CRA rule done, OCC set to unveil scoring proposal
WASHINGTON — The Office of the Comptroller of the Currency will issue a new proposal within weeks outlining Community Reinvestment Act scoring procedures under CRA reforms that the agency finalized in May, acting Comptroller Brian Brooks said Thursday.
Brooks, in wide-ranging remarks for an industry event, touched on CRA modernization as well as legal issues about who is the "true lender" in transactions between banks and nonbanks. He also defended his idea for a narrow-purpose payments charter despite industry opposition.
While the OCC ostensibly finalized its overhaul of the CRA in May under the leadership of former Comptroller Joseph Otting, the agency punted in one critical area. Citing the need for additional data from banks, the agency said it would follow up with more details about how precisely the OCC will calculate banks’ CRA performance under the new regime.
“The really hard work now is how we figure out how to performance assess banks,” Brooks said at the virtual event hosted by the American Bankers Association.
He added the OCC was trying to establish a more objective system to score banks on their performance and move “away from a world where banks performance scores are relativistic."
"In other words, you know Bank A should not be in competition with Bank B to see who is better than the other,” Brooks said.
The follow-up proposal, Brooks said, is expected to “come out late summer, so I would look for that in the next four to six weeks."
Later on in discussion with ABA CEO Rob Nichols, Brooks also defended the OCC’s approach to navigating the true-lender issue, which has been the subject of intense policy debates and litigation for years.
Historically, banks and other financial institutions have followed a legal doctrine known as "valid when made," asserting that a loan complying with all applicable laws at origination remains compliant when sold to a nonbank buyer — even if the buyer resides in a state with a lower interest rate cap.
But in the 2015 court decision known as Madden v. Midland Funding, a federal judge ruled essentially that that doctrine does not apply when one of the parties is a nonbank.
While the OCC finalized a rule in May affirming the legitimacy of “valid when made,” states and consumer advocates say the agency is enabling "rent a bank" schemes, and three state attorneys general are suing to overturn the rule.
“What we're trying to do here is to make more credit available to more people; it's really as simple as that,” Brooks said. “What I don't understand about the critique that this leads to predatory lending is, if everybody agrees that a loan is proper when the bank makes it, nothing about that loan term changes when the bank sells that non-predatory loan to an investor.”
Brooks did, however, stress that the OCC is focused on trying to discourage rent-a-bank partnerships, in which a high-cost lender looking to evade usury caps partners with a bank authorized to export its interest rate across state lines. Brooks argued that the agency's recent “true lender” proposal would place the responsibility on banks to make sure a loan's terms are fair for the borrower.
“When a bank originates the loan, it is the lender on that loan; it can't wash its hands of responsibility. That’s what rent-a-charter is: when the bank makes a loan and walks away like it was never there,” Brooks said. “Under our rule, if the bank is the true lender, and the interest rate does travel with the loan, we're going to look to the bank for all of the compliance obligations.”
Brooks also defended his recent remarks on the OCC's potentially offering a new charter for nonbanks that provide payments services, intended for companies seeking access to the Federal Reserve’s payment rails that don’t need deposit insurance. The ABA and other trade associations sent a letter to the OCC the day before Brooks’ speech saying they would “oppose any effort by the OCC to offer a narrowly focused payments charter.”
Brooks said such a charter could be a critical component in speeding up necessary innovations for the payments system.
“What I'm trying to think about here is what the future of payments look like, the way that businesses and consumers want to consume payment services,” Brooks said. “I don't think that looks like the status quo in the U.S. now. The good news is, I don't think banks think that either — banks are constantly innovating; they're looking for better and faster ways. What I try to do is to make that easy.”
Pressed by Nichols on whether the OCC would consider the trade groups' request that any process to develop the payments charter be subject to “perhaps a formal review process or comment process,” Brooks declined to answer. “I think this is really a lot less radical than people have perceived," he said.
“The OCC today regulates most payments activity that happens in the United States because most payments activity happens inside of banks,” Brooks said. “I don't think this is a new thing — I think it's our attempt to retain supervision of an activity that historically was only done in banks, is still principally done by banks, but in 10 years probably won't be principally done in banks.”