CRA strife, fintech charter, updating AML: Inside Otting's first year
WASHINGTON — Comptroller of the Currency Joseph Otting did not want to come here to run a static agency.
More acquainted with the quick decision-making style of the banking world, Otting came to the nation's capital a little over a year ago, finding a policymaking environment that tends to move at a slower pace.
He has been intent on moving the ball forward, particularly in positioning the Office of the Comptroller of the Currency as the lead agency on crafting reforms to the Community Reinvestment Act. With regulators unable to agree on a joint CRA proposal, the OCC took the rare step of issuing questions on its own for public comment.
“I don't think anybody else is crazy enough to take this on, quite frankly, than me,” Otting said of CRA reform.
In a sit-down interview to discuss his first year in office, Otting discussed the challenges of getting regulators on the same page with a plan to modernize CRA enforcement. The regulators' policy has not been updated for decades.
He said he firmly believes the Federal Reserve and Federal Deposit Insurance Corp. will sign on to a more formal proposal, likely next year.
Over the past year, Otting has also advanced an OCC plan initiated by his predecessor to offer a specialized federal charter to fintech firms, which has reignited lawsuits from state regulators. And he has reversed course at the OCC by moving lead examiners back into the offices of big banks while slashing operating costs.
Below is a discussion about his first 12 months as comptroller. The responses are excerpted and edited for length.
What were your main priorities coming into the job?
JOSEPH OTTING: The first was to make sure that we're operating the agency in the most efficient and effective manner that we could. ... We've also looked at the way that we spend the money that we're entrusted with. We've been very focused on: Are we getting a fair deal from suppliers? And we've negotiated a fair amount of supplier contracts.
On the second bucket, we started out with a number of initiatives that we intended to accomplish. First was initiating a review of CRA. Second of all was how ... [Bank Secrecy Act/anti-money-laundering policy] is done today. And our ability to look at that and say: Are we maximizing our ability to spot bad actors who are trying to use the banking system to deposit bad money, flush it through and take it back out?
The third was small-ticket consumer lending. The banking industry basically got out of that business and ... payday lenders and check cashers and pawnshops came into that space. It gave consumers less choices. So one of the things that we wanted to do was encourage banks to get back into that space but do it in a fair and equitable manner for consumers.
The fourth was to relook at the fintech charter that started under [former] Comptroller [Thomas] Curry. When I got here, I wanted to make sure we had our policies and procedures in place, that we thought through a [fintech] dissolution plan, if necessary. Did we feel that we had the legal authority to do that? And based upon that review, we went forward and said that we'd be willing to accept fintech charters.
Several years ago, Curry oversaw a peer review that resulted in the OCC moving some in-house examiners off-site. What happened to that?
In the large-bank examinations, Comptroller Curry had started a process to remove the examiners. And when I got here, I stopped that based upon my review of the situation that: A. Having people on-site, I think, improves risk management. Meaning, that they can attend any meeting they want. When I was being examined by the OCC, my [examiner-in-charge] knew that he could go into any loan committee, any risk meeting unannounced and uninvited. He had free access to go through the organization. He rode up and down the elevator with personnel.
I thought that brought an added benefit of risk insight to an institution. I also felt our ability to communicate. Meaning, his floor was locked. I couldn't go into his area without him allowing me to come in protected. But my ability just to go down five floors and have a discussion with him, or have him come up five floors, made a difference.
The OCC’s comment period for the advance notice of proposed rulemaking on CRA reform recently closed. What are your thoughts based on the comments and the next steps from here?
First of all, we met with over a thousand people to talk about what should be in the advance notice of proposed rulemaking. And the one thing that I can assure you is by an overwhelming vote, 90% or more, people all feel that we need to retool CRA. The issue is how do you fix it? That’s where it's going to take a lot of dialogue and discussion.
There is a lot of feedback, both by community groups and banks, that we really don't understand how CRA is evaluated. There's confusion, there's complexity and I think people will say subjectivity into the way that people evaluate CRA. So what we're starting down the path is: How do we recreate a way to examine a financial institution’s success with CRA?
The second issue that people have brought forward was what qualifies for CRA. And people will say one year it will qualify, the next year the new examiner doesn't want it to qualify.
The third issue is we don't have a good mechanism today to be able to determine how much in CRA activities are out there in the form of lending and investments and donations. And so if we could track that, then we also could see where isn’t CRA being done and how could we change the model.
And then the last area in CRA was really: How do we bring clarity so when a financial institution wants to open a branch or close a branch ... that there would be clarity that an institution is still in compliance with their CRA requirements.
There was slightly less than 1,500 people who responded. We're in the process of digesting that feedback. And we're trying to put it into buckets about what people told us based upon the feedback. And then the plan would be that we will, in conjunction with the FDIC and Fed, sit down and start thinking about what actually a notice of proposed rule would look like.
Some of the comments expressed concern about the OCC issuing the notice without the other regulators participating? Would you still proceed with this process further regardless of whether they join?
I don't think I have to make that decision yet. We have enormous amount of feedback and input in that ANPR. That wasn't just the OCC putting that document out. The thing you have to realize is that ANPR going out and giving that feedback and coming back, that data is available for everybody now.
And I think instead of criticizing us, people should be saying: Good for the OCC that they went out. And now we all have that data available for us, to sit down and have a discussion about how do we move CRA forward.
We're in the process of now meeting weekly on this, trying to think through it and we'll bring our other regulatory partners in. Everybody recognizes this is something that collectively we need to fix. And I think everybody is prepared to roll up our sleeves and sit down and talk about.
Do you think you will be able to succeed in finalizing CRA reform?
I do. I think like anything in Washington, I had ideas that I threw out there because I'm open for anybody else to give me ideas. It isn't that we have a one way to do this. But if we're all in agreement what the goal should be with CRA, which is to serve the communities to which financial institutions are operating in ... then everybody's lined up about what the goal should be. Then the question is: How do we bring solutions and ways to measure success together?
I don't think it's as complicated as some people want to make it, to be honest with you. And I think with the right people giving the right input, we can come up with solutions to be able to achieve that.
How does Congress play a role in this?
All the things that we would propose are under the existing statute. So the role that they could play is: They could change the statute and implement new legislation; or their feedback is very important to the success of what this looks like. I don't think anybody else is crazy enough to take this on, quite frankly, than me.
The fintech special-purpose bank charter has also elicited controversy, including litigation from state regulators. How close are you to receiving your first application?
It’s not controversial from our perspective. What you have to realize is it's a lot of work to complete a banking application. Someone doesn't decide, "Hey, let's go get a banking application," and you turn it in like you do your driver's license. Often just submitting an application can take nine to 12 months.
Not a lot of people were willing to spend the money and time and energy to conduct the process for an application. When Comptroller Curry started this journey, there were probably 250 fintech companies that thought they wanted to be a bank. But as people started to realize what it took to be a bank ... often that is completely the opposite of what a fintech company is, which is quickness to market, satisfying a need.
So a lot of those fintechs now are saying, "We've discovered we don't want to be a bank, but we want to partner with banks." And so we get a lot of inquiries about what does it take to have a successful vendor relationship with a bank. Now, there are this population of people who still think they want to be a bank and are going through the process of evaluating that. We're still confident that we will have [fintech] applications to be a national bank.
How do you view BSA/AML regulations right now and where do you see it headed?
We started to really look hard at what are the rules and processes that we're requiring; and are they effective in achieving that objective or are there other ways to do that.
There were 12 or 13 recommendations. ... You've started to see some things come out of that. Like one recently where we allowed smaller banks to share resources on AML/BSA.
Early next year we'll have some clarification on some of the [AML] guidance. I think most people felt we had zero tolerance. I don't think it's a zero-tolerance game. I think the future holds more of us being able to take the data and use various mechanisms to look at the data in between different financial institutions.
And then also our ability to use, perhaps, artificial intelligence, and in that manner by scanning data. Because part of our issue today is "Bank A" is filing SARs on someone but that same person is moving money from "Bank A" to "Bank B" and then they go to "Bank C." So I think the future of BSA/AML is using the data that we have available to us in a manner that allows us to have better discovery among financial institutions.
The OCC began encouraging banks in May to do more small-dollar, short-term lending. Have you seen more institutions doing that?
A number of regional banks have unplugged those products in 2015 and in today's environment, to restart up any engine requires a product development, a product risk assessment and then be willing to put something in place.
There are a number of institutions that we expect in 2019 to launch either the products they had or a new, revised version of that product. ... It doesn’t mean that everybody is going to go to the banks, but it gives consumers an alternative. And I think that's the most important thing.
What has been the biggest challenge or maybe the biggest surprise for you looking at the past year?
I think a lot of people feel like in Washington it's dysfunctional. But when you get here, you realize there is a process. And things are working. ... There are changes being made that the average person doesn't see and there are a lot of things that are underway.
What will be your main priorities in your second year?
We clearly aren’t done with the CRA. I mean that is going to be a very big lift this year. We would like to get that done by late 2019: Get a notice of proposed rulemaking out that we could feel comfortable with and that we get support.
We're constantly looking at the risks in the banking industry. Up until now, because we haven't had a major cyber event, the only thing I see that destroys a bank is credit risk. So we're constantly on vigilant review of what's going on in the credit risk environment. We continue to watch what are banks doing in consumer underwriting and what are they doing in business underwriting, and what does the leverage lending marketplace look like.
There is risk in the system, but most of that is outside of the banking industry. So I don't see as much risk this cycle around in leverage lending in banks. I do see it in hedge funds and debt funds and things like that.
The second bucket is where usually capital was destroyed was in construction and land lending. And again you know this cycle around banks have maintained relatively modest portions of their portfolio in that.
Do you feel like more of a Washingtonian now? Do you feel like you understand the capital better?
God help me if I ever become one. I'm honored to perform the role as the comptroller of the currency. There is really no other role that I would want to do in Washington D.C.
I really felt based upon my banking background that I had the ability to come into this role with an other-side-of-the table, so to speak, perspective.
The one thing I would tell you that I've learned in Washington is people make a lot of sacrifices to come to this city. They incur tremendous costs to come here and serve their country. And it takes a real dedication for people to do that.