Comptroller's Viewpoint

 

Modernizing the Regulatory Approach to the CRA

The CRA remains a critical tool to encourage lending, investment, and bank services in communities that need them most. Since 1977, the CRA has been responsible for trillions of dollars in lending and investment in neighborhoods across the country. More can be done by modernizing regulations that implement the CRA.

This year, we reviewed approximately 1,500 comments from our 2018 advance notice of proposed rulemaking. Respondents overwhelmingly supported modernizing the CRA regulations. Regulators could update four areas to encourage more investment, lending, and services:

• Clarify which activities qualify for CRA consideration: Requiring regulators to publish lists of approved loan products, investments, and services, and creating transparent processes for seeking approval of new activities would eliminate ambiguity regarding which activities count toward CRA performance.
• Expand assessment areas to match how consumers bank today: Requiring banks to delineate assessment areas not only around branches, headquarters, and deposit- taking ATMs, but also in areas where they have significant concentrations of deposit customers, would help eliminate CRA deserts and stimulate investment and lending in rural communities. Adding assessment areas that capture banks’ broader customer bases would reflect advances in technologies delivering bank products and services and hold banks more accountable for meeting the needs of their entire communities.
• Create a more objective means to evaluate CRA performance: Objective, empirical benchmarks would reduce subjectivity in evaluating CRA performance. Benchmarks would be set to motivate more investment, lending, and services.
• Make reporting more timely and transparent: More standardized reporting would allow for comparison across the industry and over time, reduce the gaps between published performance evaluations, and bring greater predictability to certain licensing applications.

To see firsthand the success of CRA activity and to discuss with stakeholders how CRA regulations can be improved, this summer I visited five cities—Atlanta, Baltimore, Los Angeles, New York, and Washington, D.C.—and several pueblos in New Mexico.

 

Increasing Consumer Choice With Short-Term, Small-Dollar Lending

Millions of consumers rely on short-term, small-dollar banking products each year. The institutions we supervise play an important role in helping Americans not only achieve long-term financial goals but also deal with unforeseen short- term expenses. When banks do not participate in the small-dollar credit market, consumers have fewer choices, which often leads to short-term credit products with higher prices and less favorable terms.

When banks offer short-term loan products with sustainable pricing and repayment terms, consumers benefit from other banking services, such as financial education and credit reporting.

Banks may not be able to serve all of this market, but they can reach a significant portion of it and bring additional options and more competition to the marketplace. The OCC will continue to work with the other federal banking regulators to explore principles-based options to encourage banks to deliver safe, fair, and less expensive short-term credit products that support the long-term financial health of their customers.

 

Reducing the Burden of BSA/AML Compliance

The OCC is committed to ensuring that the institutions it supervises have robust controls to safeguard them from being used as vehicles to launder money or to facilitate terrorist financing or other federal crimes. In May, Senior Deputy Comptroller for Bank Supervision Policy Grovetta N. Gardineer testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs on the need to update the nearly 50-year-old BSA/AML regime. The regulations should be updated to address rapidly evolving risks, including the inappropriate use of shell companies, and to make better use of technology to protect the financial system from illicit activity.

The agency recognizes that private sector innovation, including new use of existing tools and adopting new technologies, can play a role in identifying suspicious activity and combating money laundering and terrorist financing. In two statements issued in late 2018, the OCC and the other federal financial regulatory agencies encouraged banks to use innovative technologies to help meet their compliance obligations and issued guidance on ways that community banks with lower BSA risk profiles can share resources related to BSA compliance to reduce costs and increase operational efficiency.

In addition, the agencies, together with the Financial Crimes Enforcement Network, formed a working group in 2018 to improve the effectiveness and efficiency of banks’ BSA/AML compliance. In 2019, the working group released a joint statement to improve the transparency of the agencies’ risk- focused approach to BSA/AML supervision. Under this approach, the federal banking agencies tailor examination plans and procedures based on the unique risks of each bank, thereby allowing banks to allocate compliance resources commensurate with their risks. We are also working with other agencies to update the Federal Financial Institutions Examination Council’s BSA/AML Examination Manual to further clarify this approach.

Operating Efficiently and Effectively

This year, our focus on improving the agency’s efficiency and effectiveness yielded meaningful results. We reduced our budget by 15 percent compared with 2018. We did this, in part, by investing in employees and technology to meet our mission for years to come. Additionally, we built on this progress by better aligning OCC business units and continuing our efforts to modernize the OCC’s approach to bank supervision.

Because of these and other efficiencies, the OCC reduced the amount we charge banks for our supervision. We reduced the 2019 marginal rates in the general assessment fee schedule by 10 percent and will reduce the fees again by 10 percent for the 2020 calendar year. The reductions in rates reflect cost savings in the OCC’s operations and align the OCC’s revenues with the agency’s streamlined cost structure.

Aligning OCC Business Units

The Executive Committee reviewed the agency’s structure to identify ways to better align like work, eliminate redundancies, clarify lines of communication, present a single voice to supervised institutions, and generate additional synergies.

As a result, we realigned certain functions. Within supervision, we combined the Chief National Bank Examiner’s office and Compliance and Community Affairs into the Bank Supervision Policy Department, allowing the OCC to present a single supervisory policy voice to the institutions we oversee. We established the Chief Operating Officer position, which has direct responsibility over the agency’s core mission functions of supervision and supervision policy. In addition, two new units that consolidate certain supervision and supervision-support functions report to the Chief Operating Officer. These changes took effect October 1, 2019. We also realigned business units within the Chief Counsel’s Office, the Economics Department, and Information Technology Services.

Modernizing Approach to Bank Supervision

We are modernizing our approach to bank supervision by leveraging technology. With the introduction of the single supervisory platform project, we set out to integrate the agency’s supervision practices, processes, systems, and tools to provide near real-time enterprise data and analytics. The agency expects to deploy a single supervisory platform by fiscal year 2021.

In 2019, the agency completed phases I and II of the project. During phase I, project leaders verified the current state of supervision, including workflow, people, processes, requirements, systems, data, analytics, and tools. During phase II, project teams used a gap analysis to gather information, identify opportunities for consolidation, and prepare recommendations for developing the system in phase III.

 

Empowering Employees

Employee engagement is crucial to the success of our mission. The OCC promotes engagement by providing meaningful work in a supportive, professional environment where team members share a common vision. To achieve that vision, our employee engagement plan includes

• implementing a redesigned performance management program to more effectively recognize high performance and support the growth and development of employees through pay and other forms of recognition.
• improving our communication to ensure employees understand the rationale for changes and to help employees facilitate smooth transitions.
• following up on feedback from previous year surveys and implementing ongoing employee engagement discussions at all levels throughout the organization.

Through ongoing dialogue, in 2019 we fostered employee engagement and affirmed the OCC’s commitment to organizational goals and values. In 2019, the senior leadership team demonstrated its commitment to engagement through various initiatives in the 2019 executive committee engagement action plan as well as other actions taken based on employees’ feedback, including the Federal Employee Viewpoint Survey.

Other Activities and Progress

The agency continued to promote diversity and financial literacy, to simplify capital requirements and the Volcker rule, to implement the Economic Growth, Regulatory Relief, and Consumer Protection Act (Economic Growth Act), and to promote responsible innovation.

Promoting Diversity and Financial Literacy

As we support banks in giving back to their communities, expanding financial literacy, and promoting diversity, I want the OCC to lead by example. In 2019, we launched the OCC High School Scholars Internship Program for rising seniors from District of Columbia public or charter high schools. Our inaugural class consisted of 80 minority students. The students spent six weeks over the summer learning about the OCC and gaining valuable employment experience and meaningful life skills, including financial literacy. Programs such as these enrich the lives of participants and benefit sponsoring organizations by promoting diversity, bringing fresh perspectives to the agency, and facilitating mentor relationships with potential federal employees.

The program is consistent with the requirement of section 342 of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which requires the OCC to partner with organizations that are focused on developing opportunities to place talented young minorities and women in industry internships and summer employment.

Simplifying Capital Requirements and the Volcker Rule

The federal banking agencies progressed toward streamlining capital requirements, especially for community and midsize banks. Since issuance of the capital rule in 2013, banks and other stakeholders have raised concerns regarding regulatory burden, complexity, and costs associated with parts of the rule. In July 2019, the federal banking agencies finalized a rule simplifying compliance with several aspects of the capital rule for community banks.

The OCC and other federal financial regulatory agencies approved a final rule amending section 619 of Dodd–Frank, known as the Volcker rule. The final rule tailors compliance requirements for banks that do not engage in significant trading activities and clarifies the key provisions around prohibited and permissible activities. In particular, the final rule revises those requirements that were not effective at distinguishing between prohibited and permissible activities and that restricted responsible banking activity.

Under the revised requirements, banks with less than $1 billion in trading assets and liabilities are presumed to comply with the Volcker rule and have no obligation to demonstrate compliance. These changes provide regulatory relief to institutions that do not pose the types of risks the Volcker rule was intended to limit. The final rule will become effective on January 1, 2020, with a compliance date of January 1, 2021.

Economic Growth, Regulatory Relief, and Consumer Protection

In the year since passage of the Economic Growth Act, the OCC and other federal banking agencies have issued several rules to implement Economic Growth Act provisions and reduce unnecessary regulatory burden, particularly on small and midsize banks.

A rule published in December 2018 expanded the eligibility for an extended 18-month on-site examination cycle to qualifying insured depository institutions with less than $3 billion in total assets. In June 2019, the federal banking agencies expanded the eligibility of some smaller, less complex banks to use short-form call reports, which require less time and effort to file.

The OCC issued a rule in May 2019 expanding the flexibility of the federal savings association charter by allowing certain federal savings associations to operate as covered savings associations and elect national bank powers. This rule provides federal savings associations having total assets of $20 billion or less with a streamlined process for adapting their business models to changing community needs without changing their charters.

The OCC remains committed to completing the implementation of the Economic Growth Act in collaboration with the other federal agencies.

Encouraging Responsible Innovation

Innovation, including the rapid growth of financial technology (fintech), is changing how banking products and services are delivered and consumed. Responsible innovation can increase consumer choice, improve the delivery of products and services, and enable financial institutions to meet the needs of consumers, businesses, and communities more effectively. Innovation can also enhance a bank’s ability to compete by gaining operating efficiencies and increasing effectiveness.

The OCC has led the banking sector in promoting responsible innovation. We work closely with banks and fintech companies through our Office of Innovation, which is a clearinghouse for innovation-related activities and serves as the OCC’s central point of contact for staff, banks, nonbank companies, and other industry stakeholders on innovative matters. In its third year of operation, the office directs resources to researching and monitoring trends and technologies, fostering agency expertise on trends and related issues, and enhancing domestic and global interagency collaboration efforts.

This year, the office conducted a variety of outreach activities, including office hours and listening session events in New York, Washington, D.C., and Dallas. Office staff frequently participated in industry events and conducted bank visits to discuss innovation. Chief Innovation Officer Beth Knickerbocker testified at a hearing held by the Task Force on Financial Technology of the U.S. House of Representatives Committee on Financial Services.¹

The OCC recognizes that fintech companies can play an important role in responsible innovation in the federal banking system by becoming OCC-chartered institutions. The OCC has worked closely with fintech companies and other nonbanks that may choose to apply under the OCC’s authority for full-service or other types of charters, such as trust banks, banker’s banks, or credit card banks.

Proposed Innovation Pilot Program

In 2019, the OCC proposed a voluntary pilot program to support the testing of innovative products, services, and processes that could benefit consumers, businesses, and communities. The Innovation Pilot Program would be open to OCC-regulated banks and federal savings associations, their subsidiaries, and federal branches and agencies, including those partnering with third parties to offer innovative products, services, or processes. It would also be open to banks working together, such as in a consortium or utility.

The program would offer timely engagement between the OCC and banks of all sizes and complexities regarding safety and soundness expectations, risk management principles, and compliance requirements of potential products and services. It would facilitate the development of appropriate risk management controls that can be scaled up as necessary. Participants would be subject to the OCC’s safety and soundness expectations, risk management principles, and compliance requirements. The program would not provide statutory or regulatory waivers.

 

Conclusion

As the nation’s preeminent prudential supervisor, the OCC plays an important role in helping to promote economic opportunity and encourage job creation throughout the country. My experience as a banker and now a regulator gives me a unique perspective on how the agency can support these goals. I look forward to continuing the significant progress we have already made and to fostering an environment in which banks can meet the needs of their communities and achieve their business goals while safely managing risks.