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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 CRA.  As 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.

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.