NCRC, Two Other Advocacy Groups, File Joint Amicus Brief in Lacewell v. OCC

Taking Deposits is a Fundamental Part of Banking

Last week, the National Community Reinvestment Coalition (NCRC) joined with the Center for Responsible Lending (CRL) and the National Consumer Law Center (NCLC) to file an amicus brief in the Office of Comptroller of the Currency (OCC)’s appeal in Lacewell  v. OCC  in the federal Second Circuit Court of Appeals.  

Lacewell concerns whether or not the OCC can give a charter to a financial institution (FI) other than a bank that does not take deposits. These FIs are also known as “fintechs.” The district court agreed with the New York Department of Financial Services (NY DFS) that the OCC cannot issue a special purpose charter to fintechs under the National Banking Act. The OCC contends that it can because no law exists that explicitly prohibits it from doing so. The OCC’s politically expedient reasoning is troubling because it could lead to the OCC preempting states, which have traditionally regulated nonbanks, from regulating a wide swath of financial services.

The OCC’s argument is based largely on a 2003 regulation that it wrote itself, which stated that to be in the “business of banking,” an entity must conduct at least one of the following core banking functions: receive deposits, pay checks or lend money. Today, the OCC grounds its new actions in its own prior definition of a bank – and from there, it contends that the OCC and not the states should be in charge of setting rules for all of these activities.

Applying such a view would radically expand the idea of what it is to be a bank, and if accepted by the court it would allow the OCC to apply its regulatory vision to a much larger share of our economy. Federal courts have already rejected other attempts by the OCC to extend its authority through a redefinition of the business of banking to include national banks that do not accept deposits. 

The NY DFS argued in its appellate brief that the OCC is attempting a massive authority grab, and we agree. NY DFS oversees institutions with approximately $4.7 trillion in assets. If the OCC wins its appeal, then a good share of that coverage – and the related influence – would be preempted.

The OCC’s proposal greatly expands the notion of banking. By its definition, almost any financial institution involved in the exchange of money could become “the business of banking.” The universe of chartered institutions would have very few limits, as would the OCC’s preemption powers.

The OCC Charter Will Eliminate State Interest Rate Caps and Foster a “Rent-a-Bank” System That Evades State Consumer Protection Laws

Federal preemption would also prevent states from applying many consumer protection laws to OCC chartered nonbanks. Notably, New York state has established strict interest rate caps on lending; if the OCC was successful in its appeal, NY DFS would lose at least some of its ability to protect its residents. 

A large portion of the amicus brief the advocacy groups filed focused on “rent-a-bank” schemes, where a nonbank lender launders money through a chartered bank to evade state rate caps. The evidence suggests that if nonbank lenders were allowed to become banks, they would use the charter privilege to expand their operations, resulting in more high-cost lending. 

The OCC Charter Will Undermine the Community Reinvestment Act By Creating a Two-Tier System That is Unworkable

We also have concerns with how the chartering of non-depository fintechs would undermine the application of the Community Reinvestment Act (CRA).

Since its passage, CRA has linked chartering with deposit-taking. All CRA obligations occur inside assessment areas and always because the examined institution holds deposits within a metropolitan statistical area, or MSA. Non-depository institutions have never had CRA requirements, even if they engaged in other aspects of banking. For example, nonbank mortgage companies provide the same product as a traditional bank mortgage lender, but because they do not hold deposits, they do not have a CRA obligation. The OCC’s proposed charter would allow fintechs to get the benefits of a federal charter, but without the obligation to meet the needs of the communities where they do business.

CRA requires that banks must meet these needs and the OCC is supposed to assess the adequacy of the national banks’ reinvestment. The places where a bank locates its deposit-taking functions becomes the determinative factor for defining “community” for reinvestment activities. The operating principle is that regulated banks must demonstrate that they meet the needs of the community in the places where they take deposits.

Yet despite that understanding, the OCC proposes to create the opportunity for regulatory arbitrage. Nonbanks will have access to many privileges that banks have (access to the lower costs of capital, for one) without any of the regulatory obligations that banks have, including demonstrating that they are reinvesting in the communities where they do business.

Nothing in the new OCC charter framework answers how a non-depository would meet its obligation to reinvest in the community. The OCC has proposed a plan that could address this gap, but by aiming to apply a “Financial Inclusion Plan” (FIP), it re-defines the well-established precedents of CRA. If allowed, the OCC’s use of a FIP framework, instead of CRA, would effectively create a two-tiered framework for community reinvestment. Banks will have a robust CRA responsibility, while other nonbanks do not need to demonstrate any commitment to the communities where they do business. Some consumers will have relationships with banks that must meet a broad set of CRA obligations, whereas other consumers will have relationships with nationally-chartered nonbanks with little to no restrictions.

We believe that by proposing to give access to the benefits of the banking system to non-depositories, the OCC has embarked on a dangerous precedent. Stakeholders across the spectrum have emphasized the importance of also extending CRA-like requirements to fintech companies. For example, the Independent Community Bankers of America (ICBA) criticized the OCC’s original white paper because it “falls short of explaining whether fintech charter applicants would be subject to financial inclusion requirements similar to CRA, and how such requirements would be met.” 

The proposed OCC nonbank charter will also make it more difficult for other agencies, like the Federal Reserve Board (FRB), to do their jobs of evaluating an FI’s commitment to the communities where they do business. The Bank Holding Company Act of 1956 says that the FRB, when evaluating applications, mergers or acquisitions of bank holding companies, must judge how well the institutions meet community needs.

Former FRB Director of the Division of Consumer and Community Affairs Sandra Braunstein addressed the purpose of CRA and the FRB’s role in reviewing banks’ commitments to their communities:

“In passing the CRA, Congress reaffirmed the long-standing principle that insured depository institutions must serve “the convenience and needs” of the communities they are chartered to do business, which included meeting their credit needs. The Bank Holding Company Act of 1956 already required the Federal Reserve Board with reaching decisions on proposed acquisitions by banks or bank holding companies, to evaluate how well the institutions involved were meeting community needs, consistent with the requirements of safety and soundness. Some argued that this CRA obligation was a quid pro quo for privileges such as the protection afforded by federal deposit insurance and access to the Federal Reserve’s discount window.”

The OCC’s plan to provide charters to nonbanks is at odds with “the wider statutory scheme of national banking regulation,” as national banks are required to join the Federal Reserve System. Under the rules of the Federal Reserve Act, non-depositories currently cannot join.

The OCC’s Proposed FIP Framework Does Not Provide Meaningful Regulatory Oversight or Allow for Public Input – Bedrock Principles of CRA 

We are also concerned because there will be little to no federal oversight or public scrutiny of the OCC’s proposed FIP framework. While the OCC’s March 2017 version of the charter proposal conditioned the OCC’s preliminary approval of a nonbank charter on the applicant’s implementation of its FIP, the July 2018 supplement did not. Instead, the July 2018 supplement was ambiguous about whether nonbank applicants should take affirmative steps and develop concrete financial inclusion plans around their commitment before approval by the OCC. The OCC also eliminated as part of the application that a nonbank reach out to community groups in the places where it was or would do business. While the March 2017 version recognized the importance of community “outreach to interested community and consumer groups may be particularly helpful in determining these community financial needs,” the July 2018 supplement neither acknowledges nor includes important language around nonbank’s ongoing obligation to receive and respond to public input on how it executes its “financial inclusion commitment” or any updates to it.  

These changes will reduce the role that grassroots community groups, community development institutions, labor organizations, civil rights groups, consumer protection groups and other community input has in the process. This input is important for federal regulators, including the OCC, to be able to understand whether online marketplace lenders, for example, are innovating responsibly and whether they are taking affirmative steps to ensure that low- and moderate-income (LMI) households have fair access to their products and services.

NCRC strongly opposes the OCC’s efforts to grant charters to non-depository institutions. We believe that this can only occur with Congressional action, as a variety of existing federal laws are written on the assumption that taking deposits is an essential component of banking. The OCC’s idea presents a threat to the national banking framework, including the Community Reinvestment Act.

Adam Rust is a senior policy advisor at NCRC.

Photo by lucas Favre on Unsplash

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