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NYDFS Files Independent Lawsuit Against OCC Fintech Charter
Following the April 26 lawsuit filed by the Conference of State Bank Supervisors (CSBS) opposing the OCC’s fintech charter (see previous InfoBytes post), the New York Department of Financial Services (NYDFS) filed its own lawsuit on May 12, asking the court to block the OCC from creating a new special purpose fintech charter. “The OCC’s charter decision is lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York and other state regulators,” NYDFS Superintendent Maria T. Vullo said in a statement announcing the lawsuit. “This charter puts New York financial consumers . . . at great risk of exploitation by newly federally chartered entities seeking to be insulated from New York’s strong consumer protections.” NYDFS’s complaint, filed in the U.S. District Court for the Southern District of New York, alleges that the OCC’s charter would include “vast preemptive powers over state law.” Specific concerns include the risk of (i) weakened regulatory controls on usury, payday loans, and other predatory lending practices; (ii) consolidation of multiple non-depository business lines under a single federal charter, thus creating more “too big to fail” institutions; and (iii) creating competitive advantages for large, well-capitalized fintech firms that could overwhelm smaller market players and thus restrict innovation in financial products and services. The complaint also asserts that the “OCC’s action is legally indefensible because it grossly exceeds the agency’s statutory authority.” Finally, the complaint claims that the proposed fintech charter would injure NYDFS monetarily because the regulator’s operating expenses are funded by assessments levied by the OCC on New York licensed financial institutions. According to NYDFS, every non-depository financial firm that receives a special purpose fintech charter from the OCC in place of a New York license deprives NYDFS of crucial resources that are necessary to fund its regulatory function.
Citing violations of the National Bank Act and conflicts with state law in violation of the Tenth Amendment of the U.S. Constitution, NYDFS seeks declaratory and injunctive relief that would declare the fintech charter proposal to be unlawful and prohibit the OCC from taking further steps toward creating or issuing the charter without express Congressional authority.
In a press release issued the same day, the CSBS said it “strongly supports the [NYDFS] lawsuit” and reiterated that the OCC “does not have the authority to issue federal charters to non-banks, and its unlawful attempt to do so will harm markets, innovation and consumers.”
OCC’s March Fintech Guidance Documents Draw Range of Comments, Reactions from Stakeholders
Back in December of last year, the OCC announced its intention to move forward with developing a special purpose national bank charter for financial technology (fintech) companies. In an accompanying white paper the OCC outlined the basis for its authority to grant such charters to fintech companies and potential minimum supervisory standards for successful fintech bank applicants. And, as previously covered by InfoBytes, in March, the OCC released a Draft Licensing Manual Supplement for Evaluating Charter Applications From Financial Technology Companies (“Draft Fintech Supplement”) and a Summary of Comments and Explanatory Statement (“March 2017 Guidance Summary”) (together, “March 2017 Guidance Documents”) in which it provided additional detail concerning application of its existing licensing standards, regulations, and policies to fintech companies applying for special purpose national bank charters. With the comment period for its March 2017 Guidance Documents closing earlier this month, the bank regulator drew a range of reactions from stakeholders, several of which are described below:
Center for Responsible Lending (CRL). In its comment letter—submitted on behalf of a number of consumer, civil rights, small business, and community groups—the CRL argued, among other things, that “the OCC does not have the legal authority to charter non-depositories,” and “is not a substitute for critical safeguards that exist at the state level,” and that the existence of a national bank charter for non-depository fintech institutions would likely result in the preemption of strong state laws. The signers expressed concern that, in its approval process, the OCC “has completely failed to address critical consumer and small business protection requirements.” The letter adds that the chartering process, as it now exists, “seems more designed to pick winners and losers and grant special privileges to established players in the industry than to facilitate innovation.”
Mercatus Center at George Mason University (Mercatus Center). In its comment letter, the Mercatus Center set forth its position and belief that the OCC’s current proposal “shows some improvement over its previous statements,” but “remains overly focused on the survival of the entity instead of the protection of customers.” According to Brian R. Knight, a Senior Research Fellow at the Mercatus Center, the proposal imposes requirements and conditions on special purpose national banks (SPNBs) “that many will find impossible to meet—without a sufficient countervailing benefit.” Knight recommends therefore, that the OCC, among other things: (i) reorient charter requirements away from insisting that SPNBs demonstrate survivability and toward ensuring that they can fail in an orderly manner that protects their customers; and (ii) clarify the requirements for SPNBs to obtain and maintain a charter consistent with the rights and responsibilities of national banks under relevant law.
Consumer Bankers Association (CBA). In an April 14 comment letter, the CBA argued that the OCC "has not provided a clear rationale or justification for offering a national bank charter to fintech companies,” and that the standards for such banks are not yet fully developed.” The group urged the OCC to conduct an in-depth study of the fintech sector to determine whether or not the public would benefit from a fintech charter.
Independent Community Bankers of America (ICBA). As previously covered by InfoBytes, the ICBA has been a vocal opponent of the OCC’s fintech charter efforts throughout the agency’s nearly yearlong process. Reiterating concerns raised in its January 17 comment letter, the ICBA submitted another comment letter on April 12, calling upon the OCC to rescind the proposed licensing manual supplement and request specific congressional authorization to grant fintech charters. Specifically, the ICBA asserted the need to spell out clearly the supervision and regulation that these chartered institutions and their parent companies would be subject to. The ICBA noted its observation that federal agencies “are inconsistent on how they define a ‘bank’ or what constitutes the ‘business of banking,’” and argued the benefits of giving Congress the “opportunity to define the business of banking and consider all the policy implications of issuing a fintech charter.” In particular, the ICBA insisted that the OCC publish liquidity and capital requirements for fintech firms that would be the same as those applied to depository institutions. The ICBA also issued a statement concerning a lawsuit filed April 26 by the Conference of State Bank Supervisors CSBS against the OCC (see related InfoBytes Special Alert), in which the organization “commend[ed] the CSBS for elevating this issue and remains deeply concerned with the OCC’s proposed fintech charter, which the agency has pursued without congressional authorization or a formal rulemaking process subject to public comment.”
American Bankers Association. In an April 14 letter, the ABA expressed its support for the OCC’s proposed charter, so long as “the same rules and oversight are applied consistent with those for any national bank.” The ABA emphasized, among other things, the benefit of a bank charter as a “clear signal to customers that they are dealing with a trusted partner,” as “[t]he title of ‘bank’ carries significant weight in the mind of customers and should not be taken lightly.”
Marketplace Lending Association (MLA). In its April 13 comment letter, the MLA called for the OCC to “consider developing metrics that are different from those used for traditional depository institutions.” Specifically, the MLA argues, “[i]instead of applying rigid capital and liquidity requirements across the board, the OCC should consider implementing requirements that are based on basic prudent operations, long-term profitability, and risk factors that would apply” to fintech firms with different business plans or structures.
Financial Innovation Now (FIN). Finally, in a letter sent earlier this month to the Senate Banking Committee (FIN)—an “alliance of leading innovators promoting policies that empower technology to make financial services more accessible, safe and affordable for everyone”—offered several policy recommendations in response to the legislators’ request for proposals to grow the economy. Among the recommendations offered, was a call for a “Financial Innovation National Strategy” to foster innovation, job creation, and competition in the financial services sector. As part of that strategy, the FIN letter outlines six policy proposals: (i) statutory designation of an Undersecretary of Treasury for Technology; (ii) federal money transmitter laws; (iii) payment technology assessments under the Card Act; (iv) consumer data access protections; (v) better federal regulatory coordination; and (vi) flexible approaches to new tech entrants.
OCC Updates Comptroller’s Handbook, Issues New Guidance for Evaluating Retail Lending Risk Management
On April 12, the OCC issued Bulletin OCC 2017-15 announcing its new booklet, “Retail Lending,” which discusses retail lending risks and measures for evaluating retail credit risk management activities. The booklet, part of the Comptroller’s Handbook, applies to “examinations of all institutions engaged in retail lending” and supplements the following core assessment sections: “Large Bank Supervision,” “Community Bank Supervision,” and “Federal Branches and Agency Supervision.” According to the Bulletin, Examiners should reference this booklet when review beyond the core assessment is appropriate because the specific products, services, or activities “have a material impact on the risk profile and financial condition” of banks. The new booklet describes (i) “characteristics of an effective retail credit risk management framework”; (ii) “criteria examiners should consider when evaluating retail credit originations, account management, collections, and portfolio management activities and processes”; and (iii) “objectives of control functions commonly used in a retail lending business to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel.”
OCC Issues Consent Order to U.S. Branch of International Bank, Requires Development of BSA/AML Program
As previously reported in InfoBytes, on March 17 the OCC released its list of enforcement actions taken in February against national banks, federal savings associations, and current and former affiliated individuals. Among those actions is a consent order issued on February 13 against a U.S. branch of a Curacao-based subsidiary of a United Arab Emirates bank for allegedly failing to comply with the Bank Secrecy Act’s anti-money laundering (BSA/AML) rules and requirements, failing to timely file suspicious activity reports (SARs), and failing to conduct adequate due diligence on foreign correspondent accounts. The consent order, among other things, requires the U.S. branch to: (i) create and submit a comprehensive BSA/AML compliance action plan; (ii) appoint a BSA officer who will “ensure compliance with the requirements of the BSA and the Office of Foreign Assets Control (OFAC)”; (iii) review, update, and implement an enhanced written ongoing BSA/AML Risk Assessment and a separate OFAC Risk Assessment process to timely identify and analyze risk categories; (iv) acquire an independent third-party consultant to conduct a “Look Back” plan to determine whether suspicious activity was timely identified and reported by the branch; (v) develop and implement a written program to ensure the timely review of BSA/AML suspicious activity alerts and filing of SARs; and (vi) create a comprehensive training program for “appropriate operational and supervisory personnel.”
OCC Announces February 2017 Enforcement Actions
On March 17, the Office of the Comptroller of the Currency (OCC) released a list of administrative enforcement actions taken against banks and bank officers in February. Several of the reported actions included payment of civil money penalties (CMPs) for, among other things, violations of the Federal Trade Commission Act, Bank Secrecy Act (BSA) deficiencies, and unsafe or unsound practices by institution-affiliated parties for breaches of fiduciary duty. Among the actions containing CMPs a Tennessee bank fined $1 million for deficiencies related to billing practices with regard to an identity protection product consumers paid for but never received, and a California bank fined $1 million for continuous non-compliance with a 2010 Consent Order for BSA deficiencies including “inadequate risk assessment process[es], inadequate system of internal controls, inadequate suspicious activity monitoring and reporting process[es], inadequate customer due diligence and enhanced due diligence programs, ” as well as having a “BSA/AML independent audit [that] failed to identify . . . significant internal control weaknesses.”
OCC, FDIC, and Fed Release Stress Test Scenarios for 2017
On February 3, the Fed announced the release of the “Supervisory Scenarios” to be used by banks and supervisors for the 2017 Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress test exercises and also issued instructions to firms participating in CCAR. The Fed also published three letters that provide additional information on its stress-testing program. The three letters describe: (i) the Horizontal Capital Review for large, noncomplex companies; (ii) the CCAR qualitative assessment for U.S. intermediate holding companies of foreign banks, which are submitting capital plans for the first time; and (iii) improvements to how the Fed will estimate post-stress capital ratios.
On February 3, the OCC similarly released economic and financial market scenarios for 2017 that are to be used by national banks and federal savings associations (with total consolidated assets of more than $10 billion) in their annual Dodd-Frank Act-mandated stress test. On February 6, the FDIC released its stress test scenarios, working in consultation with the Fed and OCC.
The three sets of supervisory scenarios provide each agency with forward-looking information for use in bank supervision and will assist the agencies in assessing the covered institutions’ risk profile and capital adequacy.
OCC Releases Schedule of Fees and Assessments for 2017
On December 1, the OCC issued Bulletin 2016-43, which informs all national banks, federal savings associations, and federal branches and agencies of foreign banks of the fees and assessments the OCC will charge for calendar year 2017. The rates for all asset categories have been adjusted for inflation. The bulletin becomes effective January 1, 2017.
Comptroller Curry Discusses Importance of Effective Supervision Before Clearing House Annual Conference
In prepared remarks delivered on November 30 before The Clearing House Annual Conference in New York City, Comptroller of the Currency Thomas J. Curry discussed lessons from the 2008 financial crisis. Curry noted that he was “often disappointed how quickly some forget the lessons of more recent events, particularly what brought the financial system to the cliff in 2008 and what has put our banks and our economy on much firmer ground since.” His remarks emphasized the value of strong capital, the need for ample liquidity, and the importance of effective supervision.
In discussing capital, Curry noted that since the beginning of 2009, there has been a $700 billion increase in common equity capital. Such levels would allow the 33 largest bank holding companies to be well capitalized and continue lending even under the most severe scenario used by the banking agencies’ stress tests. He cautioned, however, that “[w]eakening the ratio through special exclusions only undermines our original intent and weakens the protection against excessive leverage.” Comptroller Curry similarly noted that the Liquidity Coverage Ratio and the proposed Net Stable Funding Ratio complement each other to push covered banks to hold ready resources to meet short-term cash outflows and to shift to more stable, longer-term funding.
On the subject of supervision, Curry noted the importance of “holistic supervision based on the CAMELS rating system.” He also added that while a periodic reassessment of banking laws and regulations is appropriate, “we must never settle for ‘light-touch’ supervision.” And, in concluding, Curry stressed that community banks and their examiners, in order to “remain strong and healthy,” need to “focus on strategic risk, rising credit risk from stretching for yield while relaxing underwriting standards, expansion of new technologies, and compliance issues.”
OCC Updates Community Bank Supervision Comptroller's Handbook
On November 3, the OCC announced an update to the “asset quality core assessment procedures” in its Community Bank Supervision Comptroller’s Handbook (Handbook). Among other things, the revised Handbook: (i) updates concentration risk management procedures and stress testing guidance for community banks; (ii) incorporates procedures for credit underwriting assessments; (iii) enhances appraisal, evaluation, allowance, and credit review examination procedures; and (iv) updates the asset quality references and standard request letter.
OCC Establishes Office of Innovation
On October 26, the OCC announced plans to establish an Office of Innovation (Office) with staff located in Washington, New York, and San Francisco. The OCC simultaneously published a paper titled “Recommendations and Decisions for Implementing a Responsible Innovation Framework,” which provides an overview of the financial services landscape and the OCC’s innovation initiatives. With the expectation to begin operations in first quarter 2017, the new Office will implement certain aspects of the OCC’s responsible innovation framework, including: (i) creating an outreach and technical assistance program; (ii) conducting awareness and training activities for OCC staff, such as implementing an “internal web page that provides OCC staff a ‘one-stop-shop’ to access information on industry trends and innovative products, services, and processes”; (iii) encouraging coordination and facilitation among the regulatory community and industry stakeholders; (iv) conducting industry innovation research; and (v) promoting coordination with other agencies, particularly those with overlapping jurisdictions. Beth Knickerbocker will head the Office as acting Chief Innovation Officer.
The OCC noted that its “assessment of granting a special purpose national bank charter to nonbank financial technology companies, and under what conditions, continues.” Later in 2016, the OCC plans to publish a paper to address issues related to a potential special purpose charter.