Fintech, Community Lending in Spotlight as Otting Heads to Hill

By Evan Weinberger

Comptroller of the Currency Joseph Otting will update Congress this week about where the Trump administration intends to take bank regulation in areas including financial technology firms and the future of community lending rules.

Otting is set to make his first appearance before the House Financial Services Committee on June 13 and the Senate Banking Committee on June 14 since taking over last year as the lead regulator for the country’s national banks.

The hearings come after President Donald Trump signed Dodd-Frank Act changes into law that will shrink the number of banks subjected to strict regulation and ease some rules for community banks. The hearings could become a proxy fight for Democrats seeking to push back against administration efforts to roll back bank rules, said Joseph Lynyak, a financial services partner at Dorsey & Whitney LLP.

“I’m going to be very curious how he’s going to present himself, and whether it’s a combative thing versus a non-combative thing,” Lynyak told Bloomberg Law in a phone interview.

Aside from the broader themes of Trump-era deregulation of banks, Otting is likely to face questions about a host of policy issues. Here’s what to watch for.

Community Reinvestment Act

The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., and the Federal Reserve are in discussions for a rewrite of how banks are measured for compliance with the Community Reinvestment Act.

The CRA is a 1977 law intended to measure banks’ lending to low- to moderate-income neighborhoods. A poor CRA exam result could make it harder to engage in mergers or branch expansions and potentially result in the loss of municipal contracts.

But the rules for complying with the law have not been updated since the 1990s, and regulators, banks, and consumer advocates agree that an update is needed.

Otting, the former chief executive of OneWest Bank and a veteran of other big banks, made overhauling the CRA a priority when he took over the OCC.

What that rewrite will look like, and when a proposal will be coming, are questions that lawmakers will likely want answered, Quyen Truong, a partner at Stroock & Stroock & Levan and a former top Consumer Financial Protection Bureau and FDIC official, told Bloomberg Law.

“Timing and then more insights about what they plan to do would be really important,” Truong said in a phone interview.

On the policy side, lawmakers, banks, and community activists will be curious about potential changes in how regulators measure CRA compliance, as well as alterations to the timing of exams and notification of results, she said.

Fintech Charter

A second area that Otting is likely to be questioned about is where he stands on the fintech charter.

Otting has so far been noncommittal about his views on the creation of a special national charter for online lenders, payment processors, and other fintech firms, a proposal first put forward by his predecessor, former Comptroller Thomas Curry. Instead, Otting has said that the OCC will release a report in July outlining where the agency comes down on the charter.

Such a charter could allow fintech firms to avoid state licensing requirements by allowing them to have a single federal operating license. For consumer advocates, talk of such a charter evokes memories of past battles with the OCC over preemption of state banking regulations.

“What really worries me is they will provide protection and cover and preemption for potential violations [of state consumer protection laws] that may exist,” Ira Rheingold, the executive director of the National Association of Consumer Advocates, told Bloomberg Law in a phone interview.

Whatever Otting decides will either allow fintech firms to get stand-alone charters or find other ways to expand, including entering into partnerships with banks.

“It will be very important whether or not the OCC goes ahead and gives fintech charters to particular institutions,” Truong said.

Small-Dollar Loans

Otting can expect to get an earful from lawmakers about a May 23 OCC bulletin encouraging banks to get involved in the small-dollar lending market.

The bulletin outlined a type of installment loan that would carry lower interest rates than the up to 350 percent interest rates charged by payday lenders.

Otting has said the OCC is not against bank partnerships with outside firms to provide such loans. But he warned against a return to the “rent-a-charters” from the early 2000s, which saw payday lenders and other companies team up with national banks to evade state interest rate caps.

“My initial read was there was nothing in there that particularly frightened me,” Rheingold said of the OCC’s May bulletin.

The OCC’s move comes as the CFPB under acting Director Mick Mulvaney reconsiders payday lending rules put in place just before his predecessor, Richard Cordray, left office to run for governor of Ohio.

Consumer advocates fear the OCC guidance is a prelude to either repealing or watering down those restrictions.

How the OCC and the CFPB come together on bank small-dollar loan offerings will be a key question for lawmakers and agency watchers moving forward.

Anti-Money Laundering, Volcker

Otting could face questions from lawmakers about potential changes to how banks are evaluated for Bank Secrecy Act and anti-money laundering compliance. Lawmakers from both parties have voiced support for easing the examination process and other aspects of bank compliance.

Otting is also expected to provide details about proposed changes to the Volcker Rule, Dodd-Frank’s ban on proprietary trading, that the OCC and four other financial regulators released late last month.

The rule prevents banks with federally backed deposit insurance from trading for their own benefit rather than buying or selling securities to fulfill requests from customers. It also restricts lenders’ ability to invest in hedge funds and private-equity firms

The Trump administration proposal would streamline compliance requirements. It would remove assumptions that certain positions held by lenders are automatically proprietary trades and would set up a tiered system that places the toughest requirements on the largest banks, among other things.

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