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A federal regulation that would have allowed the Trump administration to essentially label certain fintech—or financial technology—companies as banks and allow them to avoid certain state regulations was struck down in a decision from a federal judge in Manhattan late Monday.

The decision is the result of a lawsuit from the New York State Department of Financial Services, which had claimed the regulation would harm consumers.

The regulation, which was promulgated by the federal Office of the Comptroller of the Currency, would have allowed fintech companies that don't receive deposits, like payday lenders, to switch their supervising agency from DFS to the OCC.

That would have allowed those companies to largely avoid certain regulations promulgated by DFS and other state agencies. They would, instead, be largely supervised by the OCC.

DFS Superintendent Linda Lacewell said the court's decision to invalidate the regulation will allow those companies to be more stringently regulated by state officials.

"This decision makes the financial well-being of consumers from New York and around the country a priority," Lacewell said. "It reflects the rational conclusion that DFS and other state banking regulators have the expertise to provide the strict supervisory oversight and enforcement of anti-money laundering and consumer protection statutes and regulations that non-depository financial service providers are required to follow."

Representatives from the OCC said they plan to seek an appeal of the decision to the Second Circuit U.S. Court of Appeals.

"The agency disagrees with the decision and the court's interpretation of the authority the National Bank Act grants the OCC," the OCC said. "The agency plans to appeal the ruling to resolve this issue."

Attorneys for DFS and the OCC had actually negotiated a stipulated final judgement in favor of the state agency, but submitted competing versions to the court for a final decision.

While DFS was seeking to have the regulation set aside nationally, the OCC pitched a more narrow result to U.S. District Judge Victor Marrero of the Southern District of New York, who's presided over the case since it was filed last year.

Attorneys for the OCC wrote in their proposal that the regulation should only be set aside for fintech companies that don't accept deposits but also have a nexus to New York state. That could mean they're chartered in New York or intend to do business in New York.

Under that proposal, the regulation would still be valid for fintech companies that aren't tied to New York state. Attorneys for the OCC wrote that, under their proposal, no harm would come to New York state.

"The allegations in the complaint demonstrate that DFS's alleged injuries, and thus any remedies to which it is entitled are limited to New York state," the OCC wrote. "Indeed, courts regularly vacate agency actions only in part, tailoring the remedy to match the agency's error."

Marrero, in his decision, did not address the various arguments of the OCC, but rejected them outright based on his previous rulings in the case. Earlier this year, Marrero rejected a motion from the OCC to dismiss the lawsuit, finding DFS had standing to bring the challenge.

Attorneys for the OCC had since failed to persuade him to come to a different result, Marrero wrote.

"The Court finds that OCC has failed to identify a persuasive reason to deviate from ordinary administrative law procedure on this score," Marrero wrote.

The issue of the case was over how financial institutions are regulated between the federal government and the states. Entities chartered by a state agency, like DFS, are generally also subject to federal regulations. But those that obtain a federal charter are largely supervised exclusively by the OCC, meaning they can avoid certain state regulations.

Under the current regulatory scheme, financial entities that do not receive deposits, like payday lenders and other fintech companies, are largely left up to states to regulate. DFS was concerned that, if allowed, the federal regulation would prompt more entities to escape state oversight by seeking a federal charter.

Lacewell said the decision handed down Tuesday by Marrero will prevent that possibility.

"The decision stops OCC's attempt to usurp state authority by establishing a federal fintech regulatory framework at the expense of consumers," Lacewell said. "Going forward, DFS will continue to be a fierce advocate for consumers in New York and nationwide."

The OCC had defended the regulation in court by saying it complied with a section of the National Banking Act that allows financial institutions to apply for federal charters if they're in the "business of banking."

DFS had countered that argument, saying that fintech companies are not in the "business of banking" because they don't receive deposits. Marrero agreed with that point in his decision earlier this year.

"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.

It was the second time DFS sued the OCC over the regulation. The state's legal challenge was dismissed the first time around because the court said the agency lacked standing at the time.

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