WASHINGTON — A new rule that aims to bar large banks from declining services to unpopular industries is unlikely to survive during the Biden administration, analysts say.
The “fair access” rule,
But critics of the rule, including banks, could have several paths to overhaul or abolish it, especially since Democrats are set to take control of both the executive and legislative branches. President-elect Joe Biden's pick to succeed acting Comptroller Brian Brooks could revamp the regulation, congressional Democrats could attempt to repeal it through the Congressional Review Act or banks could seek to block the rule through with litigation.
"There’s little chance this rule would be upheld by a court challenge,” said Adam Levitin, a professor at Georgetown Law School.
Brooks, who issued the rule on his last day at the agency, insists it is a nonpartisan way to fight discrimination against industries of all stripes that are treated unfairly by banks.
But banking trade groups have blasted the regulation, calling it heavy-handed and saying the OCC moved too quickly without adequate public engagement.
“We are disappointed that the OCC has chosen to rush through this ill-advised rulemaking on the Acting Comptroller’s last day in office. In addition to short-circuiting the traditional rulemaking process and failing to take into account thoughtful comments from thousands of stakeholders, we believe it is a mistake for the OCC to mandate which businesses banks must service," said Hugh Carney, senior vice president of prudential regulation at the American Bankers Association. "Banks are in the best position to manage their risks and maintain their safety and soundness."
Perhaps the most likely scenario for blocking or revising the rule, observers said, is that the Biden administration rapidly appoints a new acting comptroller who delays the effective date. Once a new Senate-confirmed comptroller is in place, he or should could reopen the rulemaking process.
“We have seen agencies in the past postpone effective dates to buy more time to take the regulatory steps needed to change a pending regulation,” Jaret Seiberg, an analyst for Cowen Washington Research Group, said in a research note.
“The issue is whether Team Biden gets its person in charge in time to delay the effective date,” Seiberg continued. “We believe that will happen as we expect Team Biden to follow Team Trump's lead in aggressively using the law to name its people as acting agency heads pending confirmation of the actual nominees.”
As a legal matter, a future comptroller appointed by Biden would have wide latitude to delay the effective date.
“There's a reasonably good likelihood that OCC leadership appointed by President Biden will put the effective date of the rule on hold while they further consider it, even though it’s now been finalized,” said Jeffrey P. Naimon, a partner at Buckley. “You’ll often find that done when a new administration of a different party comes in and seeks to address a rule recently put into place by the old administration.”
Several analysts compared the “fair access” regulation to the Consumer Financial Protection Bureau’s payday lending rule, which was first finalized in October 2017 by outgoing Democratic Director Richard Cordray. Under the Trump-appointed CFPB Director Kathy Kraninger, the rule's effective date was delayed until a new rule was finalized this past July, which rescinded underwriting requirements.
Another option for overturning the rule involves the Congressional Review Act. The law gives lawmakers 60 legislative days to overturn a rule, with the Senate only requiring a majority vote. The resolution would need to get signed by Biden.
While Democrats only have a 50-50 advantage in the Senate (Vice President-elect Kamala Harris breaks the tie), political pressure to invalidate the rule is already coming from an unusual alliance of environmental groups, gun-control advocates and bank industry groups. Such a coalition has already sparked optimism that a Congressional Review Act resolution could attract bipartisan support.
Observers said the sheer speed with which the OCC moved to finalize the rule, just 10 days after the comment period closed on the proposal, will force Congress to take notice.
"The rush from proposed to final will likely trigger review of the rule under the Congressional Review Act, especially given the Democratic control of both the House and Senate," said Lawrence Kaplan, of counsel at Paul Hastings.
But if Congress does block it, Brooks said in an interview, "they'll have to explain to America why it is that people shouldn't be able to make payments to whom they want, or invest in what they want, or use financial services they're entitled to."
The fair-access rule appeared to grow out of criticism by GOP lawmakers and other Republicans of decisions by certain banks to curtail lending and other services to industries with reputational risks, such as gun sellers, fossil fuel companies and even private prisons.
But the industry's pushback over the OCC rule has been just as swift, raising the possiblity of litigation.
The nation’s leading bank trade associations, including the ABA and Bank Policy Institute, have made clear that they
Without such data, experts said, a judge could determine the agency's rulemaking process violated the Administrative Procedure Act. The considerable speed of that process could also open the agency up to due diligence questions under the APA. The rule was finalized just 55 days after first being proposed in late November, and the OCC received more than 35,000 comments.
“Finalizing a rule so quickly, especially given negative comments, certainly could engender APA relief in the courts,” said Kaplan.
Levitin, who submitted comments last month in opposition to the proposed rule, offered a similar assessment. “I don’t believe the OCC really went through and analyzed all the comments that they received. It’s just not possible,” he said.
Brooks stressed that the regulation was a nonpolitical effort to ensure equal access to financial services in the U.S. “One thing that drives me crazy is when people describe this as an ‘oil and gas rule’ or whatever,” he said. “I mean, listen, we're talking about independent ATM operators. We're talking about Muslim charities, we're talking services businesses. It's wild how widespread this is."
“It's always easy to say this industry you don't like doesn't deserve banking services," Brooks continued. "And that's all fine until you can't get banking services, and that's the way these slippery slopes always go.”
If the rule does take effect, industry officials warn that it will cause big headaches for the banks that are required to comply. The rule would bar those banks from denying services unless they could show that a prospective customer failed to meet quantitative and impartial risk-based standards. The rule is expected to apply in most situations only to banks with at least $100 billion of assets.
“At a bare minimum, they’re going to have to think very carefully about how they document a decision to deny banking services,” said Dan Stipano, a former OCC attorney who is now a partner at Davis Polk & Wardwell.
One industry source, who spoke on the condition of anonymity, said that it would take banks many months just to determine how the rule fits alongside their internal systems and then make necessary changes to their lending policies. Rather than schedule meetings this week to discuss how to comply with the rule, banks are likely to wait until next week, when Biden will take office, before deciding how to proceed, this person predicted.
The industry source noted that large banks offer many more products and services than loans. Complex products such as derivatives would also be covered by the OCC’s rule.
In commercial finance, banks typically look at a range of qualitative factors, including the business strategy of the prospective customer and the quality of its management team, in making loan decisions.
“All of those are more subjective, qualitative factors that I think banks should absolutely take into account,” the industry source said. “If you only looked at the numbers, you’d probably be accused of not doing your due diligence.”
