The Federal Banking Agencies (“FBAs”) — collectively the Office of the Comptroller of the Currency (“OCC”); the Board of Governors of the Federal Reserve System (“Federal Reserve”); the Federal Deposit Insurance Corporation (“FDIC”); and the National Credit Union Administration (“NCUA”) — just issued with the concurrence of FinCEN an Order granting an exemption from the requirements of the customer identification program (“CIP”) rules imposed by the Bank Secrecy Act (“BSA”) under 31 U.S.C. § 5318(l) for certain premium finance loans. The Order applies to “banks” — as defined at 31 C.F.R. § 1010.100(d) — and their subsidiaries which are subject to the jurisdiction of the OCC, Federal Reserve, FDIC, or NCUA.

The Order generally describes the CIP rules of the BSA, which at a very high level require covered financial institutions to implement a CIP “that includes risk-based verification procedures that enable the [financial institution] to form a reasonable belief that it knows the true identify of its customers.” This process involves gathering identifying information and procedures for verifying the customer’s identity. Further observing that, under 31 C.F.R. § 1020.220(b), a FBA with the concurrence of the Secretary of the Treasury may exempt any bank or type of account from these CIP requirements, the Order proceeds to exempt loans extended by banks and their subsidiaries from the CIP requirements when issued to commercial customers (i.e., corporations, partnerships, sole proprietorships, and trusts) to facilitate the purchases of property and casualty insurance policies, otherwise known as premium finance loans or premium finance lending.

The key to the exemption — similar to other narrow exemptions previously issued by FinCEN in regards to the related beneficial ownership rule (as we have blogged, see here and here) — is that these transactions are perceived as presenting a “low risk of money laundering.” This finding is repeated throughout the Order, and is rooted in arguments made in letters submitted to FinCEN and the FBAs by a “consortium of banks.”

More specifically, the Order explains that premium finance loans present a low risk of money laundering, and therefore are exempt from the CIP rules, because of the following considerations and “structural characteristics,” raised either by the consortium of banks and/or the government itself:

  • The process for executing a premium finance loan is highly automated, because “most . . . loan volume is quoted and recorded electronically.”
  • These loans typically are submitted, approved and funded within the same business day and are conducted through insurance agents or brokers with no interaction between the bank and borrower — which means that this process renders it difficult for banks to gather CIP-related information efficiently.  These practical problems are exacerbated by the frequent reluctance of insurance brokers and agents — driven by data privacy concerns — to collect personal information.
  • Property and casualty insurance policies have no investment value.
  • Borrowers cannot use these accounts to purchase merchandise, deposit or withdraw cash, write checks or transfer funds.
  • FinCEN previously exempted financial institutions that finance insurance premiums from the general requirement to identify the beneficial owners of legal entity customers.
  • FinCEN previously exempted financial institutions that finance insurance premiums that allow for cash refunds from the beneficial ownership requirements.
  • FinCEN previously exempted commercial property and casualty insurance policies from the general BSA compliance program rule for insurance companies.
  • The exemption “is consistent with safe and sound banking.”

Although this exemption is narrow and somewhat technical, it represents yet another step in an apparent trend by FinCEN and the FBAs to ease the regulatory demands, albeit in a very targeted fashion, imposed under the BSA.  Clearly, the key argument to be made by other financial institutions seeking similar relief is that the particular kind of financial transaction at issue presents a “low risk of money laundering.”

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

On September 12, 2018, the Office of the Comptroller of the Currency (the “OCC“) released its first update to the “Deposit-Related Credit” booklet of the Comptroller’s Handbook (the “DRC Booklet“) since its March 2015 release.  (The OCC initially released a widely-critiqued DRC Booklet in February of 2015 as a replacement to its “Credit Check” booklet, but this release was quickly withdrawn.)  The DRC Booklet provides guidance to OCC examiners in their review of “deposit-related credit” (“DRC Products“) which typically constitute small-dollar, unsecured credit products related to a consumer’s deposit account, such as “check credit,” “overdraft protection services,” or “deposit advance products.”

Importantly, this is the first revision to the DRC Booklet since the OCC’s rescission of its guidance entitled “Supervisory Concerns and Expectations Regarding Deposit Advance Products” and corresponding OCC Bulletin 2013-40 that had effectively precluded banks subject to OCC supervision from offering deposit advance products.  As we have previously discussed, the OCC recently has taken positive, if sometimes contradictory, steps towards encouraging banks to offer small-dollar credit, and the updated DRC Booklet appears to be another positive step forward.  Among other things, it removes examination procedures related to burdensome “ability to repay” requirements as well as references to OCC Bulletin 2013-40’s risk management expectations.

The OCC’s revisions also attend to various housekeeping matters, such as the incorporation of recent OCC Bulletin 2018-14, “Installment Lending: Core Lending Principles for Short-Term, Small-Dollar Installment Lending,” OCC Bulletin 2017-21: “Third-Party Relationships” and OCC Bulletin 2017-43: New, Modified, or Expanded Bank Products and Services–Risk Management Principles,” and they integrate the Dodd-Frank concept of “unfair, deceptive, or abusive acts or practices.”  Finally, the DRC Bulletin has been revised to clarify certain provisions of the Military Lending Act as they relate to DRC Products.

As we have noted, financial institutions such as national and federal savings banks may have opportunities to structure DRC Products that will not only fall outside the CFPB’s small-dollar rule but also meet supervisory expectations, produce substantial revenues and provide credit to otherwise credit-limited consumers.  (And at least one major financial institution has already launched a program in this changing regulatory environment.)  The revisions to the DRC Bulletin are yet another indication of the OCC’s increased permissiveness of DRC and other small-dollar products, and we will continue to provide updates on these regulatory changes as they occur.

On September 12th, the Conference of State Bank Supervisors (CSBS) announced that it would again pursue litigation in opposition to the OCC’s recent decision to accept applications from non-depository financial technology firms for a special purpose national bank (SPNB) charter.

While it announced that its Board of Directors had approved renewing litigation against the OCC at an August 28 meeting, the CSBS did not indicate when it plans to file the lawsuit.  The lawsuit would represent the second time that the CSBS has pursued litigation challenging the OCC’s authority to issue a SPNB charter to fintech companies.  On April 30, 2018, a D.C. federal district court dismissed the first lawsuit filed by the CSBS challenging the OCC’s authority to grant SPNB charters on the grounds that the CSBS had failed to establish any injury in fact necessary for Article III standing and that the case was not ripe for judicial review.  In its initial filing, the CSBS argued that the OCC’s 2017 proposal to issue SBNB charters to fintech companies exceeded the authority granted to the OCC by Congress under the National Bank Act (NBA) and other federal banking laws to charter institutions that engage in the “business of banking.”  The CSBS argued that to engage in the “business of banking,” the NBA requires an institution, at a minimum, to receive deposits.

The New York Department of Financial Services (DFS) also previously filed a lawsuit challenging the OCC’s authority to issue SPNB charters.  That lawsuit, which was filed in a New York federal district court, was dismissed in December, 2017 on similar grounds.  While the DFS has not announced whether it will renew its litigation against the OCC, DFS Superintendent Maria Vullo stated in a July 31 press release that “DFS believes that this [OCC] endeavor, which is also wrongly supported by the Treasury Department, is clearly not authorized under the National Bank Act.  As DFS has noted since the OCC’s proposal, a national fintech charter will impose an entirely unjustified federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape.”

We recently blogged about the announcement by Varo Bank, N.A., a fintech bank, that it had received preliminary approval from the OCC of its application for a full-service national bank charter.  We do not expect the CSBS or the DFS to challenge the preliminary approval since there would not appear to be any basis to challenge the OCC’s authority to issue a full-service national bank charter to Varo assuming it satisfies the standard conditions for obtaining such a charter.

In a press release, the organizers of Varo Bank, N.A. announced they have been granted preliminary approval by the OCC of their application to form a de novo national bank, which they claim “put[s] Varo on track to become the first all-mobile national bank in the history of the United States.”

In July 2018, the OCC announced that it would begin accepting applications for special purpose national bank (SPNB) charters from financial technology (fintech) companies.  Rather than a SPNB charter, Varo is seeking a full-service national bank charter from the OCC.  A SPNB charter provides an option for a fintech company for whom, because of its own non-financial activities or those of an affiliate, the Bank Holding Company Act would be an obstacle to obtaining a full-service national bank charter.  Obtaining a full-service national bank charter, however, is the preferred option for a fintech company that can do so consistent with the BHCA.  Many years ago, two of my Ballard partners successfully converted a consumer finance company to a full-service national bank.

Federal court lawsuits challenging the OCC’s authority to issue SPNB charters were filed in 2017 by the Conference of State Bank Supervisors and the New York Department of Financial Services.  Both lawsuits were dismissed for failure to establish an injury in fact necessary for Article III standing and lack of ripeness for judicial review.  While such challenges may be renewed now that the OCC has announced that it will begin accepting SPNB charter applications, there would not appear to be any basis for a similar challenge to the issuance of a full-service national bank charter to Varo assuming it satisfies the standard conditions for obtaining such a charter.

The Office of the Comptroller of the Currency (OCC) has issued an advance notice of proposed rulemaking (ANPR) on which it invites public comment “to solicit ideas for building a new framework to transform or on ways to transform or modernize the regulations that implement the Community Reinvestment Act of 1977 (CRA).”  The ANPR follows the Treasury Department’s issuance of a memorandum in April 2018 that made recommendations for modernizing the CRA to reflect the significant organizational and technological change experienced by the U.S. banking industry since the CRA’s enactment.  The Treasury’s memorandum was directed to the primary CRA regulators, consisting of the OCC, the Federal Reserve, and the FDIC.  Each of these agencies has individually adopted regulations to implement the CRA.  In issuing the ANPR, the OCC becomes the first of the three agencies to move forward on updating its CRA regulations.  Comments on the ANPR will be due no later than 75 days after the date it is published in the Federal Register.

The ANPR is intended to respond to stakeholder concerns that (1) the CRA’s statutory purpose of encouraging banks, consistent with safety and soundness considerations, to help meet the credit needs of the communities they serve including low- and moderate-income (LMI) areas “is not fully or effectively accomplished through the current regulations,” (2) the current CRA regulatory framework “no longer reflects how many banks and consumers engage in business of banking,” and (3) the current CRA regulatory requirements lack “clarity, consistency, and certainty.”

Following a discussion of the different methods currently used to evaluate a bank’s CRA performance depending on its asset size and business strategy, what is included in a bank’s assessment area, and the relationship between a bank’s assessment area and its CRA-qualifying activities, the ANPR invites comments on five groups of questions.  The questions in the first group are general in nature and solicit comments “on changes to transform or modernize the current CRA regulatory framework.”  For example, the OCC asks whether the current CRA regulations are “clear and easy to understand” and “applied consistently” and whether the current CRA rating system is “objective, fair, and transparent.”

The other four groups of questions are directed at specific topics as follows:

  • Revising or transforming the current regulatory approach by implementing either (1) an alternative evaluation method to replace existing performance tests and standards that would “separately evaluate retail or [community development (CD)] activities for all banks, accounting for variations in size, business model, or other factors,” and use “updated metrics that take into account information on a bank’s performance context, such as the demographic characteristics and the economic and financial condition of specific communities,” or (2) “a more transformational approach” that could, through the use of “a metric-based performance measurement system with thresholds or ranges (benchmarks) that correspond to the four statutory CRA ratings,” make the process for evaluating a bank’s CRA performance more transparent, define “community” more broadly, and expand the activities receiving CRA consideration.
  • An updated approach to defining a bank’s assessment area under which a bank would continue to receive consideration for CRA-qualifying activities within its branch and deposit-taking ATM footprint and could receive consideration “for providing these types of beneficial activities in LMI areas outside of [such footprint] and other underserved areas.”
  • Expanding CRA-qualifying activities through regulatory changes “that could ensure CRA consideration for a broad range of activities supporting community and economic development in banks’ CRA performance evaluations, while retaining a focus on LMI populations and areas, and set clear standards for determining whether an activity qualifies for CRA consideration,” such as small business loans.
  • Updating CRA recordkeeping and reporting requirements under a metric-based framework.

The ANPR concludes with an invitation for “other ideas and options for modernizing the CRA regulatory framework not identified in this ANPR.”


A new bulletin issued by the Office of the Comptroller of the Currency (OCC), Bulletin 2018-23, makes slight, but significant, changes to OCC policy regarding when evidence of illegal or discriminatory credit practices could result in a downgrade to a national bank’s Community Reinvestment Act (CRA) examination rating.  The bulletin clarifies that, contrary to another OCC bulletin issued in late 2017, there are still circumstances that could justify a downgrade of two CRA rating levels.

On October 12, 2017, the OCC, under Acting Comptroller Keith Noreika, issued revised Policies and Procedures Manual (PPM) 5000-43 to clarify the relationship between evidence of illegal credit practices and an institution’s CRA rating.  PPM 5000-43 provided two principles to guide the OCC’s CRA rating determination.  First, the OCC would require a logical nexus between the evidence of illegal or discriminatory credit practices and the CRA rating. The OCC said that it would consider lowering a rating where the evidence of illegal activities “directly relates” to an institution’s CRA lending activities (as opposed to other activities).  The second principle committed the OCC to giving an institution full consideration for all remedial actions taken.

Bulletin 2018-23, issued by Comptroller Joseph Otting, changes the OCC’s approach to the first principle provided by PPM 5000-43.  With respect to the activities that can impact a bank’s CRA rating, the OCC clarified that “[g]enerally, the OCC considers lowering the composite or component performance test rating of a bank only if the evidence of discriminatory or illegal credit practices directly relates to the institution’s CRA lending activities” (emphasis added).  The addition of the word “only” may strengthen the OCC’s commitment to limit rating impacts to situations where illegal activities directly relate to CRA lending.  However, the use of “generally” could still provide examiners with flexibility.

Most significantly, Bulletin 2018-23 reverses the OCC’s prior statement that such an impact would only result in one rating-level downgrade.  The OCC deleted a footnote from PPM 5000-43 that clearly stated that the OCC’s policy is not to downgrade ratings by more than one level and added a new sentence to the primary text.  The new sentence says “the OCC’s general policy is to downgrade the rating by only one rating level unless such illegal practices are found to be particularly egregious.”  It remains to be seen how the OCC will define “particularly egregious” practices.

These changes come in the wake of several other CRA developments this year.  In April 2018, the Treasury Department released an extensive list of recommendations to modernize the CRAAs we commented at the time, implementation of those recommendations would require rulemakings by the banking agencies, including the OCC, the Federal Reserve, and the Federal Deposit Insurance Corporation.

The OCC also issued OCC Bulletin 2018-17 in June 2018.  Most notably, this bulletin changed the timing of CRA examinations.  In a letter to Comptroller Otting dated July 24, 2018, several U.S. Senators criticized these changes and claimed that the OCC had effectively undermined the CRA’s effectiveness by lengthening the examination schedule for some large banks and delaying the impact of a CFPB fair lending investigation until a subsequent CRA examination takes place (instead of delaying the conclusion of a CRA examination while a fair lending investigation is pending).

These developments and the OCC’s policy changes indicate that 2018 will continue to be an impactful year for the CRA as it relates to national banks.



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.