From CRA to fintech, new FDIC leadership faces tough choices
WASHINGTON — The new Trump-appointed bank regulators have begun moving forward on a swath of changes to bank regulations — all except one: the Federal Deposit Insurance Corp.
While the Office of the Comptroller of the Currency has announced plans to ease restrictions on small-dollar lending, begin dialing back the Volcker Rule and is expected to seek comments on the best ways to revamp how regulators implement the Community Reinvestment Act, the FDIC has stayed out of the fray as it seemingly awaits Senate confirmation of Jelena McWilliams as its chairman.
“The day-to-day business is still going on at the FDIC but any long term and new policy initiative will not proceed until the new chairman arrives,” said V. Gerard Comizio, a partner in the corporate department and chair of the banking practice at Fried Frank’s Washington office. “It’s both an acknowledgment from current leadership that the new chairwoman will have an agenda of some kind and they will want to defer to that person without jumping out in front of it. And they don’t want to guess wrong in undertaking something that the new chairman is not fully on board with.”
McWilliams has bipartisan support and is widely expected to be confirmed soon. But she’ll face challenges immediately on several contentious topics, areas where the FDIC — regardless of which party is in power — has not always agreed with its fellow regulators.
Following are some of the top policymaking decisions the next chairman of the FDIC will need to address.
Modernizing the Community Reinvestment Act
For months, Comptroller of the Currency Joseph Otting has said he is working with the FDIC and Federal Reserve to release an interagency solicitation for public comment on how to improve the Community Reinvestment Act, a 40-year-old law meant to hold lenders accountable in the communities where they have operations.
Both banks and consumer groups say the law is outdated, particularly as online lending has grown and exams are not consistent or clear across regulators.
“Bankers don’t particularly care for the way it is currently regulated. . . . Most agencies that regulate it don’t care about” how it’s applied, Otting said during an American Bankers Association conference on April 25. “How do we go back to that and make it easy and simple to understand?”
Otting initially said he hoped the regulators would issue a joint solicitation for comment by the end of March, to no avail. Some observers said the delay in getting the other agencies on board might partly be because of the FDIC’s pending chairman, while adding that Otting also set an aggressive timetable for an interagency collaboration.
“Rulemaking takes time even when agencies are fully staffed and firing on all cylinders, and the Trump administration is still staffing key positions,” said Isaac Boltansky, director of policy research for Compass Point Research & Trading, in a recent interview.
McWilliams has previously said CRA is important to her, though she was careful not to detail which changes she would support during a Senate Banking panel hearing on Jan. 23.
“I can also assure you on a personal level as somebody who was a part of the low- and-moderate-income community, that the mission of the CRA resonates profoundly with me on a personal level as well,” she said during the hearing. “I can give you my commitment that I will ensure that the FDIC fully executes the mandate of the CRA.”
Will the FDIC allow banks to begin offering deposit-advance loans again?
Another lingering question is whether the FDIC, under a new chairman, will join with the OCC in allowing banks to offer certain small-dollar, short-term loans again. Banks have largely cut off that type of lending after the FDIC and OCC jointly issued guidance restricting deposit-advance products in 2013.
Under acting Comptroller Keith Noreika last year, however, the OCC rescinded that guidance. And Otting recently said he would issue a statement asking banks to get back into the business, particularly with loans ranging from $500 to $5,000 and with terms of 45 days or longer.
“This is definitely a number one category for us . . . we are encouraging banks to get back into this market,” Otting said during the ABA conference in Washington. “If we can get people back into the regulated market, it would be good for them and the economy.”
Otting also said he “applauds” acting CFPB Director Mick Mulvaney for recently soliciting comment on a payday-type rule issued under the previous leadership that restricted small-dollar lending for loans with maturities of less than 45 days. Many expect the incoming FDIC chairman to join the discussion on the topic.
“Comptroller Otting has been very vocal about the fact that there is a place for this type of product in the banking system. People are looking to see if the FDIC will follow suit,” said Benjamin Olson, a partner in the Washington office at Buckley Sandler. “I think there is some expectation that they will under the next chairman.”
Where does the FDIC stand on fintechs entering the banking system?
One major topic that all the new regulators are currently debating is whether to allow nonbank fintech companies into the banking system through a federal charter. The FDIC in particular has yet to make a decision on Square’s application to form an industrial loan company, which is a limited-purpose bank that gets deposit insurance.
The charter has a long history of being controversial because an ILC can be owned by a firm with little to no financial ties (Walmart has applied for an ILC several times without success). The FDIC has not approved a new ILC since 2008.
On Monday, the FDIC is hosting a forum on technology in banking, where the topic could be discussed. McWilliams has signaled the debate will be important to her.
“I don't know how much work has been done on the ILCs in the last few years. I assume not a lot, because I've not seen any new charters,” McWilliams said during her testimony, before she received votes from all but one member of the Senate Banking panel. “If confirmed . . . I'm happy to work with your office to understand where the holdup has been in the approval process.”
Streamlining anti-money-laundering laws
Both regulators and lawmakers in recent months have raised concerns that anti-money- laundering laws crafted in the 1970s have turned into more of a paperwork reporting process for banks than effectively helping law enforcement prevent crimes, including terrorist financing.
Otting said he was meeting with current FDIC Chairman Martin Gruenberg and Fed Vice Chairman for Supervision Randal Quarles April 30 to “put forward our term sheet of recommendations” to the Financial Crimes Enforcement Network later this month.
It’s likely that McWilliams will follow through on these efforts after Gruenberg, though it’s unclear how far regulators will want to go.
“If the Fed and OCC are re-examining AML regulations, then I think the FDIC will be re-examining it as well,” Olson said. “There are concerns about the compliance burden on institutions. But preventing money laundering is a really important and serious issue, so it doesn’t fit neatly into discussions about reducing regulatory burden.”
Regulators will take a stab at Volcker, again
The Volcker Rule is a controversial regulation that top officials from both the Obama and Trump administrations agreed needed changing, but there has been no decision yet on how to change it. Critics see the rule created through the Dodd-Frank Act to restrict big banks from speculative trading as too broad and complex to implement.
“Many within and outside of the industry have said that this is an example of a complex regulation that is not working well,” Quarles said in his testimony before the House Financial Services Committee on April 18. “Our fellow regulators are working actively with the Federal Reserve in seeking ways to further tailor implementation of the Volcker Rule and to reduce burden, particularly for firms that do not have large trading operations and do not engage in the sorts of activities that may give rise to proprietary trading.”
Last year, the OCC solicited for public comments on how to revise the rule without waiting for the other four regulators overseeing the regulation to join suit.
McWilliams, who is a top executive at Fifth Third Bank, said during her recent testimony that the Volcker Rule was “one example” of requirements that are “not applicable” to smaller banks and should be revisited.
“Community banks do not do proprietary trading. Nonetheless, they have to do compliance, which, I can tell you, for a bank of the size of my current employer, is quite comprehensive,” she said.
However, regulators have yet to agree jointly and formally on changes to the Vocker Rule, underscoring how complicated the regulation is.
“It remains to be seen whether they are going to proceed with that project,” Comizio said.
Neil Haggerty contributed to this article.