OCC’s Otting on CRA timeline, Camels and fintech legal battles

The three federal bank regulators usually try to issue rules jointly, but Comptroller of the Currency Joseph Otting on Tuesday pointed to two areas where the agencies may move on separate paths.

Speaking at a regtech conference in New York co-hosted by American Banker, Otting once again suggested the Office of the Comptroller of the Currency could move on a proposal to reform the Community Reinvestment Act before the Federal Reserve Board and Federal Deposit Insurance Corp. were ready to sign on to the plan.

Otting also indicated disagreement between the regulators on whether they need to reform the Camels ratings system. The FDIC and Fed recently sought public comment on how to apply ratings more consistently, but the OCC did not participate.

"I'm not sure that banks want the Camel ratings to change," Otting said during the discussion with Rob Blackwell, American Banker's editor-in-chief.

Among the agency heads, Otting has often sounded the most bullish on the need to revamp outdated policies, even if he acknowledges that the process can be slow.

Rulemaking, particularly when other agencies are involved, is “very complex, very difficult and very elongated, especially for a city that's highly motivated to do nothing,” Otting said.

Here are some key takeaways from his remarks.

FDIC Chairman Jelena McWilliams, Comptroller of the Currency Joseph Otting, Fed Vice Chairman Randal Quarles
Joseph Otting, comptroller of the U.S. currency, center, speaks while Jelena McWilliams, chairman of the Federal Deposit Insurance Corporation (FDIC), left, and Randal Quarles, vice chairman of supervision at the U.S. Federal Reserve, listen during a House Financial Services Committee hearing in Washington, D.C., U.S., on Thursday, May 16, 2019. A top Democratic lawmaker yesterday questioned whether the Federal Reserve Vice Chairman can be trusted when he says leveraged lending isn't a current threat to the financial system, pointing to his failure to foresee similar dangers before the credit crisis a decade earlier. Photographer: Anna Moneymaker/Bloomberg
OCC plans to have CRA proposal done by end of 2019
The OCC already acted alone last year when it issued an advance notice of proposed rulemaking, asking the public for input about CRA reform. But officials have expressed hope that the three agencies could work together on a draft plan.

In his speech, Otting said his agency at least will release a notice of proposed rulemaking "before the end of the year." But echoing recent comments by FDIC Chairman Jelena McWilliams, he would not guarantee that it would be a joint proposal.

“I can assure you that, left to my own druthers, we would be sitting here celebrating the one-year anniversary of CRA modernization,” Otting said. “But I can tell you this: The OCC will lead and have an NPR out before the end of the year. And we're just dedicated to doing that.”

"As everybody knows the notice of proposed rulemaking only positions it so the next round of feedback and comments can come along," he added. “We'd be hopeful that the FDIC and the Fed would join [the NPR]. But at this point in time, I don't know where that is. You'd have to ask the Fed and the FDIC.”

Otting said the consequences of the agencies not working together would be limited, yet he acknowledged the potential for "downsides" and "slight inconsistencies" since there are separate CRA regimes.

"The OCC regulates 70% of CRA investments in lending. The preponderance of that activity is sitting in the national banks," he said.
Office of the Comptroller of the Currency
A pedestrian passes the seal of the Office of the Comptroller of the Currency (OCC) displayed outside the organization's headquarters in Washington, D.C., U.S., on Wednesday, March 20, 2019. The OCC this week fined Citibank $25 million for failing to offer some existing customers lower interest rates on mortgages or closing cost discounts that they were entitled to under a program for borrowers with a relationship with the bank. Photographer: Andrew Harrer/Bloomberg
Otting not convinced Camels changes are needed
Otting turned heads towards the end of the panel discussion as he expressed skepticism about a recent notice by the FDIC and Federal Reserve to receive public comments to overhaul the Camels rating system.

Notably, the OCC was not included in that release, despite being the third regulator tasked with applying the Camels system. But the comptroller shined light on the decision Tuesday, saying he was “not sure that banks want the Camels ratings to change.”

Otting said the OCC reviewed its procedures under the Camels system to ask: "Are we consistent [in] the way we apply the Camels ratings?"

"And I think our conclusion was — we were consistent.”

Otting seemed to doubt that a request for comment on Camels ratings would do much to clarify the system.

A bank’s Camels rating is a “very well-kept secret among the top of an institution,” he said. “So people having an opinion of that — it would be highly limited. And then clearly you can't talk to, you know, other organizations about your Camels rating.”

The comptroller said regulators should consider tweaking the management rating component “to be more formulaic.”

“Historically,” management ratings have “been used by some regulatory agencies when there are violations of law, or violations of not serving your customers properly. And I think that's what will open up some dialogue," he said.
Agency is defiant in the face of fintech legal challenges
Otting struck a confident tone Tuesday on the OCC’s plans to appeal a court ruling striking down the agency’s beleaguered special-purpose fintech charter.

Asked about the fintech charter’s rocky road through the courts, Otting dismissed the loss.

“When you use the word ‘courts,’ I would use the word ‘court,’ ” he said. “It's only been decided by one judge, and the beauty of America is, one person doesn't get to decide the rules.”

The key feature of the OCC’s fintech charter was that recipients would not need to apply for deposit insurance. In his ruling against the OCC, Judge Victor Marrero wrote that the National Bank Act’s “business of banking” clause “unambiguously requires that, absent a statutory provision to the contrary, only depository institutions are eligible to receive national bank charters from the OCC,” according to the court filing.

But Otting disputed the necessity of deposit insurance in banking Tuesday, arguing that banks have the option to do any of the basic functions of banking, not a requirement.

“We feel it's definitely within our power. The National Bank Act is pretty clear: You can take deposits, or process checks, or make loans,” Otting said. “Any of those are defined as in the business of banking.”

Yet Otting said many fintech firms may end up being more interested in applying to become a full-fledged depository institution.
OCC will release update of AML examiner manual in December
Otting also announced a year-end reveal for an updated edition of the OCC’s bank examiner’s handbook, with specific changes aimed at how bank examiners will approach anti-money-laundering compliance.

Otting has long talked about making a shift to “risk-based” AML compliance. On Tuesday, he said that bank examiners would spend less time with low-risk banks with a strong track record of AML/BSA compliance.

“If you're a high-quality management team with a low-risk customer base, and you've got a good history of managing that risk, then we're not going to go from A to Z with you on every exam,” Otting said. “Versus an entity that has had challenges, a high-risk customer base and perhaps you know, issues with their AML/BSA — we will spend more of our resources over in that bucket.”

Otting said he expected the manual to be published late December as a joint initiative with the Financial Crimes Enforcement Network, the National Credit Union Administration, the FDIC and the Fed.