Rollout of new anti-redlining rules sparks confusion in banking industry

A top federal bank regulator on Wednesday released a sweeping revision of anti-redlining rules Wednesday amid reports about his pending resignation, spurring alarm and confusion among the banking industry and its critics.

The Office of the Comptroller of the Currency (OCC) unveiled new rules for banks and regulators to follow under the Community Reinvestment Act (CRA), a 1977 law that requires banks to serve low-income communities and finance loans and projects in areas historically neglected by the financial sector.

The OCC and Federal Deposit Insurance Corporation (FDIC) unveiled a joint proposal in December to update CRA regulations, which are widely acknowledged by the industry and consumer advocates as outdated. The CRA regime has not been substantially revised since 1995, well before the internet fundamentally reshaped consumer banking.

But Comptroller of the Currency Joseph Otting released the final version of those rules Wednesday without the FDIC on board, and just hours after several media outlets reported that he planned to resign this week. Otting was also absent from a Wednesday call with reporters about the CRA proposal, a surprise given his intense focus on revamping the law and his history of accessibility with the media.

“He’s spent every waking day of his controllership on this rule but he’s not available,” said OCC chief operating officer Brian Brooks, the agency’s second in charge, when asked why Otting wasn’t on the call.

Bryan Hubbard, deputy comptroller for public affairs, said in an email that Otting “was making other calls on the subject” and the agency is “not confirming or commenting on what personal plans he may have.”

A financial industry source told The Hill that Otting had been expected to leave before his five-year term ended in 2022 and likely before January 2021.

Yet Otting’s decision to break from other financial regulators and release a controversial rewrite of federal banking rules on his way out the door in the middle of a pandemic left advocates and lawmakers scratching their heads.

“What the impact is, given they went alone and it is expected to face legal challenges, is questionable,” said the financial industry source.

Otting, a former banker and business partner of Treasury Secretary Steven Mnuchin, made a rewrite of the CRA regulations the primary focus of his stint at OCC. Banks that fail to meet benchmarks for lending encouraged by the CRA may not be blocked from future mergers, acquisitions or new branches.

Otting and other industry advocates have argued for a CRA grading system that relies less on the subjective analyses of bank inspectors and more on specific standards based on lending data. The OCC and FDIC released in December a proposed framework for judging banks with a single ratio meant to capture the volume and frequency of loans to low-income areas, among other changes.

FDIC Chairman Jelena McWilliams, another former banker, and Otting released their December proposal without sign on from the Federal Reserve Board, prompting concerns from Democrats who were already skeptical of their efforts.

“Other regulators must give greater weight to the experiences of communities across the country that have historically seen disinvestment and reject this rushed and wrongheaded rule,” said Sen. Sherrod Brown (Ohio), the top Democrat on the Senate Banking Committee, in a statement Wednesday.

Jesse Van Tol, chief executive of the National Community Reinvestment Coalition, blasted Otting for “an awkward, disjointed and rushed move by a single agency that couldn’t get agreement from the two other agencies that regulate banks within the same administration.”

“The OCC should have been able to agree and work with the other two agencies that oversee enforcement of the same law. It couldn’t. It failed. That’s an administrative fiasco,” he said.

While all three agencies had expressed a desire to unite behind a common proposal, Otting’s decision to release the final rules without the FDIC may hinder that effort, leaving banks subject to three different regulatory regimes for one law.

McWilliams said in a Wednesday statement that while the agency “strongly supports the efforts to make the CRA rules clearer, more transparent, and less subjective, the agency is not prepared to finalize the CRA proposal at this time,” citing the intense strain of the pandemic on small banks. 

OCC officials have argued throughout the pandemic that the economic downturn caused by COVID-19 only reinforces the need to reform rules meant to support the most vulnerable communities.

Otting said during a Senate Banking Committee last week that the new CRA regime “would drive more dollars into low- and moderate-income communities across America,” a message echoed by Brooks on Wednesday.

“We really do believe that this is going to help accelerate the delivery of credit to the most distressed communities. Does anybody really want us to delay that?” he said.

Brooks also brushed off the significance of the FDIC’s refusal to sign on to the final proposal, suggesting that the agency could come around later.

“If you’re writing a story that says the FDIC is not joining, I would be careful about embarrassing yourself, because I think that’s a premature judgment on your part,” Brooks said in response to a question about McWilliams not signing onto the OCC’s rules.

“She’s an important partner of ours and was deeply involved in helping us get to the point right today,” he added.

The OCC’s release of the new CRA rules came just 41 days after the formal comment period ended—a remarkably short time compared to the typical life cycle of a federal rule and especially so amid a massive financial shock.

Brooks pushed back on concerns about the swift rollout of the new CRA rules, arguing that they had been in development for more than two years and that OCC staff waged a “Herculean effort” to amend the rule to reflect concerns from consumer groups and industry. 

“The best parts of the final rule are changes that we made in response to comments from community groups, and we really thank them for their help,” Brooks said.

He cited changes that include putting greater weight on the frequency and number of loans instead of their total amount, increasing the credit a bank would get for mortgage loans to low-income borrowers, and delaying a new CRA grading rubric and process for determining their lending area.

But bank industry advocates had mixed feelings about the OCC rules.

Rob Nichols, president and chief executive of the American Bankers Association, praised the OCC “for their commitment to this important effort,” but expressed concerns about the data used to determine the rule’s new benchmarks and the lack of universal uptake among regulators.

“We have consistently advocated for CRA modernization that encourages banks to invest efficiently and effectively in every neighborhood they serve,” Nichols said in a statement. “The fact that only one of the three federal banking regulators overseeing CRA has adopted this final rule means it does not meet that goal.”

The Consumer Bankers Association was more complimentary, touting the OCC’s “needed improvements to qualifying activities, quantifying examination ratings, and providing incentives for outstanding ratings.”

“Now that the OCC has issued its proposal, we hope the FDIC and Fed will finish their work and issue a modernized rule consistent with modern banking practices and the needs of today’s consumers,” the group said.