By a vote of 54-43, Joseph Otting has been confirmed by the Senate as Comptroller of the Currency. Mr. Otting is a former president and CEO of California-based OneWest Bank, where he worked with Steven Mnuchin, who now serves as Secretary of the Treasury.

According to Politico, Acting Comptroller Keith Noreika has submitted his resignation, to be effective one business day after Mr. Otting takes office.  Politico also reported that because Mr. Noreika has been working at the OCC as a “special government employee,” he can return to the private sector without any mandated waiting period.

Mr. Otting has not yet taken a public position on the OCC’s special purpose national bank (SPNB) charter proposal.  However, we would expect Mr. Otting to pursue the same policy objectives as those pursued by Mr. Noreika.  While serving as Acting Comptroller, Mr. Noreika stated several times that the OCC is continuing to consider the proposal and intends to defend its authority to grant an SNPB charter to a nondepository company in the lawsuits filed by the NY Department of Financial Services and the Conference of State Bank Supervisors.  He also 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 questioned the continuing need for the current barriers between banking and commerce in recent comments.

In a new Policies and Procedures Manual (PPM) issuance (PPM 6300-2), the OCC establishes its framework for evaluating certain types of licensing applications when the applicant bank has an overall Community Reinvestment Act (CRA) rating of “Needs to Improve” or “Substantial Noncompliance.”  Both ratings are referred to in the PPM as a “less than satisfactory CRA rating.”  The PPM applies to all national banks, federal savings associations, federal branches of foreign banks subject to the CRA, and state-chartered institutions subject to the CRA seeking to convert to a federal charter.

By way of background, the PPM states that OCC regulations implementing the CRA provide that the OCC must consider a bank’s CRA rating when reviewing the bank’s application for any of the following (Covered Applications): branch establishment, branch relocation, main or home office relocation, a Bank Merger Act filing involving two insured depository institutions, conversion from a state to a federal charter, and conversion between federal charters.  The PPM also states that it provides clarity and guidance on the OCC’s longstanding practice of subjecting Covered Applications from banks with significant CRA issues to enhanced scrutiny.

The OCC’s framework set forth in the PPM applies to applicant banks filing Covered Applications in two situations: where the bank has an overall satisfactory or better CRA rating but has one or more geographic rating areas rated less than satisfactory and where the bank has an overall less than satisfactory CRA rating.

For a bank with an overall satisfactory or better CRA rating but a less than satisfactory rating in one or more geographic rating areas, the general presumption is that the CRA consideration is consistent with approval of the Covered ApplicationHowever, the specific facts of a particular transaction may, on balance, result in a determination that the CRA consideration is not consistent with approval.

If a bank has an overall less than satisfactory CRA rating, the OCC will give enhanced scrutiny to the bank’s Covered Application.  As part of such scrutiny, the applicant bank will be required to submit with its application a description, and appropriate supporting information, of how it would meet CRA objectives in connection with the proposed transaction.  The bank must also describe in detail how approval of the Covered Application would allow the bank to improve its CRA performance.  The OCC would generally find that the CRA consideration is consistent with approval of a Covered Application if the bank demonstrates that approval, subject to conditions or otherwise, would help the bank to achieve its CRA objectives and would further the CRA’s public policy goals by encouraging the bank to help meet the credit needs of the communities it serves.

The PPM discusses four factors that the OCC will consider in assessing whether or not the CRA consideration is consistent with approval of a Covered Application by a bank with an overall less than satisfactory CRA rating.  The factors are:

  • whether the overall less than satisfactory CRA rating was issued recently, the severity of the less than satisfactory CRA performance rating, and the progress made by the applicant bank to address the issues underlying the less than satisfactory rating.
  • whether approval of the Covered Application would result in a material increase in the applicant bank’s size or the scope of its activities, and how such increase would affect the bank’s ability to help meet the credit needs of the communities to be served.
  • whether the proposed transaction would benefit the communities to be served, as well as the nature and extent of such benefits.
  • whether approving the Covered Application with conditions would (a) be sufficient to ensure that the pro forma organization will be able to achieve its CRA objectives, (b) clearly further the specific goals of CRA, or (c) significantly further fair access to banking services.

The PPM also states that, in certain circumstances, evidence of discriminatory or other illegal credit practices related to CRA lending activities can cause a bank to receive an overall less than satisfactory CRA rating, and that in such instances the same general framework and considerations apply.  Other topics discussed in the PPM are the timing of when the framework and considerations in the PPM will go into effect or no longer apply to a Covered Application, how the OCC handles a Covered Application when a bank has appealed a less than satisfactory CRA rating (either overall or in a particular rating area), and the content of OCC communications when the OCC notifies a bank that it has received such a rating.

 

The CFPB, Fed, and OCC have published notices in the Federal Register announcing that they are increasing three exemption thresholds that are subject to annual inflation adjustments.  Effective January 1, 2018 through December 31, 2018, these exemption thresholds are increased as follows:

Today, President Trump signed H.J. Res. 111, the joint resolution passed by the House and Senate disapproving the CFPB arbitration rule.

The House and Senate actions were taken pursuant to the Congressional Review Act (CRA), which establishes a fast-track procedure under which Congress can override a federal agency’s final rule by passing a resolution of disapproval that cannot be filibustered in the Senate and only requires a simple majority vote.

The arbitration rule became effective on September 18, 2017, with a March 19, 2018, mandatory compliance date.  Under the CRA, enactment of a resolution of disapproval blocks a rule from taking effect or continuing.  Accordingly, the signing of the joint resolution by President Trump means the CFPB arbitration rule is no longer effective.

The CRA also provides that enactment of a resolution of disapproval prevents an agency from reissuing the disapproved rule in substantially the same form or from issuing a new rule that is substantially the same, unless the reissued or new rule is specifically authorized by a law enacted after the date of the resolution of disapproval.  Thus, without new authority from Congress, the CFPB cannot reissue the arbitration rule with substantially similar prohibitions and requirements for companies using arbitration agreements or issue a new rule containing substantially similar prohibitions and requirements.

Acting Comptroller of the Currency Keith Noreika issued a statement in which he applauded the President and Congress for vacating the CFPB rule.  He called the override “a victory for consumers and small and midsize banks across the country because it stops a rule that likely would have significantly increased the cost of credit for hardworking Americans and taken away a valuable tool for resolving differences among banks and their customers.”

Last week, the OCC announced that it had issued a full service national bank charter to Winter Park National Bank of Florida.

Acting Comptroller of the Currency Keith Noreika released a statement in which he stated that Winter Park is “the first de novo national bank and first de novo approved for federal deposit insurance in Florida since the financial crisis.”  He also commented that while the OCC was seeing “increasing interest in becoming new banks,” de novo banks continue to be “exceedingly rare.”  He then suggested that the charter process needs to be improved, stating “[m]aking the process of establishing de novo banks more efficient can only accelerate the recent positive trend and create more economic opportunity for consumers, businesses, and communities across the nation.”

On October 20, 2017, the Office of the Comptroller of the Currency (OCC) issued Bulletin 2017-43 (the “Bulletin”) outlining principles that OCC-supervised banks should follow to prudently manage the risks associated with offering new, modified, or expanded products and services.

Acting Comptroller Keith Noreika, in recent remarks, confirmed the OCC’s efforts to explore and support responsible innovation, and the Bulletin indicates that it “is consistent” with that support.  Observing the “breadth and speed of change” in banks’ use of new technology, the Bulletin underscores the need for “bank management and boards of directors [to] understand the impact of new activities on banks’ financial performance, strategic planning process, risk profiles, traditional banking models, and ability to remain competitive.

“New activities,” as defined in the Bulletin, include new, modified, and/or expanded products and services.  Such products and services include those offered for the first time, previously discontinued but offered again, substantially altered, or expanded beyond a bank’s customer base, financial markets, venues or delivery channels.

The OCC expects bank management to establish appropriate risk management processes for new activity development and to measure, monitor, and control the risks associated with new activities.  The bank’s board is expected to oversee management’s implementation of the risk management system.  The OCC highlights the primary risks that arise in developing and introducing new activities, consisting of strategic risk, reputational risk, credit risk, operational risk, compliance risk, and liquidity risk.  The OCC also describes various circumstances that can increase each of such risks.

The OCC discusses the four main components that a bank should include in its risk management system for new activities consisting of the following:

  • Due Diligence and Approvals. Before implementing a new activity, management should conduct adequate due diligence to understand the rationale for engaging in new activities and how proposed new activities meet the bank’s strategic objectives. Due diligence should include determining the requirements of applicable laws and regulations, identifying potential conflicts of interest, conducting research on third-party service providers, determining the expertise and operational infrastructure requirements needed to effectively manage and support the new activities, and developing a business and financial plan.
  • Policies, Procedures, and Controls. Management should establish and implement policies and procedures that provide guidance on risk management of new activities.  Management should take other steps such as: expanding or amending existing policies and procedures to address new activities, developing a management information system to, among other things, properly evaluate the performance of new activities, and incorporating new activities into the bank’s independent risk management, compliance management system, and audit processes to ensure adherence with bank policies and procedures and adequate customer safeguards.
  • Change Management.  Management should have effective change management processes to manage and control the implementation of new or modified processes, as well as the addition of new technologies.  Such processes should include employee training, proper testing, and an exit strategy to limit adverse effects in the event of failed or flawed implementation of new activities.
  • Performance and Monitoring. Management should have appropriate performance and monitoring systems to assess whether new activities meet strategic expectations and legal requirements and are within the bank’s risk appetite.  Such systems should include limits on the size of risk exposure that is acceptable to management and the board, identification of specific objectives and performance criteria to evaluate the success of new activities, and periodic testing of the effectiveness of operational controls and safeguards and compliance with applicable laws, regulations, and bank policies and procedures, with such testing to consider potential risks for unfair or deceptive acts or practices.
  • Third-Party Relationship Risk Management. The OCC states that “unique risks” are created when a bank engages in new activities through third-party relationships and stresses the need for management to understand such risks and conduct adequate due diligence on third-party service providers.  Observing that fintech companies “continue to grow significantly in importance,” the OCC indicates that a bank should include fintech companies in its third-party risk management process and outlines steps consistent with prudent risk management that a bank should take if it partners or contracts with a fintech company to offer new products or services.

With regard to supervision, the OCC states that its examiners review new activities consistent with OCC risk-based supervision, which considers the effect of new activities on a bank’s risk profile and the effectiveness of the bank’s risk management system.  The OCC also encourages management, before engaging in new activities, to discuss its plans with the bank’s OCC portfolio manager, examiner-in-charge, or supervisory office, particularly if such activities would constitute a substantial deviation from the bank’s existing business plans.

In remarks last week at Georgetown University’s Institute of International Economic Law’s Fintech Week event, Acting OCC Comptroller Keith Noreika provided the “latest on our thinking regarding a charter for fintech companies that offer banking products and services.”

The Acting Comptroller began his remarks by expressing his “optimism about banks, fintech companies, and the business of banking as a whole.”  He also confirmed the OCC’s efforts to explore and support innovation, including by developing “a framework for OCC participation in bank-run pilots that allow banks to develop and test products in a controlled environment.”  He indicated that “[t]he idea behind our effort is to create principles that support the industry’s need for a place to experiment while furthering the OCC’s understanding of innovative products, services, and technologies. Information gathered in the pilots can inform OCC policies and help make sure that we are ready to supervise the new activity when rolled out on a larger scale.”

With regard to the OCC’s proposal to allow fintech companies to apply for a special purpose national bank (SPNB) charter, the Acting Comptroller first observed that because there was so much interest in the proposal, he felt it was important to provide an update on where we are in that process and to correct some misperceptions that I see out there.”

He then referenced his remarks in July 2017 in which he confirmed his view “that companies that offer banking products and services should be allowed to apply for national bank charters so that they can pursue their businesses on a national scale if they choose, and if they meet the criteria and standards for doing so.  Providing a path for these companies to become national banks is pro-growth, can reduce regulatory burden for those companies, and can bring enhanced services to millions of people served by the federal banking system.”

He also observed that national bank charters “will never be compulsory and should be just one choice for companies interested in banking,” existing as an option alongside other choices such as “becoming a state bank or state industrial loan company, or operating as a state-licensed financial service provider.”  He added that “[a] fintech company also has the option to pursue partnerships or business combinations with existing banks, or it could even consider buying a bank, if that makes sense.”

The Acting Comptroller commented that while such options exist, “[i]f, and it is still an if, a fintech company has ambitions to engage in business on a national scale and meets the criteria for doing so, it should be free to seek a national bank charter. That includes pursuing a charter under the agency’s authority to charter special purpose national banks or the agency’s long-existing authority to charter full-service national banks and federal saving associations, as well as other long-established limited-purpose banks, such as trust banks, bankers’ banks, and other so-called CEBA credit card banks.”  He observed that many fintech and online lending business models are a good fit for such categories of national bank charters, and noted that there was some interest in fintechs becoming full-service banks, trust banks, or credit card banks.

The Acting Comptroller described the OCC’s proposal to use its authority to charter nondepository fintech companies as “a work in progress,” and noted the challenges to such authority by the Conference of State Bank Supervisors and the New York Department of Financial Services and the OCC’s defense of its authority even though it has not yet decided whether it will exercise that specific authority.  He commented that before the OCC reaches a decision, it needs “to be certain that the companies expressing interest in becoming a national bank fully understand just what it means to be a bank” and that “[t]alking about and applying for are a long way from approval of an application, and even further away from resulting in the kind of harm and abuse suggested.”

He labeled the argument being made by opponents of the SPNB charter that it may be a “slippery slope toward the inappropriate mixing of banking and commerce” a concern “that I think has been exaggerated with the intent of scuttling our idea for a fintech charter.”  He commented that the suggestion “that such mixing would result in destabilizing the market and increase consumer abuses” is an idea that “has been blown out of proportion.”

He then described the process that the OCC might use in considering SPNB charter applications. The OCC would consider every application on its own merits.  Issues it might consider are whether: (1) the business plan is sound, (2) the proposed management team passes muster, (3) the proposed company has adequate capital and liquidity, (4) the proposed company has adequate processes for ensuring that it operates in a safe and sound manner, provides fair access, and treats customers fairly, and (5) the proposed company has a good chance to succeed.

The Acting Comptroller noted that there already are “dozens of examples where commercial companies are allowed to own banks at the state and federal levels without such abuse and harm—national credit card banks, state merchant processing banks, state-chartered ILCs” and commented that commercial companies are allowed to own such banks “for good reason—they support legitimate business goals and deliver valued products and services to their customers.”  He also stated that if a chartered bank does not meet the Bank Holding Company Act’s definition of what it means to be a bank for the purposes of the Act, “its parent company would not become a bank holding company solely by virtue of owning the bank, and therefore, nonbank holding companies, commercial entities, or other banks could own such banks under the law.”

He also indicated that he wanted to make it “crystal clear” that the chartered entity regulated by the OCC “would be a bank, engaged in at least one of the core activities of banking—taking deposits, paying checks, or making loans” and that those “who suggest that the OCC is considering granting charters to nonfinancial companies are wrong, and the more sophisticated ones know it.”  He cautioned that fear should not prevent “a constructive discussion of where commerce and banking coexist successfully today and where else it may make sense in the future.”

The Conference of State Bank Supervisors has released a list of 33 companies that will serve as members of its Fintech Industry Advisory Panel.

According to the CSBS, the Advisory Panel’s purpose is “to support state regulators’ increased efforts to engage with financial services companies involved in fintech.”  More specifically, over the next twelve months, Advisory Panel members will participate in at least two in-person meetings with members of the CSBS Emerging Payments and Innovation Task Force and other state banking commissioners “to identify actionable steps for improving state licensing, regulation, and non-depository supervision and for supporting innovation in financial services.”  The Task Force consists of regulators from ten states, including the Superintendent of the New York Department of Financial Services.

The CSBS and the NY DFS have filed separate lawsuits challenging the OCC’s authority to grant special purpose national bank charters to nondepository fintech companies.  The OCC has filed motions to dismiss both lawsuits.

Hours after the CFPB released its final payday/auto title/high-rate installment loan rule on October 5, 2017, the OCC rescinded its guidance on deposit advance products.  That guidance, entitled Supervisory Concerns and Expectations Regarding Deposit Advance Products published in November 2013 (OCC Bulletin 2013-40), and substantially identical guidance issued by the FDIC on the same day, had effectively precluded banks subject to OCC and FDIC supervision from offering deposit advance products.  We were sharply critical of the prior guidance and applaud the OCC’s action.

Acting Comptroller Keith Noreika, in his statement about the OCC’s action, mentioned the CFPB and the risk of “potentially inconsistent regulatory direction and undue burden as they prepare to implement the requirements of the CFPB’s final [payday loan] rule.”  The Acting Comptroller went further, explaining that the OCC guidance “may even hurt the very consumers it is intended to help, the most marginalized, unbanked and underbanked portions of our society.”  The OCC, therefore, appears to invite banks to consider offering the product.  It remains to be seen whether the FDIC will follow suit.

We think that national banks and federal savings banks (and perhaps other financial institutions) have an opportunity to structure deposit advance products that will fall outside the new CFPB rule, meet supervisory expectations, produce substantial revenues, and provide badly needed credit to consumers whose options may be sharply constrained by the CFPB rule.

We will continue to monitor any developments as they unfold.

A group of Democratic House members led by Rep. Maxine Waters has introduced H.R. 3937, the “Megabank Accountability and Consequences Act of 2017,” that would require federal bank regulators to consider the revocation of a bank’s charter and deposit insurance if the bank is found to have engaged in a “pattern or practice” of violations of federal consumer protection laws.  The bank’s officers and directors would also be subject to civil and criminal liability.

The 45-page bill includes 10 pages of “findings.”  One such finding is that since the enactment of Dodd-Frank, “some very large banking organizations operating in the United States have repeatedly violated Federal banking and consumer protection laws by engaging in unethical business practices” and that such banks “continue to act with impunity and violate numerous laws designed to protect consumers” despite enforcement actions that have been taken “most notably” by the CFPB.

Other findings include:

  • Senior bank executives “rarely have been held personally accountable for Federal consumer protection law violations and other illicit practices that occurred during their tenure.”
  • Federal prudential banking agencies, despite their wide-ranging statutory powers to address violations, “continue to rely on enforcement tools such as consent orders, cease and desist orders, and civil money penalties, even in instances when an institution’s violations have demonstrated unsafe or unsound business practices and past supervisory and enforcement actions have not sufficiently deterred illegal practices.”
  • Institutions have continued to engage in inappropriate and illegal practices because the federal prudential banking agencies have failed to “exercise statutorily provided enforcement authorities—such as revoking a bank’s national charter or terminating its Federal deposit insurance” or “hold the institution’s board of directors and senior officers accountable.”
  • Even if a bank’s violations of federal consumer financial laws “are deemed not to technically constitute unsafe or unsound banking practices, it may still demonstrate a pattern of wrongdoing causing unacceptable harm to its customers, such that continuing to enable it to engage in the business of banking distorts the regulatory purpose of providing national banks charters, deposit insurance and other benefits.”

The bill’s provisions would apply to a national bank, federal savings association, state Federal Reserve member bank, insured depository institution, foreign bank, or federal branch or agency of a foreign bank if such entity is “affiliated with a global systematically important bank holding company.”  A “global systematically important bank holding company” is defined as a bank holding company that the Fed has identified as a “global systematically important bank holding company” or a “global systematically important foreign banking organization” pursuant to existing federal regulations.

The bill contains a definition of “pattern or practice of unsafe or unsound banking practices or other violations related to consumer banking” that lists 7 types of activities and provides that a bank satisfies the “pattern or practice” definition if it engages in all of such activities “to the extent each activity was discovered or occurred at least once in the 10 years preceding the date of the enactment of this Act.”  It also contains a definition of “pattern or practice of violations of federal consumer protection laws.”

The bill includes the following requirements and sanctions:

  • If the OCC, after consultation with the CFPB, determines that a bank “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the OCC must “immediately initiate proceedings to terminate the [bank’s] Federal charter…or appoint a receiver for [the bank].”
  • If the FDIC, after consultation with the CFPB, determines that an insured depository institution “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the FDIC must “immediately initiate an involuntary termination of the [bank’s] deposit insurance.”
  • If the Fed, after consultation with the CFPB, determines that a state member bank “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the Fed must “immediately initiate proceedings to terminate such bank’s membership in the Federal Reserve System.”
  • If the Fed, after consultation with the CFPB, determines that a foreign bank or federal branch or agency of a foreign bank “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the Fed must “immediately initiate proceedings to terminate the foreign bank’s ability to operate in the United States” or recommend to the OCC that the branch’s or agency’s license be terminated.
  • If the OCC, Fed, or FDIC makes a determination to initiate proceedings to terminate a bank’s charter or deposit insurance, the agency must notify the bank “that removal is required of any director or senior officers responsible, as determined by [that agency], for overseeing any division of the [bank] during the time the [bank] was engaging in the identified pattern or practice of unsafe or unsound banking practices.”  Any current or former director or senior officer determined to have such responsibility “shall also be permanently banned from working as an employee, officer, or director of any other banking organization.”
  • If the FDIC determines that an insured depository institution “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm” or is notified by the OCC or Fed of the termination of a bank’s charter or an agency’s or branch’s license, the FDIC must not only initiate an involuntary termination of deposit insurance, it also must place the institution into receivership and can transfer the institution’s assets as provided in the bill.
  • Every “executive officer and director” of a national bank or federal savings association or a branch, representative office, or agency of a federally-licensed foreign bank must annually certify in writing to the appropriate banking agency, the CFPB, and any relevant federal law enforcement agency, that he or she has “regularly reviewed the institution’s lines of business and conducted due diligence to ensure,” that the institution (1) has established and maintained internal risk controls to identify significant federal law consumer compliance deficiencies and weaknesses, (2) has promptly disclosed all known violations of applicable federal consumer protection laws to the CFPB and appropriate banking agency, (3) is taking all reasonable steps to correct any identified federal law consumer compliance deficiencies and weakness based on prior examinations, and (4) is in substantial compliance with all federal consumer protection laws.
  • An officer or director who submits a certification that contains a false statement is subject to a fine or imprisonment if the statement is “done knowingly” or “done intentionally.”
  • An officer or director who knowingly violates any federal consumer protection law or directs any of the institution’s agents, officers, or directors to violate such a law is personally liable for any damages sustained by the institution or any other person as a result of the violation.  An officer or director who knowingly causes an institution to violate any federal consumer protection law or directs any of the institution’s agents, officers, or directors to commit a violation that results in the director or officer “being personally unjustly enriched and the institution being conducted in an unsafe and unsound manner” can be fined in an amount up to all of the compensation he or she received during the period in which the violations occurred or in the one to three years preceding discovery of the violations, and is subject to up to 5 years imprisonment.  The OCC, Fed, or FDIC, as applicable, must remove an officer or director who engaged in the foregoing conduct from his or her position and permanently ban such person from being involved in the operation and management of a federally-chartered or federally-insured bank.

Were it to become law, the bill’s certification requirement would likely make it very difficult for banks to attract and retain highly-qualified officers and directors.  It could also lead to instability in the banking system by creating a  “run” on deposits by depositors of a bank that became subject to the bill’s sanctions, particularly those whose deposits at the bank exceeded the insured deposit limit.

Fortunately, given the large Republican majority in the House, the bill is very unlikely to advance.