Is the OCC becoming a ‘lone wolf’ on bank policy?

The Office of the Comptroller of the Currency is making regulatory history as a “lone wolf” regulator with the publication of its advance notice of proposed rulemaking to overhaul the Community Reinvestment Act.

It’s hardly the first time. The process started with the agency’s revised policy on fair lending downgrades of CRA ratings issued last October. This revision, released by then-acting Comptroller Keith Noreika, eased the CRA regulatory burden for OCC-regulated institutions. Since then Comptroller Joseph Otting, not to be outdone by his placeholder, further eased the regulatory burden with a June bulletin relaxing CRA exam procedures and an additional release in August similar to the October revision.

Yet the most recent step, independently seeking public comment on CRA reform, remains the most significant to date.

Putting aside the critical public policy question of whether these OCC regulatory reforms are in the public interest, these efforts are being enacted without the Federal Deposit Insurance Corp. or the Federal Reserve through the normal interagency process.

By taking steps to ease the regulatory burden on national banks and federal savings associations, the OCC is placing state-chartered banks at a competitive disadvantage. Holding companies with banks regulated by different agencies must now become fluent in multiple regulatory languages. This not only results in an unlevel playing field within the banking industry, but it is also at odds with President Trump’s objective to reduce the regulatory burden for all banks.

This agency divide on CRA brings back “competition in laxity” memories from the 1970s, when banks would “charter shop” to get the friendliest regulator. In that case, the effort focused on loosening critical capital requirements and other safety and soundness regulations rather than compliance issues.

Yet it is not unreasonable in today’s intensified M&A climate to imagine a bank with major merger plans, regulated by the FDIC or the Fed, jumping over to the OCC for a friendlier CRA rating.

The OCC has historically been the friendliest of the three regulators in terms of CRA ratings, even before the new comptroller came aboard. For example, between 2014 and 2017, 18% of all OCC banks were rated as outstanding, compared with just 6% at the FDIC and 8% at the Fed. At the other end of the ratings scale, the OCC only failed 1% of its regulated banks, compared to 2% at the FDIC and 1% at the Fed.

The last time regulators could not get their acts together on CRA reform was in 2004, when former Office of Thrift Supervision Director James Gilleran disagreed with the FDIC, the Fed and the OCC on the asset-size threshold for an “intermediate small bank.” or ISB. Before that, going back to the previous 1995 CRA reforms, there was only a small-versus-large-bank distinction for CRA exams, but the ISB middle ground provided additional regulatory relief for community banks in the roughly $250 million to $1 billion asset size. He later resigned and the regulators adopted a unified approach.

Today, however, things are very different. For the first time there are former bankers running all the federal banking agencies, not to mention the U.S. Treasury. The heads of both Treasury and the OCC worked together at OneWest Bank, which had a difficult time dealing with CRA and community groups.

Not surprisingly, one of Treasury’s top priorities is reforming CRA, and it issued its report with recommended reforms, which basically punted this job to the regulators. As expected, the OCC immediately fielded the ball and spearheaded the CRA reform offensive.

But the Treasury and OCC’s bank deregulatory efforts are not stopping there. The Treasury has also recently advocated an industry friendly approach to fintech regulation. This move that was again immediately followed by the OCC’s announcement that it will begin accepting fintech charter applications with a much relaxed “financial inclusion” standard instead of conventional CRA requirements, which is tantamount to a CRA exemption for fintech banks (see https://www.americanbanker.com/opinion/why-fintechs-should-be-held-to-cra-standards).

The result of the OCC’s “competition in compliance laxity” regulatory strategy may be to increase the number of OCC-chartered banks relative to FDIC and Fed ones. The move is not dissimilar from a company in an industry composed of three players cutting costs, increasing service and providing other benefits to gain market share. To the extent that the new comptroller considers the banks he oversees as “our customers,” his lone-wolf approach in this regulatory triopoly is more understandable.

Yet in this case, success should be measured in terms of public service rather than private interests. If the FDIC and the Fed do not flex their regulatory muscles and bring the OCC back in line with them, the OCC may become the leader of the bank regulatory pack.

Since all three bank regulators were appointed by the president, it may be up to Congress to step in and protect the public interest by attempting to level the banking industry playing field — before it is even more distorted.