United States: Comptroller Of The Currency: OCC's Current Agenda Focused On Relief For Community Banks And A Potential Fintech Charter

In appearances at recent community bank forums, Comptroller of the Currency Joseph Otting outlined a strategy focused on better tailoring and easing regulatory requirements for community banks. Four areas in which Comptroller Otting plans to focus as leader of the Office of the Comptroller of the Currency (OCC) are enforcement of the Bank Secrecy Act and anti-money laundering (BSA/AML) laws, evaluations under the Community Reinvestment Act (CRA), regulation of small-dollar lending (commonly referred to as payday loans), and simplification of the Volcker rule. Comptroller Otting is also moving forward with consideration of whether the OCC should issue special-purpose charters to fintech companies that engage in the business of banking, indicating that the agency should have a formal position within the next 60 to 90 days. 

Comptroller Otting, a former banker, has assured the industry that the Trump administration "is very banker-supportive." He recently stated his view of banks as friends, not foes of the agency, indicating that he would like the OCC to improve its "responsiveness to [its] customers, which are the bankers." Accordingly, institutions subject to OCC's oversight have reason to be optimistic that regulatory relief and more industry-favorable regulation and supervision may be on the horizon. Below is further discussion concerning recent remarks made by Comptroller Otting on his regulatory reform plans and how such reforms may impact the industry.

I. Eliminating the "Gotchas" in BSA/AML Compliance

In a recent Q&A with the Independent Banker, Comptroller Otting indicated that the current regulatory approach to BSA/AML compliance is ineffective in accomplishing the intended goal of protecting the US financial system from being misused for illegal purposes. Instead, Comptroller Otting expressed the view that the framework consists of a series of "gotchas," and he stressed the need for a "collective effort that involves lawmakers, the Treasury Department, the Financial Crimes Enforcement Network [(FinCEN)] and other regulators."

Comptroller Otting's sentiments echo the views of the industry generally, which has produced a number of studies and reports that offer suggestions on how to reform the current BSA/AML regime. Some suggestions offered by the industry include FinCEN establishing annual AML priorities, raising the monetary threshold for reporting suspicious activity, establishing an advisory council that includes regulators and industry professionals, providing financial institutions with clearer standards, providing for additional compliance safe harbors, and eliminating regulatory inefficiencies to allow for a freer flow of data from financial institutions to law enforcement. In remarks to community bankers at the Independent Community Bankers of America (ICBA) 2018 Capital Summit in Washington, DC, Comptroller Otting stated that the OCC will be working with the Board of Governors of the Federal Reserve System (FRB) and the Federal Deposit Insurance Corporation (FDIC) to develop proposals designed to provide banks with more flexibility under BSA/AML laws, and further noted that proposals will be sent to FinCEN within the next few weeks.

 The federal banking agencies' approach to BSA/AML compliance has long been a source of tension between the industry and its regulators. Although not considered part of "law enforcement", banks have nevertheless been placed on the front lines in the fight against illicit financial activity and expected to devote substantial resources to the timely identification and reporting of suspicious activity engaged in by customers and third parties utilizing the banking system. Institutions found to be deficient in maintaining an adequate BSA/AML compliance system face substantial administrative, civil, and even criminal penalties for such deficiencies. While acknowledging that willful or flagrant violations of BSA/AML requirements warrant strong corrective or even punitive action, the industry has long argued that regulators have approached BSA/AML supervision as a "gotcha" proposition in which a bank's failure to identify isolated or non-systemic suspicious activity is used as a basis to deem the bank's entire BSA/AML compliance system as deficient or non-compliant. Any shift in supervisory approach that is designed to be more cooperative towards the common goal of protecting the banking system from being used in the furtherance of illegal activity would certainly be welcomed by the industry. 

II. Move towards CRA Evaluations Being Based Solely on CRA Criteria

Comptroller Otting also stated his intention to tackle reforms of agency evaluations under the Community Reinvestment Act (CRA). The CRA was enacted in 1977 and after four decades it is widely seen as needing modernization. This is particularly the case given the transformative changes the banking industry has undergone during this time. Certain members of Congress and industry professionals alike have been pushing for reform of the CRA statute and regulations. Recently, the Secretary of the Treasury provided recommendations for reforming the CRA regulations. Included among these recommendations are improving guidance on how banks are examined for CRA compliance, updating the definitions of geographic assessment areas to reflect the changing nature of banking arising from changing technology, customer behavior, and other factors, providing greater transparency in the rating system generally, and clarifying the types of lending and investments that would qualify for CRA credit.

A bank's failure to receive a rating of "Satisfactory" or better on its CRA public evaluation carries potentially significant consequences, including limitations on the bank's ability to exercise broader powers and to engage in expansion activities. The statutory text of the CRA requires examiners to assess an institution's "record of meeting the credit needs of its entire community, including LMI neighborhoods, consistent with the safe and sound operation of such institution." Under the current CRA regulations, ratings can be downgraded based on evidence of discriminatory or other illegal credit practices, including evidence of violations of the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, and Unfair or Deceptive (or Abusive) Acts or Practices (UDA(A)P). In recent years, many insured depository institutions have become frustrated by complications and ambiguities in the CRA regulations that make it difficult to implement effective CRA strategies that accurately anticipate regulators' concerns. In addition, even institutions that have made significant and successful CRA commitments have experienced CRA downgrades based on adverse regulatory findings on compliance with non-CRA laws even when they have demonstrably succeeded in meeting community credit needs. This can be even more frustrating where institutions believe these adverse regulatory findings are unjustified.

Comptroller Otting noted that he is supportive of the original intent of the CRA but questions the expansion of the CRA into unrelated areas. According to Comptroller  Otting, downgrading a bank's CRA ratings due to non-CRA related matters such as alleged UDA(A)P violations goes beyond the original purpose of the statute. Comptroller Otting plans to ensure that the OCC's CRA analysis is based on the bank's record of meeting community credit needs, and he advised that he would like to provide banks with greater guidance on the types of loans and investments that qualify for CRA credit. The OCC, FRB, and FDIC are working on a proposal that would provide more guidance to banks on the types of loans and investments that qualify for CRA credit, and presumably the regulators will broaden the proposal to also take into consideration the Treasury's recommendations. Such regulatory changes are designed to enhance the ability of banks to serve their communities and bring CRA examinations up to speed with technological advances in the banking industry.

III. Getting Banks Back into the Business of Small-Dollar Lending

Small-dollar lending is often criticized as carrying excessive interest rates and fees, targeted to unsophisticated borrowers ill-equipped to protect themselves from unscrupulous lenders. Indeed, in the early-2000, the OCC undertook a series of enforcement actions to eliminate payday lenders from the banking industry.  Comptroller Otting's recent statements and actions, however, suggest that the OCC may now be more open to national banks partnering with small-dollar lenders.  Comptroller Otting recently indicated that the OCC is focused on "bring[ing] small-dollar loans back to banks," because in his opinion "[b]anks should be part of the solution and one choice for consumers who have small-dollar, short-term credit needs." These statements follow the OCC's February 2018 termination of a longstanding consent order with payday lender Ace Cash Express (ACE).1 The 2002 order had prohibited ACE from providing any service, including those related to pay-day loans, to the national banking industry. 

Proponents of small-dollar lending contend that small-dollar loans fill a gap in the industry for individuals who lack other funding sources to meet short-term credit needs. Current regulations, including the small-dollar lending market rule and ability-to-repay rules issued by the Consumer Financial Protection Bureau (CFPB), make it burdensome and less profitable for banks to issue small-dollar loans, while the demand for such loans has risen and non-bank lenders have proliferated due in part to the lack of competition from traditional financial institutions. Regulatory changes in this space will largely depend on cooperation with the CFPB, and any bank considering partnering with small-dollar lenders should take measures to assure such partnerships are conducted in a safe and sound manner consistent with the OCC's guidance on third-party relationships and other applicable guidance and regulations.2

IV. Simplification of the Volcker Rule

Comptroller Otting's agenda for the OCC also includes simplifying the Volcker rule. Changes to regulations implementing the Volcker rule would require interagency action due to enforcement authority being shared among the federal banking agencies, the Securities Exchange Commission, and the Commodities Futures Trading Commission.

For years, the industry has sought changes to the Volcker rule that would ease compliance burdens and costs and allow for greater leeway in investing and trading by banks. Industry opponents to the rule assert that the complex rule is overly restrictive in limiting banks' ability to facilitate investments and engaging in legitimate hedging activities. Even if the rule is simplified, however, compliance with new regulations may still pose excessive burdens on small banks that have minimal trading activity.3

Comptroller Otting has indicated that the Volcker rule should be streamlined, trading restrictions should be more "user-friendly" for banks, and banks should be able to evaluate fairly quickly whether a transaction complies with the rule. During his speech at the ICBA 2018 Capital Summit, Comptroller Otting indicated that the regulators are collectively working on revising Volcker Rule trading limits, and noted that he expects some findings to be developed within the next month or so.  Randy Quarles, Governor and Vice Chair for Supervision of the FRB, has also been vocal about necessary changes to the Volcker rule. According to Vice Chair Quarles, the regulators collective efforts thus far have included working on simplifying key terms under the rule, including "proprietary trading" and "covered fund"; working to clarify the test that determines if a bank is permitted to trade for liquidity purposes (i.e., whether the trading is needed to meet "reasonably expected near-term demands" of markets); and working on simplifying supervision standards among the five regulators. 

V. Status of Fintech Charter by OCC

Unlike Comptroller Otting's predecessor, Acting Comptroller Keith Noreika, Comptroller Otting is not yet settled on issuing special-purpose charters to fintech companies, but expects to have a position within the next 60-90 days. The OCC issues special-purpose national bank charters from time to time, typically for trust banks and credit card banks. If fintech companies are authorized to apply to the OCC for special-purpose national charters, it would allow the companies to avoid the compliance costs and burdens associated with having to be chartered/licensed in multiple states and comply with multiple state laws. Instead, such companies would rely on the OCC as their primary regulator and benefit from federal preemption of certain state laws, including usury laws, consumer protection laws, and capital standards. Many smaller banks do not support national charters for fintech companies, claiming that such companies would usurp their market share. Comptroller Otting acknowledged that fintech companies may be viewed as competitors to small banks for certain loans, but noted that smaller banks could potentially benefit from the ability of these institutions to originate mortgages more cheaply and quickly, which smaller banks could purchase. Comptroller Otting further noted that any fintech company that is issued a special-purpose non-bank charter "would be subject to the same rules and regulations as banks," including underwriting standards, capital, liquidity, and CRA obligations. 

Any decisions made by the OCC with respect to issuing a charter for fintech companies are likely being closely monitored by state regulators. In May 2017, the New York Department of Financial Services (NYDFS) challenged the Acting Comptroller Noreika's plan to grant national charters to non-bank fintech companies, claiming that granting national charters to nonbank fintech companies exceeded the agency's authority under the National Banking Act. In addition, in April 2017 the Conference of State Bank Supervisors brought a similar suit in federal court. Therefore, Otting is likely taking into consideration the possibility of litigation if a decision is made to offer national charters to fintech companies, and an affirmative decision would likely have an implementation delay unless the OCC and the various state regulators can come to a mutual agreement regarding national charters. 

VI. Outlook

As articulated by Comptroller Otting, the OCC's agenda for the next few months seems promising for the industry and would appear to provide regulatory relief to banks in many areas not addressed in the deregulation legislation that recently passed the US Senate and is currently being considered by the US House of Representatives. Comptroller Otting, as a former bank executive, understands the compliance burdens posed by the laws and regulations mentioned above, and national banks should expect, under his leadership, the OCC will pursue regulatory reform that will ease compliance burdens and allow for expanded growth and business opportunities, especially for community banks.

At the same time, Comptroller Otting's proposals may face legal challenges in the current environment. Regulatory actions that may be perceived as weakening CRA or fostering predatory lending could face opposition from various community groups and other federal and state regulatory agencies. Similarly, expansion of the non-bank national charter to fintech companies will likely continue to be challenged by state regulatory authorities. Each of Comptroller Otting's proposals should and will receive close scrutiny over the coming months.

*Amber A. Hay contributed to this Advisory. Ms. Hay is a graduate of University of Michigan Law School and is employed at Arnold & Porter's Washington, DC. office. Ms. Hay is not admitted to the practice of law in Washington, DC.

Footnotes

1 OCC Order Terminating the Consent Order, #2018-013 terminating #2002-92 (Feb. 14, 2018).

2 OCC Bulletin 2013-29.

3 The US Senate recently passed legislation, Senate Bill S. 2155, that would exempt from the Volcker rule banks with less than $10 billion in assets and minimal trading activity, and the US House of Representatives passed a similar Volcker rule exemption billon April 13 that would have the same effect.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions