Post-Chevron landscape gives trust bank challengers the edge

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• Key insight: A lawsuit from the Independent Community Bankers of America challenges whether the Office of the Comptroller of the Currency exceeded its authority by allowing national trust banks to conduct activities beyond the traditional scope of trust banking.
• Supporting data: The OCC has approved or conditionally approved 21 national trust bank charters during the second Trump administration, including 13 for cryptocurrency companies, according to ICBA’s lawsuit.

• Forward look: The lawsuit is likely to take years to wend its way through the trial and appeals process, but the overturning of so-called Chevron deference in 2024 makes the plaintiffs’ argument easier for courts to accept. 

A banking industry-led lawsuit against the Office of the Comptroller of the Currency challenging the agency’s interpretation of the national trust charter holds nearly two dozen new special-purpose banks approved or conditionally approved during the second Trump administration in the balance. A 2024 Supreme Court ruling gives the plaintiffs’ case considerably better odds of success. 

Art Wilmarth, Professor Emeritus of Law at George Washington University, said he expects courts to invalidate the OCC’s regulation expanding the allowable activities for national trust banks and potentially affecting charters already granted. He says national trust bank charters relying on the disputed authority could be vulnerable if the court concludes that the OCC exceeded its statutory authority in granting the charters.

“The ICBA should prevail, given the complete lack of any statutory authority for the OCC’s crypto trust bank regulation and charters,” said Wilmarth. “I therefore expect that the regulation and the charters will be invalidated. All national trust bank charters that authorize any type of nonfiduciary activities would be open to challenge, in my view.”

Unlike full-service banks, national trust banks are not federally insured by the Federal Deposit Insurance Corp., and the regulatory requirements that apply to them can differ significantly from those traditional banks typically face.

The litigation, filed Friday by the Independent Community Bankers of America, argues that the OCC has gone beyond its statutory authority in allowing companies — including more than a dozen cryptocurrency firms — to obtain national trust charters for activities that ICBA says fall outside the legal limits of the charter.

At the center of the lawsuit is a dispute over what activities a national trust bank can conduct.

Congress revised the National Bank Act in 1978 to allow national banks to focus narrowly on trust-related activities “and activities related thereto.”

Comptroller of the Currency Jonathan Gould — then serving as OCC general counsel — penned Interpretive Letter 1176 in 2021. That letter stated that national trust companies could provide certain cryptocurrency custody and related services. Gould has said the letter clarified, rather than changed, the charter’s scope and intent.

The letter served as the basis for a number of conditional approvals for trust charter applicants, drawing scrutiny from the banking industry. The OCC has since promulgated the letter into a formal rulemaking, and has approved or conditionally approved 21 national trust bank charters since the start of the second Trump administration, according to the lawsuit. 

Ian Katz, managing director at Capital Alpha Partners, said it’s too early to say whether ICBA can prove that the OCC exceeded its authority, but noted that banks and other industries were fairly successful in challenging rules set out by the Biden administration.

“It’s a bit soon for us to predict whether the ICBA can prove that the OCC exceeded what’s permitted by the National Bank Act, but trade groups in recent years have had some success suing Democratic-led regulatory agencies for exceeding their statutory authority,” Katz said. “It will be interesting to see whether banks will get a similarly receptive judiciary when suing a Republican-appointed regulator.”

Joe Lynyak, partner at the law firm Dorsey & Whitney, said the agency effectively used the 2021 letter as a foundation for a much larger regulatory change without going through the process that would have been required for substantive rulemaking.

“There’s two primary arguments here: one is that the decision by the OCC and all of the pieces that they put together violates the Administrative Procedures Act, and the letter they relied upon, which is the OCC Letter 1176, effectively is a form of bootstrapping,” Lynyak said. “When you take as a whole, frankly, the really significant change that they claim they’ve got the authority to do, [the charge of] an APA violation, in terms of public comment and being arbitrary and capricious, stands on its own.”

Lynyak said the dispute also presents an early test of how the Supreme Court’s 2024 decision overturning Chevron deference will affect banking regulation. The landmark 1984 case Natural resources Defense Council v. Chevron held that courts should defer to executive branch interpretations of vague statutes except in narrow circumstances. 

Courts in this case will have to independently determine what the National Bank Act permits rather than deferring to the OCC’s interpretation. While they can consider the agency’s expertise and reasoning, that expertise is no longer binding. Lynyak said the OCC’s interpretation could ultimately be viewed as creating a new type of institution.

“I think there’s a very sound basis to say that the OCC has overstepped in this case by creating something that wasn’t there before,” Lynyak said. “Historically…a national bank can have trust powers, but it’s circumscribed by the fact that Section 92 [of the National Bank Act] limits what you can do.” 

The absence of Chevron would allow a court to dive deep into the administrative record and consider whether the agency actually addressed concerns raised in the rulemaking process, something that has not really happened yet in the banking context. 

“The litigation is probably going to be somewhat paper-based, pointing out instances in which the court will be invited to review with the APA, and then also the extent to which they want to take up the absence of the Chevron deference issue,” Lynyak said. “This is going to be one of the first instances that I’m aware of where this becomes really important in the banking sector.”

Whether courts ultimately rule in ICBA’s favor is also something that will not be known with finality for some time. The litigation and appeals process can take years, and a court would also have to determine what remedy is appropriate for institutions that were chartered under the OCC’s disputed interpretation. Lynyak said the court could impose tighter restrictions on the existing institutions rather than invalidating their charters.

“I think the easier way would be to argue that they’re going to be subject to a greater degree of scrutiny and limitations, probably by imposing Section 92’s requirements,” Lynyak said. “The other part is what the court will do in terms of enjoining the existing charters from continuing to operate during the interim.”

Lynyak said he expects the case could end up at the Supreme Court. 

“There is potentially so much money involved in some of these entities, and the investors that are supporting the entities, that this is probably going to move way up the food chain before it’s ultimately resolved,” he said.