ABA Letter to OCC on Fair Access to Financial Services Proposal

Chief Counsel’s Office
Office of the Comptroller of the Currency
400 7th Street SW, Suite 3E-218
Washington, DC 20219

Dear Ladies and Gentlemen:
The American Bankers Association (ABA) appreciates the opportunity to comment on the Office of the Comptroller of the Currency (OCC) Notice of Proposed Rulemaking, Fair Access to Financial Services (Proposed Rule). The Proposed Rule would add a new Part 55 to Title 12 of the Code of Federal Regulations (CFR), which would require “covered banks” to provide “fair access” to financial products and services to natural persons and legal entities, as prescribed.

ABA urges the OCC to withdraw the Proposed Rule. As explained below, the arbitrary and capricious nature of the proposal, the lack of clear statutory authority, its inconsistency and potential conflict with longstanding and widely accepted risk management and supervisory practices, and the significant compliance costs it would impose, make the Proposed Rule untenable. Moreover, we are also concerned that Proposed Rule’s scope may also require compliance by many small institutions, such as those in rural or underbanked areas, based on subjective interpretations of undefined terms in the definition of covered bank. 

Summary of Proposed Rule

According to the release, the OCC proposes to obligate institutions with $100 billion or more in assets (covered banks) to provide “fair access” to all financial products and services (financial services) to all natural and legal entity persons within their “geographic market.” Specifically, under the Proposed Rule, “fair access” means that covered banks must: (1) offer financial services “available to all persons in the geographic market served by the covered bank on proportionally equal terms”; (2) use only “quantitative, impartial risk-based standards established in advance” in determining whether to offer the service; and (3) not deny service if it would “prevent, limit, or otherwise disadvantage the person.” The Proposed Rule also prohibits a covered bank from denying “in coordination with others, any person a financial service the bank offers.”

OCC’s Statutory Mission Statement Is Not Sufficient Authority for this Rulemaking

As authority for this new set of regulations, the OCC cites amendments to its mission statement in section 1 of the National Bank Act (12 U.S.C. 1) made by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The amended section states that the OCC “is charged with assuring the safety and soundness of, and compliance with laws and regulations, fair access to financial services, and fair treatment of customers by, the institutions and other persons subject to its jurisdiction.” The OCC states that this new language is the basis for their authority, but at the same time acknowledges it is “ambiguous.” To provide clarity to the banks it supervises, the OCC claims to have responsibility to interpret the language, although there has been no industry confusion as to its meaning nor petition for clarity. It strains credulity and is likely arbitrary and capricious to promulgate a significant, burdensome, and novel rule on the addition of two brief clauses to the prefatory mission statement for the OCC within the National Bank Act.

In fact, legislative history shows that there was no expansion of regulatory and enforcement authority made by the addition of these clauses. According to the Senate Committee on Banking, Housing, and Urban Affairs Report, Congress made the amendments to “clarif[y] the mission and authorities of the OCC.” In the years before the Dodd-Frank Act, the OCC’s Strategic Plans had highlighted its mission to promote “fair access” to financial services with the focus clearly on “consumers” and compliance with “consumer laws and regulations.” In other words, there is no indication that Congress intended to expand the authority of the OCC to issue novel rules outside the scope of established consumer protection laws.

As the OCC notes in the preamble, Congress has provided explicit protections for natural persons in the Equal Credit Opportunity Act (ECOA) and Fair Housing Act, among other laws. Congress has not done so generally for legal entities, outside of the scope of the laws mentioned above. If Congress had wanted to provide such protections, it would have done so expressly, as it had done, for example, with the application of ECOA to both natural person and legal entity applicants.

The OCC Should Not Impede Normal Course Bank Business Strategy or Discretion

We have significant concerns about the Proposed Rule’s unprecedented regulation of covered banks and their ability to exercise their business judgment by imposing an affirmative obligation to provide products and services to the public as prescribed by the OCC. This regulatory posture seemingly puts covered banks into the role of a financial utility. While the OCC expects banks to exercise appropriate corporate governance in setting a strategic plan and establishing its core values and purpose,6 the Proposed Rule creates an irreconcilable “responsibility” to “fulfill this obligation” by providing services to all persons without regard for earnings considerations or financial, operational, reputational, or regulatory risk. We strongly believe a regulatory framework that allows covered banks to use their discretion to engage in various business transactions and relationships, within the bounds of safety and soundness and established consumer protection laws, supports economic efficiency and robust financial markets. If finalized, however, the Proposed Rule would harm markets and the economy by impeding the efficient allocation of capital.
The Proposed Rule would materially interfere with a covered bank’s prerogative to determine its own strategy and business plan for providing products and services based on considerations outside of any “objective, quantifiable risk-based analysis.” Such strategies may include those that envision the bank focusing only on certain industries or geographies or avoiding, as a strategic matter, entities or transactions that pose a high risk of increasing negative stakeholder sentiment towards the covered bank while, in many cases, providing insufficient return due to low margins that would not justify such costs. Private companies in all industries continually make such decisions in our market-driven economy within the bounds of laws that are carefully and expressly designed to protect consumers.

We also question the wisdom of the OCC in superseding the responsibility of a covered bank’s management and board of directors to determine the bank’s business strategy, set its risk appetite, and manage its unique earnings, capital, liquidity, compliance, operational, and reputation risks. In the free market system that is essential to economic growth and prosperity, a privately owned bank should retain the ability to decline, avoid, or otherwise reduce services based on any lawful consideration deemed appropriate, as well as safety and soundness and related regulatory constraints. In addition to risk management considerations, as a practical matter, it is not operationally feasible to have staff expertise and experience in every industry, transaction or funding arrangement. Therefore, banks need to identify areas of focus and have the flexibility to make strategic lending and other decisions.

The Proposal Undermines Well Established Safety and Soundness Practices

Although the preamble mentions safety and soundness, as well as Bank Secrecy Act (BSA) considerations, the language in the Proposed Rule does not discuss or reconcile existing OCC guidance that would be inconsistent or in conflict with the new “fair access” requirements. The summary below does not capture all banking products and services, or their respective risks. Rather, we have highlighted key OCC guidance related to concentration, reputation and operational risk that provides for bank discretion to deem certain clients, transactions or activities to be outside of its risk tolerance. It is unclear why the OCC appears to be undermining many years of risk identification and management experience on the part of covered banks and their OCC examiners, thereby injecting new uncertainty and regulatory risk.

Reputation and Litigation Risk Management

Banks must consider and manage reputation risks to the institution in the interests of shareholders, as well as safety and soundness implications for the bank. Banks manage such risk in a variety of ways, including exercising lawful discretion and judgment in the account opening and underwriting processes, as well as assessing qualitative factors of potential customers. This risk management is inherently qualitative in nature and presumes that the bank has the discretion to deny as well as offer service depending on the risk appetite of the bank in any given area.

The OCC has emphasized repeatedly in guidance the importance of managing reputation and litigation risk. Its Corporate and Risk Governance Handbook notes the importance of managing “negative public opinion” not just to the bank, but to the industry at large:

Reputation risk is the risk to current or projected financial condition and resilience arising from negative public opinion. The strength and level of transparency of a bank’s corporate and risk governance structure influence the bank’s reputation with shareholders, regulators, customers, other stakeholders, and the community at large. A responsible corporate culture and a sound risk culture are the foundation of an effective corporate and risk governance framework and help form a positive public perception of the bank. A bank that fails to implement effective corporate and risk governance principles and practices may hinder the bank’s competitiveness and adversely affect the bank’s ability to establish new relationships and services or to continue servicing existing relationships. Departures from effective corporate and risk governance principles and practices cast doubt on the integrity of the bank’s board and management. History shows that such departures can affect the entire financial services sector and the broader economy.

In addition, under its Third-Party Relationship Guidance, the OCC has also made it clear that banks must consider not just their own reputation, but also that of third parties with which they do business:

Evaluate the third party's depth of resources and previous experience providing the specific activity. Assess the third party's reputation, including history of customer complaints or litigation. Determine how long the third party has been in business, its market share for the activities, and whether there have been significant changes in the activities offered or in its business model. Conduct reference checks with external organizations and agencies such as the industry associations, Better Business Bureau, Federal Trade Commission, state attorneys general offices, state consumer affairs offices, and similar foreign authorities. Check U.S. Securities and Exchange Commission or other regulatory filings. Review the third party's Websites and other marketing materials to ensure that statements and assertions are in-line with the bank's expectations and do not overstate or misrepresent activities and capabilities. Determine whether and how the third party plans to use the bank's name and reputation in marketing efforts.

The Proposed Rule is wholly inconsistent with, at the very least, these two pieces of OCC guidance. In addition, some institutions, not necessarily covered banks, have taken the position that they will not provide services to certain industries for ethical or faith-based reasons, because of the perceived ethics of the business within their communities, employees, and shareholders. Their reputation in their communities would be at stake if they did not exercise such discretion. In the end, the qualitative risks are real, and banks are properly considering them.

Concentration Risk

The Proposed Rule’s requirement to offer the service to the public on “proportionally equal terms” would have the unsafe effect of forcing banks to provide services to all potential customers in the market, even though such service may lead to unacceptably risky concentrations. According to the OCC Handbook on Loan Portfolio Management, to manage safety and soundness risk a bank must consider concentrations in certain industries among other factors. The Handbook states: “Risk diversification is a basic tenet of portfolio management. Concentrations of credit risk occur within a portfolio when otherwise unrelated loans are linked by a common characteristic. If this common characteristic becomes a common source of weakness for the loans in concentration, the loans could pose considerable risk to earnings and capital.” The Handbook further states that “The defining characteristics of some useful segments are readily discernible — borrower’s industry, geographic area, collateral, tenor, facility structure, and risk rating, for example.” [Emphasis added]. The Proposed Rule does not acknowledge this issue, let alone offer any guidance on how covered banks should (or could) manage the conflict between its “proportionally equal” requirement and the necessity of managing concentration risk.

Operational and Compliance Risk Management

Certain business lines, such as merchant acquiring and credit card lending, generate an exceedingly large volume of credit decisions that necessitate automated credit or pricing decisions. These automated systems may consider risk factors related to industry or geographic categories. The Proposed Rule could materially slow the underwriting process, introducing unnecessary operational and compliance costs and even making some business lines economically unviable. Furthermore, banks that offer merchant acquiring or processing services typically manage risks by limiting or denying service to certain types of merchants that are deemed high-risk for fraud or other reasons. Under the OCC Merchant Processing Handbook, such risk management techniques are explicitly required:

When evaluating merchants' credit quality, banks must consider the business lines and any products the merchants offer. The bank card associations segment businesses by activity, and acquiring banks should analyze merchants along similar lines on an ongoing basis. Most acquiring banks compile lists of prohibited or restricted merchants, describing the types of merchants they are unwilling to sign or are willing to sign only under certain circumstances. Certain types of businesses are inherently more risky. [Emphasis added]

In addition, OCC Bulletin 2008-12 states: “Banks should also consider carefully the legal, reputation, and other risks presented by relationships with processors including risks associated with customer complaints, returned items, and potential unfair or deceptive practices.” The Bulletin goes on to suggest seeking “references from other financial institutions” about the potential merchant.10 Such references from other financial institutions and third parties would likely be a qualitative, and not a quantitative, assessment. Lastly, a bank may need to deny a business relationship if a third-party payment network prohibits the bank from processing for that network. The Proposed Rule appears on its face to be in direct conflict with this extant guidance.

The Proposal Impedes Bank Services to Underserved Markets

Many banks have developed specific offerings for natural persons and small businesses that have been traditionally underserved or for specialized communities. For example, some banks are attempting to promote financial inclusion and reduce the racial wealth gap by providing targeted services to minority communities and businesses. These programs may use criteria other than “quantitative, impartial risk-based standards,” and may restrict access to only certain individuals or small businesses in a geographic market. For example, Congress has authorized such programs in the ECOA, which otherwise prohibits discrimination in credit transactions. The Consumer Financial Protection Bureau (CFPB), which implements ECOA through Regulation B, has not only acknowledged these Special Purpose Credit Programs (SPCPs), but has also recently encouraged banks and other financial institutions to adopt them.

On December 21, the CFPB issued an Advisory Opinion on SPCPs that meet ECOA's implementing rules in 12 CFR § 1002.8. The CFPB noted that it issued the Advisory Opinion "in the hope that broader creation of special purpose credit programs by creditors will help expand access to credit among disadvantaged groups and will better address special social needs that exist today."11 The Advisory Opinion emphasizes that a bank offering an SPCP could require program participants “to share one or more common characteristics (for example, race, national origin, or sex) so long as the program is not established and is not administered with the purpose of evading the requirements of the ECOA or Regulation B.” These programs, authorized by Congress and encouraged by the CFPB, allow banks to tailor their products and offer them to fit the financial needs of certain individuals or small businesses in their communities and not on “proportionally equal terms” to the general public. The Proposed Rule appears on its face to restrict participation by covered banks in such programs.

Scope, Requirements, and Language in the Proposal Are Unworkable

The Proposed Rule’s language and requirements are unworkable and would introduce increased operational, compliance, and legal costs. In addition to imposing burdensome “fair access” requirements, key terms imbedded in the Proposed Rule are nebulous and subjective, which would ultimately lead to uneven examination and enforcement.

Proposed Section 55.1(a)

In addition to defining key terms of “financial service” and “person,” this subsection addresses the scope of “covered banks” subject to the Proposed Rule. As noted above, any national bank or federal savings association with $100 billion or more in assets would be presumed to meet the “covered bank” definition. However, the Proposed Rule also could apply to other institutions that have the ability to “raise the price a person has to pay to obtain an offered financial service from the bank or from a competitor” or “significantly impeded a person, or person’s business activities, in favor of or to the advantage of another person.” These vague standards have no accompanying guidance or gloss to give potential “covered banks” assistance in determining whether they are covered by either definition. For example, what party (e.g., the bank, the OCC, or the third-party customer) has the authority to make this determination? How could this party prove or disprove whether either standard has been met? Underlying these vagaries, is the question of whether all OCC banks have an implicit obligation to demonstrate that the bank does or does not meet these standards before the provision of any particular financial service.

Proposed Section 55.1(b)(1)

The term “proportionally equal terms” is undefined and potentially could apply to any financial or legal term of the relationship, such as scope and duration of service, fees, governing or applicable laws, Internet or other access to service, as well as pricing based on total bank relationship of the client and its related parties. In any scenario, covered banks need to retain the ability to impose higher prices or other terms (e.g., collateral security or reserve requirements), depending on the business strategy and risk appetite of the bank. Covered banks should also have the ability to provide financial services with different prices and other terms due to increased documentation costs, credit risk limits or concentration limits, among other factors. For practical purposes, the Proposed Rule apparently would require detailed and documented quantitative analyses to refute the notion that a bank is, in effect, denying loans to borrowers in a certain industry by merely applying credit spreads or other risk premiums that could price loans out of a typical borrower’s repayment capability. Such a process would be onerous.

Because the Proposed Rule does not define the term “geographic market,” it could apply to anything from a zip code, municipality, metropolitan statistical area, county, state, or area of contingent states. It is also unclear whether the term requires a physical presence in those geographic markets. For example, would the term geographic market include areas where the bank has no branch, office, or focused marketing effort? The use of this undefined term presents important interpretive issues for which the Proposed Rule offers no insight.

Proposed Section 55.1(b)(2)

The “quantified and documented failure” requirement would impose a significant burden in terms of the increased documentation needed to justify a denial decision. There may be legitimate quantitative reasons to deny service that are not due to a specific client failing to meet documented standards. For example, many banks address risks due to concentration limits on a state-by-state basis, and correspondingly manage that concentration through differing financial and other terms or through denial of service.

The Proposed Rule requires that covered banks use “quantitative, impartial risk-based standards” to determine whether to provide a service to a person. Such a rigid standard would preclude the use of qualitative, impartial risk-based standards, which are commonly used in many account opening processes. Not all determinants of creditworthiness or appropriateness as a customer are based on factors that can be reduced to quantitative metrics. For example, underwriting standards for loans sometimes require written explanations for gaps in employment history. The assessment of these explanations requires subjective, not quantitative analysis. Other common qualitative factors include: reputation of the potential client; management expertise of the owners of a small business seeking a loan; characteristics of unique and hard to value assets brought into a fiduciary relationship by the client; an assessment of the potential for litigation or difficult family dynamics in the case of private banking arrangements; and the valuation of assets such as oil, gas, timber, and other unique assets that represent potential collateral for a borrower.

In fact, a key consideration in underwriting and risk management is the process of forecasting economic factors (both macroeconomic and company-specific) that can affect the future cash flows of a bank’s customers and the values of any relevant collateral. While these processes may often result in quantitative estimates, the forecasts are normally subject to highly subjective, qualitative judgments that relate to a variety of risks that may never be reliably quantified, including modeling limitations and imprecision, market liquidity, and, perhaps most importantly, future regulation and competition. Indeed, relative skill in accurately forecasting such factors in determining the bank’s strategic decisions is an important element of a bank’s ability to manage risk, compete, and return value to stakeholders that should not be inappropriately circumscribed by the OCC.

Proposed Section 55.1(b)(3)

Under this subsection, a covered bank may not deny service to any person if “the effect of the denial is to prevent, limit, or otherwise disadvantage the person” from either “entering or competing in a market or business segment” or benefiting “another person or business activity in which the covered bank has a financial interest.” As noted above with respect to the definition of “covered bank,” a preliminary question is who would be the arbiter of such a complex and highly subjective assessment? The covered bank, the person, or the OCC? How would an institution or person prove such a disadvantage or lack of disadvantage? Lastly, what are the consequences for a violation? Depending on who makes the determination and how it is made, this seemingly simple requirement could undermine the safety and soundness of a covered bank by forcing it to provide any service to any person seeking such a service on the terms that would facilitate the relationship. Because it would be nearly impossible to reconcile these requirements, the Proposed Rule would effectively force the bank to decide if it will provide a particular service to any person seeking it or potentially violate the rule by denying such service.

Proposed Section 55.1(b)(4)

Under this subsection, a covered bank may not “deny, in coordination with others, any person a financial services the bank offers.” The scope of this prohibition is not clear and could affect the ability of covered banks to participate in financial services offered in conjunction with others. For example, the imposition of this provision would likely threaten the ability of covered banks to engage in any number of syndicated transactions, as the refusal or inability of any partner in the syndication to move forward could open the bank to potential liability under this section. As a result, any number of syndications, which are commonly used to finance affordable housing and complex commercial developments, among others, would be put at risk.

OCC Has Not Met Procedural Requirements for Rulemaking and Significantly Underestimates the Burden

Without providing any detail as to the scope or depth of its analysis, the OCC presumptively concludes that its proposal will not impose significant burdens on covered banks. The OCC further claims that the imposition of new requirements would alleviate burdens on covered institutions. Given the fact that the Proposed Rule was not listed in the Fall 2020 Unified Agenda of Regulatory and Deregulatory Actions, we question whether the OCC had given itself sufficient time to conduct such an analysis.

According to the Office of Information and Regulatory Affairs’ website, “The Trump Administration's Unified Agenda of Regulatory and Deregulatory Actions (Agenda) reports on the actions administrative agencies plan to issue in the near and long term…[and] demonstrates this Administration's ongoing commitment to fundamental regulatory reform and a reorientation toward reducing unnecessary regulatory burdens on the American people…. The Agenda recognizes that reform will take time and require rigorous analysis, public input, and careful consideration of legal requirements. To this end, the Agenda provides greater information and transparency about regulatory actions proposed by agencies.” The OCC has met neither the spirit of the Agenda’s expressed goal nor the obligations in Executive Order 1286616 in issuing the Proposed Rule; indeed, even a cursory assessment of the potential costs would show that in fact the Proposed Rule is burdensome and unworkable.

A good faith analysis under the Regulatory Flexibility Act and the Unfunded Mandates Reform Act should consider the operational costs to covered banks to come into compliance with the rule. Such compliance costs would include additional expense and time by the bank board and management to reconsider its business strategy and operations for all the services provided by the bank and any operating subsidiary. Any one institution could offer hundreds of individual services to the public, so such an analysis of all services would involve considerable time and expense.

In addition, management would be required to review and amend all existing policies and procedures for financial services and third-party relationships, potentially hundreds of policies and procedures, to ensure that they are provided on “proportionally equal terms” within the geographic market and that relationship decisions are based only on “quantitative, impartial risk-based standards.” Reviewing and revising existing criteria that do not meet the proposed rule’s requirements would be an enormous undertaking that would necessitate significant compliance, business, legal, and other personnel resources. Given that there is no compliance or transition period embedded in the proposal, banks would have to conduct their review of all existing policies and procedures in an expedited manner, leading to additional costs.

In addition to the above, each covered bank would need to develop new or enhance existing record keeping and other information technology systems that support compliance with the rule. For example, with the “proportionally equal” requirement, banks would need to consider new approaches to record keeping to track whether in fact the service has been provided to the entire community proportionally in such a manner. Based on experience with other regulatory changes that have required new or enhanced record keeping, the cost can be considerable, even with the addition of one new data point.

In addition to record keeping and other new systems, banks would need to train and in many cases hire new personnel to oversee compliance within each business line, as well as in compliance and internal audit departments. The labor and IT system costs could easily exceed several million dollars per covered bank. Smaller institutions that offer specialized financial services may incur significant costs if they are deemed to have the ability to “raise the price a person has to pay to obtain an offered financial service from the bank or from a competitor” or “significantly impede a person, or person’s business activities, in favor of or to the advantage of another person.” Therefore, the OCC’s statement that the rule does not impose any burden, and in fact alleviates burden, is not accurate or justifiable.

Although silent on this point, the Proposed Rule has raised concerns about the potential for a private right of action to sue a bank for denial of services. Even if a covered bank were fully compliant with the regulation, reputational and other costs incurred due to the threat of litigation would need to be factored into any regulatory impact analysis.

Conclusion

ABA appreciates this opportunity to comment on the Proposed Rule. On behalf of our members, we strongly urge the OCC to withdraw the Proposed Rule. Not only was it drafted without clear statutory authority and proper consideration of the substantial costs to covered banks, it would impose conflicting sets of requirements on covered banks and significantly limit their ability to manage risks, thereby jeopardizing, rather than enhancing, bank safety and soundness. If you wish to discuss these comments, please feel free to contact Hugh Carney at hcarney@aba.com or Joseph Pigg at jpigg@aba.com.

Sincerely,

American Bankers Association