OCC undermines own CRA rule by putting key metric on hold

Critics of the Office of the Comptroller of the Currency’s new Community Reinvestment Act rule say it was rushed to completion, bypassing the interagency approach that once defined the rule.

Left scattered in its place is a reform (from the OCC) and proposal (from the Federal Reserve), leaving stakeholders with no clear direction on how the OCC’s final version will work, critics say. Still, as national banks and thrifts try to figure out how to comply with it, those critics find themselves with an unlikely ally: the OCC itself.

In federal court filings contesting a community group challenge to the rule for being arbitrary and capricious, the OCC said the new rule was in an “inchoate state.” The OCC explained that “the necessary benchmarks and thresholds that the OCC will use for assessing banks’ performance” based on the new rule were not even in place, so any claim that banks’ CRA activities may decrease under the new standard was “speculative.”

But by arguing to dismiss the plaintiffs’ claims based on the rule’s undefined metrics, the OCC essentially concedes critics’ point that there is nothing there to fight about.

And here’s why. For more than 40 years, the OCC, the Federal Deposit Insurance Corp. and the Federal Reserve almost always acted in tandem to make rules and provide guidance, as all three agencies oversee the CRA.

These three agencies have long agreed that the CRA needs modernization, but only the OCC and FDIC in January jointly proposed replacing the existing compliance framework with one that they said was “more objective, transparent, consistent, and easy to understand.”

The FDIC subsequently withdrew from the rulemaking, citing the pandemic. But the OCC forged ahead and promulgated the new rule alone, asserting in a press release it would “increase bank CRA-related lending, investment, and services” in underserved communities.

The OCC indicated this increased activity would be accomplished through examinations using numeric benchmarks that would serve as objective measures for assessing a bank’s CRA performance in communities where it takes deposits.

But as the court filings emphasize, omitted from the final rule were any actual benchmarks against which bank CRA activity could be measured, and which would presumably cause banks to increase their lending, investments and services.

Though benchmarks were part of the January proposal, the OCC dropped it from the final rule, acknowledging criticism that the proposed standards were unclear. Instead, the agency said it would set benchmarks later.

Former Comptroller of the Currency Joseph Otting, who pushed the CRA rule to completion days before stepping down, explained why the OCC forged ahead unilaterally with a final rule in May. He wrote that communities needed more help, and that the pandemic had made the need all the more urgent.

But the expressed urgency is not found in the rule itself. It carries a phase-in period of more than two years. But without benchmarks for banks to follow, the rule’s impact will be unknown until well after the phase-in period.

As the OCC said in its court filing, banks aren’t required to comply with the standards until 2023 — standards that as of now do not exist.

Some have speculated that the agency’s timing was driven by a desire for a final regulation before Otting’s departure, and to prevent a new Congress — and potentially a new president — from overturning the rule through the Congressional Review Act.

True or not, what’s clear is that the OCC agrees that a final CRA rule without numeric benchmarks is final in name only. And without that, implementing or assessing the rule’s effects is not possible.

CRA stakeholders can hope for greater clarity when the OCC establishes benchmarks, the Fed acts on an advance notice of proposed CRA rulemaking and the FDIC decides on its approach to CRA modernization.

Indeed, the agencies could still coalesce around a joint final rule. Federal Reserve Board Chair Jerome Powell signaled as much in a press release, saying he hoped the Fed’s proposal would “build a foundation for the banking agencies to come together on a consistent approach to CRA.” So too, acting Comptroller Brian Brooks welcomed and encouraged the Fed’s proposal.

In the meantime, however, those financial institutions under the OCC’s supervision are left with pressing questions about just how to comply with one final version that has already taken effect.