A federal judge on Thursday rejected a motion from an office within the U.S. Treasury Department to dismiss a lawsuit from the New York State Department of Financial Services seeking to prevent the federal government from issuing certain bank charters to financial technology companies.

The state agency, which regulates financial institutions in New York, is suing the Office of the Comptroller of the Currency over a decision to essentially label fintech companies as banks, saying it will diminish its power to regulate the activities of those entities.

Acting DFS Superintendent Linda Lacewell celebrated the decision in a statement, saying it will give the agency an opportunity to argue why those companies should not be federally chartered as banks since federal regulations on those institutions haven't been as comprehensive as state actions.

“The court has recognized the expertise of DFS and other state banking regulators and the significant role we play in regulating nonbank financial services, promoting innovative fintech products, helping to achieve a level playing field for regulated banking institutions, and most importantly, protecting consumers,” Lacewell said. “DFS, which was created in response to the financial crisis, will continue to lead and fill any and all voids that misguided federal policy decisions create.”

It's the second time DFS has sued the OCC over its decision to allow fintech companies that do not receive deposits to seek special-purpose national bank charters. The first lawsuit was thrown out last year after a judge said it wasn't ripe for review. The OCC had not started accepting applications from fintech companies for those charters at the time.

Now, U.S. District Judge Victor Marrero of the Southern District of New York wrote Thursday that the agency's challenge to the OCC decision is ready for review since the office announced it would start accepting those applications last July.

“As a result of the Fintech Charter Decision, New York State's regulations for over '600 non-bank financial services firms' are all at risk of becoming null and void,” Marrero said.

The issue of the case is over how financial institutions are regulated between the federal government and the states. Entities chartered by a state are generally also subject to federal regulations. But those chartered by the federal government are largely supervised by the OCC alone, meaning that regulations promulgated by a state agency, like DFS, may not apply.

As of now, entities that do not receive deposits, like payday lenders and other fintech companies, are left largely up to the states to regulate. Marrero wrote that, based on the claims from DFS, there's a real possibility that fintech companies could seek a federal charter to avoid state oversight because of the decision from the OCC.

“Based on DFS's allegations about the threats of federal preemption and the unique characteristics of the dual banking system, DFS faces the current risk that entities may, at any moment, leave its supervision to seek greener pastures,” Marrero wrote.

The OCC has argued in filings seeking to dismiss the lawsuit that its decision to allow applications for federal charters from fintech companies was based on its interpretation of a section of the National Banking Act. The law says that a financial institution can apply for a federal charter if it's in the “business of banking.”

DFS has argued that fintech companies are not in the “business of banking” because they don't receive deposits. The OCC has argued that the “business of banking” definition is satisfied by other activities of those companies, like lending money. Marrero, in the decision, sided with the former argument.

“The Court finds that the term 'business of banking,' as used in the NBA, unambiguously requires receiving deposits as an aspect of the business,” Marrero wrote.

He noted in the decision that the OCC has never used the same argument regarding the “business of banking” to issue charters to other nondepository entities. In fact, Marrero wrote, when the OCC has sought to issue charters to such institutions in the past, Congress has amended the National Banking Act to allow the action.

Marrero did, however, dismiss one section of the lawsuit from DFS alleging that the fintech decision from the OCC violated the Tenth Amendment of the U.S. Constitution. He said that, while DFS had standing to raise such a claim, it had failed properly state one in its complaint.

A spokesman for the OCC said they were still reviewing the decision Tuesday and declined to comment any further.

READ MORE: