5 policy challenges awaiting next OCC chief

May 6, 2021 10:00 AM

WASHINGTON — After months of suspense over when the Biden administration would name an acting comptroller of the currency, reports began to circulate this week that the Treasury Department was set to appoint Michael Hsu, a senior Federal Reserve official, to the post.

It is still a mystery whom the administration plans to nominate for the permanent job after several names were floated. The new leadership of the Office of the Comptroller of the Currency will face a long to-do list of difficult policy questions ranging from reforming the Community Reinvestment Act to determining how the agency proceeds with its efforts to offer charter options to fintech firms.

An interim comptroller would likely play a key role advancing the ball on several issues until the administration’s nominee is confirmed.

If Hsu is officially tapped for the job, Democrats would welcome the move. Many have blamed the White House for leaving the agency on autopilot since Trump appointee Brian Brooks stepped down at the end of the prior administration and the baton shifted to Blake Paulson, an OCC career veteran. They say the delay in naming a new acting comptroller has wasted time on making progress on several policy fronts.

Here are five policy areas that will face a future comptroller of the currency on day one.

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Re-making the Community Reinvestment Act

No policy challenge looms quite as large for the next comptroller of the currency as picking up the pieces of CRA reform. The effort to finally reform the historic anti-redlining law — last updated in 1995 and requiring banks to invest a certain amount of money and services to the nation’s poorest neighborhoods — will impact billions of dollars of community investment in the years to come.

Although former Comptroller Joseph Otting technically finalized his own version of reform last May, few analysts expect the changes to stick under the Biden administration given a clear lack of support from fellow regulators at the FDIC and Federal Reserve. Banks and community groups alike oppose a fragmented, two-tiered system for CRA compliance.

But with the OCC rule not yet implemented, the Biden administration poised to appoint a new head of the agency and other regulators willing to return to the negotiating table, policymakers have a second chance to issue a final, joint rulemaking.

A new acting comptroller could play a key role in the progress of the such negotiations as would a Senate-confirmed head of the agency.

Several financial trade groups this week wrote to acting Comptroller Blake Paulson urging him to withdraw the agency's CRA rule or delay its January 2023 compliance date by at least two years.

“To date, most banks have conducted preliminary preparations to implement the June 2020 Rule; they have not yet dedicated the full scope of resources that will be needed to create the technological infrastructure necessary to comply with the Rule and its new data reporting requirements,” the groups wrote.

“However, as budget season and the 2023 compliance date draw near, CRA personnel will be required to allocate significant funds and other resources to begin building new technology systems, hiring consultants, assembling project management teams, and retooling CRA programs. These will be significant expenditures that will be wasteful if the OCC significantly modifies the Rule as part of a future interagency rulemaking.”

Ultimately, the agency’s new leadership would need to decide just how much of Otting’s approach should be preserved. Pressing questions include: How exactly should banks receive CRA credit for activity outside their typical assessment areas, and will regulators need to introduce new recordkeeping requirements for banks?

Future of fintech charters

Another item high on the list of policy questions for the next comptroller is: Which nontraditional firms should be able to qualify for a national bank charter?

The question has dogged the OCC for years. Under the Obama administration, former Comptroller Tom Curry introduced a special-purpose charter for fintech firms, but no company has yet applied and the charter is tied up in a federal court challenge brought by New York state that is currently awaiting a decision from the Second Circuit Court of Appeals.

Under former acting Comptroller Brian Brooks, the agency advanced applications for the OCC’s preexisting trust charter by cryptocurrency firms, and Brooks proposed a charter option that would be tailored to payments-focused firms.

While a future OCC appointee could weigh in on whether the agency offers the yet-to-be-used special fintech charter, a new acting comptroller could face immediate decisions on whether to approve pending applications of fintech firms that are seeking other types of charters, including Figure Technologies, Oportun and the cryptocurrency firm BitPay.

‘True lender’ rule

Consumer advocates and their Democratic allies in Congress have become increasingly critical of banks that allow nonbank partners to export interest across state lines, thereby avoiding usury laws.

The fight centers on the OCC’s “true lender” rule. Published under Brooks in October, the rule introduced a simple test the agency would use to determine who is ultimately responsible for ensuring a loan complies with the law within the context of a bank-nonbank partnership. If a bank funds a loan or is named the lender in a loan agreement, the rule said, it would be considered the “true lender.” But critics say that validates predatory “rent-a-bank” structures that allow nonbanks to market loans while evading their applicable state interest rate caps.

Democratic lawmakers are attempting to invalidate the rule through the Congressional Review Act, but it is unclear if there are enough votes in the Senate.

"Like so much of what we do, this comes back to one question: Whose side are you on?" said Senate Banking Committee Chairman Sherrod Brown, D-Ohio. "You can stand on the side of online payday lenders that brag about their creativity in avoiding the law, … or we can stand up for families and small businesses and state attorneys general and state legislators who have said enough, and are trying to protect themselves and their states from predatory lending schemes."

But a new acting comptroller or Senate-confirmed head of the OCC could announce that the agency is reopening the rulemaking process to attempt overhaul or rescind the true lender policy.

Fair access rule

One of the most controversial rulemakings of the Trump-era OCC was a policy intended to punish large national banks for making business decisions deemed political such as denying financial services to unpopular industries like firearms manufacturers. Under the rule, finalized by Brooks, banks must provide “fair access” to customers seeking their services.

Conservatives cheered the rule, while banks blasted it as unworkable. After Brooks left the agency, his successor, Paulson, announced that the agency paused publication of the rule in the Federal Register, effectively leaving it in limbo and unenforceable.

The individual Biden appoints to become comptroller in the short or long term has a decision to make. A Democratic comptroller could simply allow the unpublished rule to gather dust. If a Democrat chooses not to act, analysts say, it will be easier for future Republicans to pick up where Brooks left off.

Real estate appraisal reform?

Absent a Biden pick to lead the OCC, acting Comptroller Blake Paulson has made clear in recent weeks that he has limited policy ambitions atop the country’s national bank regulator. But there is one area where he has signaled having an interest in reform where a Biden comptroller could pick up on: residential real estate appraisals and the role they play in bank loan evaluations.

At a virtual event hosted by the Consumer Bankers Association last month, Paulson said appraisals had become “more of a compliance exercise” for banks. He also criticized the appraisal industry for putting up “significant barriers to entry” over the years, adding that “when you put up barriers to entry, you inhibit diversity in the industry.”

Appraisal reform could potentially interest a Democratic comptroller in light of progressives’ aims to address racial inequities in the financial system. Some point to appraisals as having played a discriminatory role in limiting homeownership and wealth-building among Black consumers. Studies have found that Black-owned homes are routinely appraised at lower values than white-owned homes. A 2018 Brookings Institution study argued that homes in Black neighborhoods were undervalued by $48,000 on average.