Comptroller Otting comments on short-term, small dollar loan bulletin, special purpose national bank charter for fintech companies, Madden
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.