OCC's innovation pilot gets little love from banks

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The idea of testing a fintech product while getting direct regulatory feedback should be music to a banker’s ears, but the industry appears leery of an Office of the Comptroller of the Currency plan to allow for that very thing.

The OCC received 19 comment letters on a pilot program announced in April meant to provide supervisory clarity as national banks pursue “novel activities” in which regulatory uncertainty is perceived to be a barrier to development.

Financial institutions generally favor opportunities to test new offerings and get regulatory feedback, but several commenters warned of unintended consequences from the OCC plan and urged the agency to provide more explicit regulatory protection for participants.

Across the board, banking trade groups asked the OCC to publicly state that regulated banks will not be compelled to use the pilot for every innovative product they introduce.

If institutions think the OCC program is mandatory for every new innovation, the pilot “has the potential to slow the process and stifle the very innovation it is seeking to promote,” wrote Rob Morgan, vice president of emerging technologies at the American Bankers Association.

Unlike other regulatory programs, the pilot as currently proposed provides no waivers from enforcement for participating institutions. Industry representatives argued that that could make the program untenable.

“An innovation pilot program needs to provide meaningful regulatory relief for firms to support their participation and experimentation,” wrote Charles DeSimone, vice president at the Securities Industry and Financial Markets Association. “Without offering this regulatory relief, the regulatory uncertainty associated with participating in the Pilot Program could, by itself, deter banks from participating.”

Under the program, banks could collaborate with third parties including nonbank fintech firms to determine whether a technology is feasible and get feedback from the OCC along the way.

The OCC says the pilot will be voluntary and will complement other agency tools. Among its objectives are "timely engagement" with participants on regulatory expectations.

OCC-supervised banks "may propose a pilot individually, in conjunction with a third party, or as a collaborative effort among multiple banks," the agency said in its proposal.

Beth Knickerbocker, the OCC’s chief innovation officer, said the pilot was introduced in response to more than 60 comments the OCC has received since 2016 on ways to encourage innovation. The program is meant to foster development of appropriate controls and give supervised entities regulatory input early in development, she said.

"Some areas that may be of interest could include how artificial intelligence may be leveraged to improve anti-money-laundering compliance, how to use alternative data in credit underwriting, and how banks may use distributed ledger technology," Knickerbocker said in an emailed statement.

Commenters generally lauded the OCC for taking a step forward in encouraging banks to collaborate with fintech firms.

“There is a risk of doing new things but there’s also a risk of not doing new things, and that is a risk the OCC is now starting to recognize,” Adam Hoehn, managing director of client services at Alliance Partners, a unit of the $1 billion-asset Congressional Bank in Bethesda, Md., said in an interview.

Yet industry representatives suggested banks may not participate if benefits such as avoiding enforcement action are not clearly stated.

Morgan noted the initial failure of a Consumer Financial Protection Bureau program to waive enforcement actions for fintech firms testing new products. Companies viewed the benefits as insufficient, but the CFPB has made revisions to try to draw more participation.

“The [OCC] program should produce decisions that have the full support of the OCC and bind the agency to those conclusions going forward,” Morgan wrote. ”The CFPB addressed this issue in its updated proposal by ensuring that No-Action Letters be signed by the Assistant Director of the Office of Innovation or other members of the Office of Innovation, duly authorized by the Bureau, with the explicit intent to assure the recipient that ‘the Bureau itself stands behind the no-action relief provided by the letters.’ ”

He suggested that the OCC model its program on the Securities and Exchange Commission’s process for issuing no-action letters, which he said would encourage banks to take part.

Michael Emancipator, vice president and regulatory counsel at the Independent Community Bankers of America, suggested that the OCC add a safe harbor or waiver for projects that meet "a certain set of heightened criteria or reporting requirements." The ICBA also wants an expedited approval process and for the OCC to set hard deadlines on when it has to respond to companies that apply.

He added that OCC support for one bank's product should extend to other institutions developing similar offerings.

“If a pilot is good for one bank’s population of customers, then that benefit should be extended to the customers of other community banks that might not have the resources nor risk appetite to develop a new program in-house,” he wrote.

Still, only the CFPB, not the OCC, has statutory authority to grant waivers for compliance with consumer finance laws.

Consumer advocates encouraged the OCC to hold the line.

"The most important thing is that they are not proposing to waive regulations," said Lauren Saunders, associate director at the National Consumer Law Center. "What would be more concerning is if they made definitive statements that things were not unfair or deceptive. We hate to see agencies foreclosing their ability to act when things may develop in the future."

Some community development financial institutions said the pilot would help validate for regulators the cost of originating small-dollar loans.

James Gutierrez, CEO and co-founder of Aura Financial, a San Francisco installment lender and founder of Oportun, said he is trying to persuade the OCC that banks can partner to provide payday or installment loans at annual percentage rates higher than 36%.

"We have a solution in the small-dollar loan category which is becoming more top of mind for the FDIC and OCC, because they want to look at alternatives to payday loans and access to capital," he said.

Andre Cotton, regulatory counsel at the Consumer Bankers Association, called for the OCC to amend regulations or provide guidance clarifying an interpretation of a rule or statute based on the information learned from the pilot.

“By amending unnecessary, or outdated rules or clarifying ambiguities through guidance, the OCC will create a level playing field so all market participants know and benefit from the interpretation,” he wrote.

Some commenters said the OCC's proposal was broad but that testing would still be beneficial.

“Both parties will be able to gauge whether or not a product is ready for market, and whether or not it will serve its desired function,” according to comments submitted by the $1.1 billion-asset Sunrise Banks in St. Paul, Minn. “The program would be particularly effective given some of the regulatory question marks that fintechs and new technology in the industry pose.”

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Fintech regulations Regtech Artificial intelligence Community banking Enforcement OCC American Bankers Association ICBA