting operating businesses. That’s exactly how national trust banks got their legal blessing back in the late 1970s.

If you want to hear more about the various reasons to dislike the Vullo case, tune in to the latest episode of the Bank Nerd Corner podcast, where I had the pleasure of discussing the case with the Conference of State Bank Supervisors (CSBS)'s Matthew Lambert and the incomparable Kiah Lau Haslett.