WASHINGTON — Comptroller of the Currency Joseph Otting vowed he was moving ahead on major regulatory changes related to small-dollar lending and whether fintechs should be allowed to enter the banking system.
In his first congressional testimony since taking office, Otting said during a House committee hearing Wednesday that the Office of the Comptroller of the Currency was getting closer to striking an agreement with other regulators on ways to clarify and streamline lending requirements in the Community Reinvestment Act, and simplify anti-money-laundering procedures.
But Otting faced some skepticism from members of the House Financial Services Committee on whether banks discriminate against minorities and whether the agency has sufficiently cracked down on improper practices like the opening of unauthorized accounts.
Following are takeaways from the hearing.
Otting's dismissal of discrimination concerns in banking angers Democrats
Otting struck a nerve with some lawmakers during a discussion on the Community Reinvestment Act when he said he has “not personally observed” discrimination in banking, an assertion he made more than once in the hearing.
Rep. Emanuel Cleaver, D-Mo., called Otting's claim "stupefying, even jaw-dropping." Cleaver noted his hope that the OCC's development of a new fintech charter included a minority inclusion component. "But there would be no reason for minority inclusion if there is no exclusion,” he said.
Otting replied that he was “a big believer in minority inclusion” but continued to say he has “not personally observed” discrimination in banking.
CRA changes are taking some time
Lawmakers were eager to know when bank regulators would move forward on a proposal to modernize the CRA.
Otting previously said he hoped the regulators would join him on an advance notice of proposed rulemaking by March, but such a notice has yet to be released.
“A lesson learned of coming to Washington, D.C., is you put yourself out there a little bit and I would tell you . . . I am hopeful now in the next couple of weeks that we can get that out,” Otting said, referring to a joint ANPR with other regulators. “I get up every day trying to advance that ANPR.”
Otting particularly wants to create a clearer, more objective and uniform CRA grading system for how banks are assessed for fair lending in their community and to low- and moderate-income borrowers, as required under CRA.
He is also looking at broadening the types of loans for which banks can receive CRA credit and updating the assessment areas since CRA was written prior to online lending, for example.
“I agree that the CRA could benefit from modernization to reflect the changing banking landscape” but “any modernization process must not be focused on making CRA exams easier for banks,” said Rep. Maxine Waters of California, the ranking member of the committee.
Otting faces heat for not disclosing Wells-like problems at other banks
The comptroller was also forced to defend the agency's decision not to publicly rebuke banks, other than Wells Fargo, where the OCC had found evidence that an institution had opened unauthorized accounts.
Starting in 2016, before Otting's arrival, the agency launched "horizontal reviews" at more than 40 national banks. The OCC reviewed between 500 million and 600 million new accounts opened in a three-year span and found about 10,000 accounts were due to unauthorized openings. In response, the OCC issued 252 so-called matters requiring attention, or MRAs.
Yet the agency under Otting has closed some of those cases without any public disclosure of its findings, which were first reported in American Banker, or details about which banks were involved.
In late 2017, Otting told the House committee, he determined there were no “pervasive or systemic issues.” Of the 252 cases, 20% of those have been closed with the remaining under “supervisory review,” Otting added.
However, Democrats including Rep. Carolyn Maloney of New York questioned Otting on why the OCC has not taken further public action based on the more than 250 MRAs or expanded its review to other banks.
“You decided not to take any public enforcement actions against” the banks with MRAs “and instead gave them a warning,” Maloney said to Otting. “I find that deeply disturbing, especially in light of the Wells Fargo scandal.”
Otting cautioned Maloney not to correlate the MRAs with opening fake accounts.
“We feel there [are] ways for bank to improve their policies, procedures and controls but at no point in time did we find pervasive or systemic items associated with this review,” he said.
Richard Hunt, president and CEO of the Consumer Bankers Association, said after the hearing that banks “allocate hundreds of millions of dollars to compliance functions annually” and to retain customers.
“When problems arise, bank leaders are committed to addressing them and ensuring those issues are not prevalent,” he said. “Comptroller Otting’s comments are further proof banks are accomplishing this important goal.”
Fintech decision is coming
Lawmakers on both sides of the aisle spent a significant time asking Otting whether he would allow fintech firms to get a special-purpose banking charter, an initiative left over by his predecessor, Thomas Curry.
Despite the agency's framework under Curry for fintechs to get federal charters, no such license has been granted and Otting has yet to make a decision about whether the OCC will proceed in considering applications.
Otting said he would announce a decision in July.
Some lawmakers and state regulators are concerned such a charter would preempt state laws or create an uneven regulatory playing field between banks that have a full-service bank charter and fintech firms that get a special-purpose charter.
In response to these questions, Otting said during the hearing that fintech firms “would be subject to the same supervision of national banks," signaling that fintechs might not get special carve-outs from bank regulations.
However, Otting also later added that the OCC’s legal authority under the National Banking Act “gives us the authority to issue that charter.” This was the same position Curry took when state regulators argued the OCC did not have such authority.
Otting also signaled that the OCC would be open to considering guidance that would clarify bank partnerships with vendors as more banks are partnering with fintech firms.
“I think it’s something that will be needed,” said Otting. “We’ll be happy to come out with some thoughts on what is a true vendor relationship.”
Regulators closer to easing anti-money-laundering rules
Lawmakers sought a status update from Otting on efforts by regulators to simplify anti-money-laundering rules, particularly any attempts to ease the reporting burden of submitting "suspicious activity reports."
The regulators — including the OCC, the Federal Reserve Board and the Federal Deposit Insurance Corp. — are currently working with the Financial Crimes Enforcement Network to come up with a list of amendments to AML requirements, just as lawmakers are also proposing changes to the Bank Secrecy Act regime.
Otting said during the hearing that bank regulators sent 14 recommendations last month to Fincen, which has since responded with edits. The bank regulators have formed a working group to flesh out those recommendations in the coming months.
“I have dedicated an enormous amount of time” to changing BSA and “I think we’re at the table now with the right issues identified,” Otting said. “I think that we will move that dial over the next three to 6 months.”
Small-dollar, short-term lending
Lawmakers on both sides of the aisle also questioned Otting on a bulletin issued in late May in which the OCC made a significant policy shift by encouraging banks to offer small-dollar, short-term loans.
Republicans are largely in support of banks entering the market. However, Rep. Blaine Luetkemeyer, R.-Mo., told Otting that he was “left a little bit puzzled” by how lenders would apply state laws that have various interest rate caps and whether the OCC’s bulletin preempts those laws.
“We are not retreating from preemption,” said Otting in response. The bulletin “wasn’t intended to infer that we would require national banks to adhere to the interest rates of each individual" state.
Banks regulated by the OCC must, however, comply with the interest rate cap of the state in which they are headquartered.
Otting also acknowledged that it would take some time for banks to become comfortable offering small-dollar products after many have been out of the business for several years.
“I have personally met with all the large-bank CEOs and asked them to take a look at being involved in this,” Otting said. “Most of the regional banks I think are reacting quicker because they have products that they thought they could bring to market. It will take a long period of time for banks to work through their products and then go through their risk process before they offer those products into the market.”