United States: Industry-Friendly OCC Regulations May Be On The Horizon

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 Otting plans to focus as leader of the Office of the Comptroller of the Currency are enforcement of the Bank Secrecy Act and anti-money laundering laws, evaluations under the Community Reinvestment Act, regulation of small-dollar lending (commonly referred to as payday loans), and simplification of the Volcker Rule. 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.

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 Otting on his regulatory reform plans and how such reforms may impact the industry.

Eliminating the "Gotchas" in BSA/AML Compliance

In a recent Q&A with the Independent Banker, Otting indicated that the current regulatory approach to BSA/AML compliance is ineffective in accomplishing the intended goal of protecting the U.S. financial system from being misused for illegal purposes. Instead, 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 and other regulators."

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 2018 Capital Summit in Washington, D.C., Otting stated that the OCC will be working with the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp. 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 nonsystemic suspicious activity is used as a basis to deem the bank's entire BSA/AML compliance system as deficient or noncompliant. Any shift in supervisory approach that is designed to be more cooperative toward the common goal of protecting the banking system from being used in the furtherance of illegal activity would certainly be welcomed by the industry.

Move Toward CRA Evaluations Being Based Solely on CRA Criteria

Otting also stated his intention to tackle reforms of agency evaluations under the Community Reinvestment Act. 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 low- and-moderate-income 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.

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 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. 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, the FRB and the 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.

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-2000s, the OCC undertook a series of enforcement actions to eliminate payday lenders from the banking industry. Otting's recent statements and actions, however, suggest that the OCC may now be more open to national banks partnering with small-dollar lenders. 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 long-standing consent order with payday lender Ace Cash Express, or ACE.[1] The 2002 order had prohibited ACE from providing any service, including those related to payday 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, 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[2] and other applicable guidance and regulations.

Simplification of the Volcker Rule

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 U.S. Securities Exchange Commission, and the U.S. Commodity 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 engage 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]

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, 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 chairman for supervision of the FRB, has also been vocal about necessary changes to the Volcker Rule. According to 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.

Status of Fintech Charter by OCC

Unlike Otting's predecessor, Acting Comptroller Keith Noreika, Otting is not yet settled on issuing special-purpose charters to fintech companies, but expects to have a position within the next 60 to 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. 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. Otting further noted that any fintech company that is issued a special-purpose nonbank 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 challenged Noreika's plan to grant national charters to nonbank 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.


As articulated by 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 U.S. Senate and is currently being considered by the U.S. House of Representatives. Otting, as a former bank executive, understands the compliance burdens posed by the laws and regulations mentioned above, and national banks should expect that, 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, Otting's proposals may face legal challenges in the current environment. Regulatory actions that may be perceived as weakening the CRA or fostering predatory lending could face opposition from various community groups and other federal and state regulatory agencies. Similarly, expansion of the nonbank national charter to fintech companies will likely continue to be challenged by state regulatory authorities. Each of Otting's proposals should and will receive close scrutiny over the coming months.

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

Originally published by Law360.

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