The federal banking agencies (the Federal Reserve Board, OCC, and FDIC (FBAs)), recently issued a “Policy Statement on Interagency Notification of Formal Enforcement Actions” that is intended “to promote notification of, and coordination on, formal enforcement actions among the FBAs at the earliest practicable date.”  The issuance of the policy statement follows the DOJ’s announcement last month of a new policy to encourage coordination among the DOJ and other enforcement agencies when imposing multiple penalties for the same conduct to discourage “piling on.”

The new policy statement recites that it is not intended as a substitute for routine informal communications among FBAs in advance of an enforcement action, including verbal notification of pending enforcement actions “to officials and staff with supervisory  and enforcement responsibility for the affected institution.”

The policy statement’s key instructions are:

  • When an FBA determines that it will take formal enforcement action against a federally-insured depository institution, depository institution holding company, non-bank affiliate, or institution-affiliated party, it should evaluate whether the action involves the interests of another FBA.  By way of example, the policy statement notes that an entity targeted by an FBA for unlawful practices might have significant connections with an institution regulated by another FBA.
  • If it is determined that one or more other FBAs have an interest in an enforcement action, the FBA proposing the action should notify the other FBA(s) at the earlier of the FBA’s written notification to the targeted entity or when the responsible agency official or group of officials determines that enforcement action is expected to be taken.
  • The information shared should be appropriate to allow the other FBA(s) to take necessary action in examining or investigating the entity over which they have jurisdiction
  • If two or more FBAs is considering bringing a complementary action, such as an action involving a bank and its parent holding company, those FBAs should coordinate the preparation, processing, presentation, potential penalties, service, and follow-up of the enforcement action.

We view the new policy statement as a very positive development.

Comptroller of the Currency Joseph Otting appeared before the House Financial Services Committee yesterday and before the Senate Banking Committee today.

In his nearly identical written testimony submitted to both committees, Mr. Otting identified the following items as his priorities as Comptroller: modernization of Community Reinvestment Act (CRA) regulations; encouraging banks to meet consumers’ short-term, small-dollar credit needs; enhancing supervision of Bank Secrecy Act/anti-money laundering compliance and making it more efficient; simplifying regulatory capital requirements; and reducing burdens associated with the Volcker Rule.

CRA modernization was a focus of many of the Democratic lawmakers on both committees.  In his written testimony, Mr. Otting stated that that the federal banking agencies (presumably the OCC, Fed and FDIC) are discussing an Advanced Notice of Proposed Rulemaking to solicit comments on how best to modernize CRA regulations.  In his written and live testimony, Mr. Otting voiced his support for a new CRA framework that would (1) expand the types of activities that qualify for CRA consideration (e.g. to include small business lending and opportunities for consumers to access short-term, small dollar loans), (2) revisit the concept of assessment areas to broaden it beyond branches and deposit-taking ATMs, and (3) use a metrics-driven approach to evaluating CRA performance to increase public transparency and reduce subjectivity in examiner ratings.

In their questioning of Mr. Otting, Democratic lawmakers expressed skepticism about the CRA changes outlined by Mr. Otting, suggesting that they would allow banks to be less responsive to the needs of minority communities and questioning whether Mr. Otting has sufficient awareness of and concern about banks engaging in discrimination against minorities.

Another focus of Democratic lawmakers on both committees was the “horizontal reviews” of bank sales practices conducted by the OCC at more than 40 national banks in 2016-2017.  According to Mr. Otting, the OCC reviewed between 500 million and 600 million new accounts opened in a three-year span and found 20,000 accounts that lacked proof of authorization or had other issues resulting in 252 “matters requiring attention.”  He indicated that the OCC’s review had not revealed any “pervasive or systemic” issues concerning improper account openings but did show a need for banks to improve their policies, procedures, and controls.

Other issues discussed at the hearings included the following:

  • Special purpose national bank (SPNB) charter.  Lawmakers at the House hearing questioned Mr. Otting about the OCC’s proposal to issue SPNB charters to fintech companies.  Mr. Otting repeated his recent statement that the OCC would announce its decision on the proposal next month.  Lawmakers also noted the concerns that have been raised by comments reportedly made by Mr. Otting regarding “rent-a-charter” arrangements between banks and non-bank entities.  Mr. Otting indicated that, in light of the increasing number of banks partnering with fintech companies, the OCC was open to developing guidance to address such partnerships.
  • Short-term, small dollar loans.  Mr. Otting was questioned about the bulletin issued by the OCC last month to encourage its supervised institutions to make short-term, small dollar installment loans.  As we reported, the bulletin contained language about compliance with applicable state law that was confusing or likely to cause confusion.  We observed that federal law (12 U.S.C. Section 85) governs the interest national banks can charge and authorizes banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state.  We also called upon the OCC to clarify that it did not mean to suggest otherwise.  In response to a question from Republican Rep. Blaine Luetkemeyer about the meaning of the OCC’s language, Mr. Otting indicated that the OCC was not retreating from preemption and did not intend to suggest that national banks had to charge the interest permitted by the law of the borrower’s state rather than the interest permitted by the law of the bank’s home state. Mr. Otting expressed confidence that more banks would be entering into the market for short-term, small dollar installment loans.
  • Madden decision.  Mr. Otting was questioned about the Second Circuit’s Madden decision by Republican Senator Pat Toomey, who observed that the decision has resulted in a substantial reduction in credit access to consumers.  (In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.)  Mr. Otting agreed with Senator Toomey that the decision was wrong.  However, when asked by Senator Toomey what steps the OCC was taking to address the problems caused by Madden, Mr. Otting said only that the OCC had filed a brief disagreeing with the decision.  (Presumably, Mr. Otting was referring to the amicus brief filed by the Solicitor General and OCC with the U.S. Supreme Court expressing their view that the Court should deny the petition for certiorari filed by the Madden defendants  despite their view that Madden was wrongly decided.)

We have advocated for the OCC’s adoption of a rule providing that (1) loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the National Bank Act for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.  In other words, it is the origination of the loan by a national bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.

Comptroller of the Currency Joseph Otting is scheduled to make two appearances before Congress next week.

On Wednesday, June 13, 2018, he is scheduled to appear before the House Financial Services Committee at a hearing entitled “Financial Industry Regulation: the Office of the Comptroller of the Currency.”

On Thursday, June 14, 2018, he is scheduled to appear before the Senate Banking Committee at a hearing entitled “Update from the Comptroller.”

The issues about which Mr. Otting is likely to be questioned by lawmakers include the OCC’s proposal to issue special purpose national bank charters to nondepository fintech companies and its plans to engage in rulemaking to modernize its regulations implementing the Community Reinvestment Act.

 

 

American Banker has reported that, in a press call last week regarding the OCC’s new risk report, “Semiannual Risk Perspective for Spring 2018,” Comptroller Otting stated that in July 2018, the OCC expects to announce its decision on whether it will issue special purpose national bank (SPNB) charters to nondepository fintech companies.

Under Acting Comptroller Keith Noreika’s leadership, the OCC defended its authority to grant an SPNB charter to a nondepository company in the lawsuits filed by the NY Department of Financial Services and the Conference of State Bank Supervisors (both of which were dismissed).  Mr. Otting has not yet taken a public position on the OCC’s SPNB charter proposal.  However, he has been dismissive of the argument made by opponents of the SPNB charter that it may lead to an inappropriate mixing of banking and commerce and has questioned the continuing need for the current barriers between banking and commerce.

American Banker reported that Mr. Otting also stated in the press call that some potential applicants for a SPNB charter have lost interest in obtaining a charter after learning more about the process for becoming a bank and seemed more focused on partnering with banks.  According to Politico, Mr. Otting expressed concern in the press call about “rent-a-charter” arrangements between banks and non-bank entities.  Mr. Otting was quoted by Politico as having said “We don’t believe that institutions should effectively lend their charter to a vendor.”

In its bulletin issued last week setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by OCC-supervised institutions, the OCC expressed an unfavorable view of bank-nonbank partnerships, where the “sole goal [is] evading” state-law rate limits.  We commented that while the context of the OCC’s view was “specific to short-term, small-dollar installment lending,” this apparent hostility to bank-model relationships should be of concern to all banks that partner with third parties, including fintech companies, to make loans under Section 85 of the National Bank Act.  Mr. Otting’s reported comment about “rent-a-charter” arrangements exacerbates this concern to the extent it indicates there is indeed OCC hostility to arrangements that rely on the originating bank’s Section 85 interest rate authority even outside of the small dollar loan context addressed by the bulletin.

For state-chartered banks, state law interest rate limits are preempted by Section 27 of the Federal Deposit Insurance Act.  Many bank partnerships with non-bank entities involve state banks and the FDIC, in interpreting Section 27, has generally tracked the OCC’s views on Section 85.  As a result, the OCC’s views on bank partnerships should also be of concern to state banks entering into arrangements that rely on the originating bank’s Section 27 interest rate authority.

The bulletin issued yesterday by the OCC encouraging the banks it supervises “to offer responsible short-term, small-dollar installment loans” quickly met with mixed reviews from consumer advocates.

The Pew Charitable Trusts issued a press release in which it praised the OCC’s action for “remov[ing] much of the regulatory uncertainty that has prevented [banks] from entering the market [for small installment loans].”  The press release quotes the director of Pew’s consumer finance project who called the OCC bulletin “a welcome step that should help pave the way for banks to offer safe, affordable small-dollar installment loans to the millions of Americans that have been turning to high-cost nonbank lenders.”

Other consumer advocates took a more critical view of the OCC bulletin.  The Center for Responsible Lending’s senior policy counsel is reported to have raised the concern that “in a broader deregulatory environment, banks may be given more latitude to make high-cost loans than they’ve been given in the past, and that would have disastrous consequences.”  She also reportedly noted the absence of a federal usury ceiling and suggested that the policies and practices for small dollar loans set forth in the OCC bulletin would not allow a bank to charge more than a 36% annual percentage rate on such loans.

Christopher Peterson, a senior fellow at the Consumer Federation of America and a law professor at the University of Utah, took an even harsher view of the OCC bulletin.  Professor Peterson tweeted that he “[doesn’t] support this guidance” and that “[t]he OCC is replacing the 2013 policy with a new, weaker guidance that will tempt banks back into the subprime small dollar lending.”  (The “2013 policy” referred to by Professor Peterson is the OCC’s rescinded guidance on deposit advance products).

Professor Peterson also criticized the OCC for not setting an “all-in usury limit,” commenting that the absence of such a limit “means many banks will be tempted to impose crushing rates and fees on borrowers.”  Perhaps because he recognizes that the OCC cannot set a usury limit (because that limit is set forth in Section 85 of the National Bank Act), Professor Peterson called upon Congress to “step up with [a] national usury limit.”  (Professor Peterson’s tweets can be viewed by clicking on the link below.)

 

The OCC has issued a bulletin (2018-14) setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks.

In issuing the bulletin, the OCC stated that it “encourages banks to offer responsible short-term, small-dollar installment loans, typically two to 12 months in duration with equal amortizing payments, to help meet the credit needs of consumers.”  The bulletin is intended “to remind banks of the core lending principles for prudently managing the risks associated with offering short-term, small-dollar installment lending programs.”

By way of background, the bulletin notes that in October 2017, the OCC rescinded its guidance on deposit advance products because continued compliance with such guidance “would have subjected banks to potentially inconsistent regulatory direction and undue burden as they prepared to comply with the [CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).”]  The guidance had effectively precluded banks subject to OCC supervision from offering deposit advance products.  The OCC references the CFPB’s plans to reconsider the Payday Rule and states that it intends to work with the CFPB and other stakeholders “to ensure that OCC-supervised banks can responsibly engage in consumer lending, including lending products covered by the Payday Rule.”  (The statement issued by CFPB Acting Director Mulvaney applauding the OCC bulletin further reinforces our expectation that the CFPB will work with the OCC to change the Payday Rule.)

When the OCC withdrew its prior restrictive deposit advance product guidance, we commented that the OCC appeared to be inviting banks to consider offering the product.  The bulletin appears to confirm that the OCC intended to invite the financial institutions it supervises to offer similar products to credit-starved consumers, although it suggests that the products should be even-payment amortizing loans with terms of at least two months.  It may or may not be a coincidence that the products the OCC describes would not be subject to the ability-to-repay requirements of the CFPB’s Payday Rule (or potentially to any requirements of the Payday Rule).

The new guidance lists the policies and practices the OCC expects its supervised institutions to follow, including:

  • “Loan amounts and repayment terms that align with eligibility and underwriting criteria and that promote fair treatment and access of applicants.  Product structures should support borrower affordability and successful repayment of principal and interest in a reasonable time frame.”
  • “Analysis that uses internal and external data sources, including deposit activity, to assess a consumer’s creditworthiness and to effectively manage credit risk.  Such analysis could facilitate sound underwriting for credit offered to consumer who have the ability to repay but who do not meet traditional standards.”

While the OCC’s encouragement of bank small-dollar lending is a welcome development, the bulletin contains potentially troubling language.  The OCC’s “reasonable policies and practices specific to short-term, small-dollar installment lending” also include “[l]oan pricing that complies with applicable state laws and reflects overall returns reasonably related to product risks and costs.  The OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entities licensing state(s).”  (emphasis added).  This statement raises at least two concerns:

  • The OCC’s reference to “[l]oan pricing that complies with applicable state laws” is confused (or likely to cause confusion).  Federal law (12 U.S.C. Section 85) governs the interest national banks may charge.  It authorizes banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state.  The OCC should clarify that it did not mean to suggest otherwise.
  • The OCC’s unfavorable view of bank-nonbank partnerships, where the “sole goal [is] evading” state-law rate limits, could be read to call into question a valuable distribution channel for bank loans.  While the context is “specific to short-term, small-dollar installment lending,” this apparent hostility to bank-model relationships should be of concern to all banks that partner with third parties, including fintech companies, to make loans under Section 85.  The statement in question seems at odds with the broad view of federal preemption enunciated by the OCC with respect to the Madden decision. 

 

In addition to the CFPB’s Spring 2018 rulemaking agenda that we have already blogged about, the Spring 2018 rulemaking agendas of several other federal agencies contain some items of interest to consumer financial services providers.

Items of particular interest are:

  • OCC.  The OCC plans to issue an Advance Notice of Proposed Rulemaking “for modernizing the current regulations to carry out the purposes of the Community Reinvestment Act.”  The agenda gives a May 2018 estimated date for the ANPRM.  Last month, the Treasury Department issued a memorandum in which it made recommendations for modernizing the CRA.  The memorandum was directed to the primary CRA regulators, consisting of the OCC, the Federal Reserve, and the FDIC.  Of the three agencies, only the OCC’s Spring 2018 rulemaking agenda included a CRA item.
  • NCUA.  The NCUA is drafting an amendment to its general lending rule to give federal credit unions an additional option for offering Payday Alternative Loans (PALs).  The proposal would be an alternative to the current PALs rule.  It would modify the minimum and maximum loan amounts, eliminate the minimum membership requirement, and increase the maximum loan maturity while incorporating the other features of the current PALs rule.  The NCUA expects to issue a Notice of Proposed Rulemaking in May 2018.
  • Dept. of Education.  In June 2017, the ED announced that it was postponing “until further notice” the July 1, 2017 effective date of various provisions of the “borrower defense” final rule issued by the ED in November 2016, including the rule’s ban on arbitration agreements.  It also made a concurrent announcement that it planned to enter into a negotiated rulemaking to revise the “borrower defense” rule.  In October 2017, the ED published an interim final rule postponing the effective date of such provisions of the “borrower defense” final rule until July 1, 2018, and in February 2018, the ED published a final rule to further postpone the effective date until July 1, 2019.  In its Spring 2018 rulemaking agenda, the ED indicates that it expects to issue a NPRM in May 2018 regarding the “borrower defense” rule.

The following bills were passed by the House earlier this week:

  • The “Making Online Banking Initiation Legal and Easy (MOBILE) Act, H.R. 1457.  Passed by a vote of 397-8, the MOBILE Act would allow a bank to scan and retain personal information from a state-issued driver’s license or personal identification card when an individual seeks to open an account online or obtain a financial product or service online.  The bill would also allow a bank to use the license or identification card to verify the individual’s identity and comply with a legal requirement to record, retain, or transmit the personal information of an individual seeking to open an account online or obtain a financial product or service online.  According to the accompanying House Report, the bill is intended to create a “new national standard” that would preempt state laws that do not permit the scanning of state-issued driver’s licenses or personal identification cards to verify a customer’s identity.  The bill contains an express preemption provision.  While the bill expands the documentation a bank can use to verify a customer’s identity in an online transaction, it does not require a bank to accept such documentation or limit a bank’s ability to decide who is eligible to open an account.
  • The “Federal Savings Association Charter Flexibility Act of 2017,” H.R. 1426.  Passed by a voice vote, the bill would allow a federal savings association to exercise the powers of a national bank without converting to a national bank charter.  According to the accompanying House Report, the bill is intended to allow a federal savings association to exceed the commercial and consumer loan limits to which it is subject under the Home Owners Loan Act while continuing to be treated as a federal savings association for purposes of governance, consolidation, merger, dissolution, conservatorship, and receivership.  Under the bill, a federal savings association would have to submit a notice of election to operate as a national bank and, unless the OCC otherwise notified the association, the election would be deemed approved 60 days after the OCC received notice.

Last week, the OCC released its Semiannual Risk Assessment for Fall 2017 highlighting credit, operational, and compliance risks to the federal banking system.  In addition to easing in commercial credit underwriting processes, the increasing complexity of cybersecurity threats, and ongoing challenges in complying with Bank Secrecy Act (BSA) requirements, the other key risks identified by the OCC were increasing concentration in third-party service providers for critical operations and challenges in consumer compliance risk management for banks due to the increasing complexity in consumer compliance regulations.  Among the report’s important takeaways is that, despite the CFPB’s recent deregulatory initiatives, financial institutions, particularly banks, continue to face enforcement and supervisory risk resulting from insufficient attention to regulatory compliance.

Operational risk resulting from use of third-party service providers.  The OCC indicated that banks’ increasing use of third-party service providers and the emergence of new products and services offered through financial technology companies or other industry collaborations warrant heightened supervisory focus. The OCC observed that many banks have become increasingly reliant on third-party service providers to support key operations and, as a result of increased consolidation among significant providers, large numbers of banks, especially community banks, are relying on a smaller group of third parties providing critical applications.

The OCC stated that its examiners have identified instances of concentration of third-party services for specialized services, such as merchant card processing.  The OCC acknowledged that banks can achieve greater economies of scale and better manage operations than they could do individually by having access to technical resources provided by third-party service providers.  At the same time, the OCC cautioned that increased use of a limited number of such providers “can create concentrated points of failure resulting in systemic risk to the financial  sector that banks can address through appropriate due diligence and oversight.”

Compliance risk.  The OCC observed that new or amended regulations create challenges to bank change management processes and increase operational, compliance, and reputation risks.  As examples of such changes, the OCC identified the integrated mortgage disclosure requirements under the Truth in Lending Act and the Real Estate Settlement Procedures Act, as well as the new requirements under the amended regulations implementing the Home Mortgage Disclosure Act (HMDA) and the Military Lending Act (MLA).

The OCC also noted the continued challenge for banks to comply with BSA requirements persists due to dynamism of money laundering and terrorism-financing methods. The OCC stated that bank offerings using new or evolving delivery channels may increase customer convenience and access to financial products and services, but banks need to maintain a focus on refining or updating BSA compliance programs to address any vulnerabilities created by these new offerings, which criminals can exploit.

The OCC noted that the TILA, RESPA, and MLA requirements apply to the majority of OCC-supervised institutions.  It stated that despite the integrated mortgage disclosure requirements’ October 2015 effective date, the OCC continues to identify instances where banks have not fully implemented such requirements.  It noted that common supervisory concerns include the accuracy of loan estimates and closing disclosures and inaccurate timing and tolerance violations.

With regard to HMDA, the OCC commented that changes to HMDA require banks to significantly enhance their data collection and reporting systems in 2017 and 2018 to meet their compliance obligations.  It also stated that the CFPB’s recent announcement that it intends to engage in a rulemaking to reconsider various aspects of the revised HMDA rules could result in further HMDA-reporting change management by banks.

With regard to the MLA, the OCC observed that the amended MLA regulation expands the protections provided to servicemembers and their families, covers a wider range of credit products, and is more inclusive than TILA “finance charges” for purposes of the types of charges that must be counted toward the MLA 36 percent rate limit.  It noted that the amendments have the potential for significant compliance, credit, and reputation risk exposure, including the voiding of the credit agreement.

The OCC also made the observation that banks have increasing operational and compliance risk exposure due to strains on the resources needed to effectively support the volume and frequency of regulatory changes and manage existing compliance programs.  The OCC reminded management of the need to identify and understand the risk exposure associated with these resource challenges and address them appropriately.  It warned that failure to do so could have negative impacts on the effectiveness of compliance risk management systems to ensure regulatory compliance and fair treatment of customers and also reminded management of the need to conduct sound due diligence and maintain sufficient oversight when relying on third parties to provide or service bank products.

 

The impact of new Comptroller of the Currency Joseph Otting on fintech companies is the subject of an article by Ballard Spahr attorneys Scott Pearson and Dan Delnero published by LEND360 Connect.  LEND360 is the sponsor of a national conference focused on issues impacting the online lending space.

The article, Predicting Comptroller Otting’s Impact on Fintech, discusses how Comptroller Otting is likely to approach key issues now facing fintech companies such as the OCC’s proposal to grant special purpose national bank charters to companies that make loans but do not accept deposits, the Second Circuit’s decision in Madden v. Midland Funding, and the so-called “true lender” issue.