The OCC has issued a final rule establishing standards that a bank must follow in fulfilling its obligation to provide fair access to financial services.  The final rule is effective on April 1, 2021.

The final rule was issued on the same day that Acting Comptroller of the Currency Brian Brooks stepped down at the OCC.  Critics of the OCC’s proposal included banking trade groups as well as consumer advocates.  Given that the proposal was characterized by Democratic lawmakers as an effort to force banks to lend to gun manufacturers and fossil energy companies, and given opposition within the banking industry, the final rule may face an uphill battle under the Congressional Review Act or reconsideration by a new Comptroller of the Currency appointed by President-elect Biden.

The final rule adopts the OCC’s proposal with two changes:

  • Language is added in the final rule to clarify that a bank can decline to provide a person with access to a financial service if doing so is necessary for the bank to comply with another provision of law, such as laws on credit, capital, liquidity, and interest rate risk.
  • One of the criteria for fair access in the proposal was that a bank could not deny any person a financial service offered by the bank when the denial’s effect would be to prevent, limit, or otherwise disadvantage the person (1) from entering or competing in a market or business segment; or (2) in a way that benefitted another person or business activity in which the bank had a financial interest.  The OCC eliminated this criterion from the final rule “[t]o focus the rule on the fairness of the covered banks’ decision-making processes and utilization of prudent risk management principles, as well as to facilitate the OCC’s administration of this rule.”

The OCC indicated that it received approximately 35,700 comments on the proposal (which includes approximately 28,000 form letters collected by a single organization).  Its discussion of the comments in the Supplementary Information includes the following noteworthy items:

  • The OCC rejected comments stating that the proposal represented a change in OCC policy that, among other things, requires banks to evaluate reputation risk.  According to the OCC, the final rule is not a change in policy and instead codifies existing guidance dating to at least 2014 and provides additional information on how to operationalize such guidance.  The OCC stated that the rule “clarifies that the OCC expects banks to apply quantitative, impartial risk-based standards in evaluating individual customers, including when considering reputation risk, qualitative factors, and a borrower’s industry.  It is not sufficient to evaluate these characteristics solely on a subjective basis.”  Or, as put simply by the OCC, under the final rule, “banks are free to provide or deny financial services to any individual customer–but first, they must do their homework and be able to show the work.”
  • In response to comments that the proposal could have adverse effects on the environment or enrich the gun industry, the OCC stated that nothing in the rule prevents a bank from considering financial risks caused by environmental issues.  By way of example, the OCC indicated that a lender with collateral in areas experiencing increased frequencies of wildfires, or a lender with real estate exposure in hurricane-prone areas, will be expected to account for such risks in making risk management decisions.  However, in deciding whether to provide financial services to a person, including a person whose activities affect the environment or a participant in the firearms industry, a bank must base its decision “on an analysis of whether providing a particular financial service to that person presents quantifiable risks to the bank, as opposed to indirect or generalized risks that could be balanced by the political branches of government or by price signals or other free market forces.  Conclusory, inconsistent, or categorical assertions in any substantive area not tied to the bank’s specific risk profile reflect poor management and unsafe and unsound behavior.”
  • In response to comments that the proposal represented unwarranted government involvement in bank decision-making, the OCC stated that final rule does not (1) require a bank “to provide any specific type of financial service, to do business with a particular person or industry, or to operate in a particular market,” (2) prevent a bank from declining to provide financial services “to a risky or unprofitable person or to a person with a risk-profile that the bank does not have the expertise to evaluate or manage,” (3) prevent a bank from “pricing or setting other terms of a financial service in a way that reflects the bank’s analysis of the risks posed by a particular customer,” or (4) prevent a bank from declining or ceasing to offer a particular type of financial service.  As an example of how the fourth item applies, the OCC stated that the rule does not require a bank to provide custody services but if a bank does offer such services, the rule requires the bank to provide fair access to those services to all persons “absent demonstrated individual risk factors that cannot reasonably be managed.”  As another example, the OCC indicated that if a bank has historical expertise serving the retail sector but not the energy sector, the rule allows the bank to provide financial services that require this expertise to the former and not the latter.  A bank could not, for example, provide payroll administration services to a company in the wind power business but not to a company in the natural gas business “absent a showing that facts particular to the specific natural gas company reflect risks to the bank not presented by the wind power company.”
  • The OCC received comments arguing that banks should be allowed to take all risks, not just quantifiable risks, into account when making decisions, and that the proposal conflicted with safety and soundness principles by inhibiting responsible management of reputation risk.  While citing language from the Comptroller’s Handbook on the Bank Supervision Process stating that “risk cannot always be quantified in dollars,” the OCC indicated that the final rule requires examiners and bank to “ensure that their evaluation of risk is supported by objective fact rather than mere preference or opinion.” It stated further that the OCC uses the term “quantify” to mean “measurable, auditable, and falsifiable” and that when making a decision about whether to provide a financial service to a customer, a bank may not rely on factors that cannot be quantified.  According to the OCC, “all legitimate risks can be quantified, albeit with different degrees of precision.”  In its view, “even reputation risk can be (and generally is) quantified in terms of the anticipated reach and frequency of negative news stories, the perception of those stories by various segments of the bank’s customer population, the forecasted effect on the bank’s ability to raise capital, and other factors affecting the severity of a given event.  These factors will determine whether a borrower can repay its debts and more broadly whether a given customer relationship will be profitable or unprofitable to the bank on a risk-adjusted basis.”

As reflected in our prior blogs concerning “Operation Choke-Point,” we think it was wholly inappropriate for unelected government bureaucrats to pressure banks to withhold essential banking services from lawful businesses they personally disfavored.  We have similar concerns that a handful of executives of the largest banks in the country can likewise deprive lawful businesses of banking services.  Thus, we are sympathetic to the objectives of the OCC’s fair access rule.  Nevertheless, we are also mindful of the interests of persons with conscientious objections to specified activities or concerns about the reputational consequences of servicing companies engaged in such activities.  Whether the rule represents an appropriate balancing of these competing interests—and whether the rule will survive the attacks that are sure to occur—remain to be seen.