On November 20, 2020, the Office of the Comptroller of the Currency ("OCC") proposed a new regulation setting forth the obligations of large banks to provide fair access to financial services ("Proposal") that is designed to prevent large banks from using "category-based risk evaluations to deny customers access to financial services."1
The OCC stated that the Proposal is a response to campaigns by political advocates who seek to achieve policy objectives by pressuring banks to stop providing financial services to customers (engaged in a lawful business) in certain industries or geographic regions. The preamble to the Proposal specifically points to campaigns that have targeted bank lending to firearm manufacturers, family planning organizations, private correctional facilities, and energy companies. In particular, the Proposal cites to a June 2020 letter to federal financial regulators from the Alaskan congressional delegation on the decisions of several major financial institutions not to lend to new energy projects in the Arctic and the impact such refusal to lend could have on US national security, the US economy, and on Native Alaskan communities.
The Proposal seeks to implement the OCC's statutory mission, as revised by the Dodd-Frank Act, to assure the "fair access to financial services, and the fair treatment of customers by, the institutions" subject to the jurisdiction of the OCC.2 The Proposal contends that federal law and OCC rules have long required banks to uphold a "broad and longstanding anti-discrimination principle that individuals are entitled to be treated fairly by national banks and Federal savings associations." The Proposal recites the OCC's statutory authorities to prevent discrimination in the financial services industry (e.g., Equal Credit Opportunity, Fair Housing Act, and the Community Reinvestment Act). The Proposal quotes from a speech by former Comptroller Thomas Curry where he stated that banks need to evaluate customers individually and that "[h]igh-risk categories of customers call for stronger risk management and controls, not a strategy of total avoidance." In addition, the Proposal notes that the OCC has previously issued guidance to address allegations of banks denying access to financial services to "entire industry categories engaged in lawful business activities without regard to the risk factors of the individual customers in these categories," including with respect to money services businesses and foreign correspondent banking.
New Requirements for Fair Access
The Proposal would require each "covered bank" to provide fair access to its financial services by complying with four requirements.
First, a covered bank would have to "make each financial service it offers available to all persons in the geographic market" its serves and on "proportionally equally terms." The Proposal indicates that terms may be proportional if the covered bank ensures that, at a minimum, "pricing and denial decisions are commensurate with measureable risk based on quantitative and qualitative characteristics."3
Second, a covered bank would be required to provide a person a financial service it offers "except to the extent justified by such person's quantified and documented failure to meet quantitative, impartial risk-based standards established in advance."
Third, a covered bank must provide "any person a financial service the bank offers" if the "effect of the denial is to prevent, limit, or otherwise disadvantage the person" either:
(1) "from entering or competing in a market or business segment;" or
(2) "in such a way that benefits another person or business activity in which the covered bank has a financial interest."
Fourth, a covered bank must not coordinate with others to deny "any person a financial service the [covered] bank offers."
Definition of Covered Bank
These new fair access requirements would apply only to a "covered bank," defined as any entity for which the OCC is the appropriate federal banking agency (e.g., national banks, federal savings associations, and federal branches and agencies of foreign banks)4 that has either:
"(1) the ability to raise the price a person has to pay to obtain an offered financial service from a bank or competitor, or
(2) significantly impede a person, or a person's business activities, in favor of or to the advantage of another person."
A bank is presumed to be a "covered bank" if it has $100 billion or more in total assets. A bank can rebut this presumption by demonstrating, with written materials, to the OCC that the bank does not satisfy either of the two criteria for being a "covered bank." A bank with less than $100 billion in total assets is presumed not to be a "covered bank."
The Proposal justifies limiting the scope of the new rule to the nation's largest federally chartered banks on grounds that they "exercise sufficient market power to influence the price of financial services" and that they have the balance sheets and risk management systems necessary to serve certain industries. As support for this assertion, the Proposal cites to the fact that approximately 50 percent of the dollar value of outstanding loans and leases in the United States are held by institutions with more than $100 billion in assets. Further, the Proposal notes that "it is also fair to place particular responsibilities on the largest banks because their systemic importance often results in their receiving assistance and favorable treatment from the government."
The Proposal states that the OCC considered including an alternative threshold for determining if a bank was a "covered bank" based on the national market share of a financial service. The OCC requests public comment on whether a national market share threshold should be included and, if so, what the appropriate national market share (10 percent, 20 percent, or another percentage) should be.
The OCC also requests public comment on whether the $100 billion asset threshold should be replaced with a different presumption that better captures institutions that satisfy the definition of "covered bank."5
The time frame the OCC has specified for finalizing the Proposal is unusually compressed and appears to be designed to allow the rule to be finalized before President-elect Biden is sworn into office. Notably, the comment period is also shorter than the 60 days recommended for proposals and does not provide much room for delay in publication of a final rule in the Federal Register at a time when other agencies are also seeking to finalize numerous other rules prior to January 20, 2021.6 While the OCC has recently argued that publication of a proposal on the agency's website is sufficient for purposes of the public notice requirements of the Administrative Procedures Act, it did not reconcile this position with Federal Register publication requirements.7
The Proposal is likely to raise questions about its impact on long-standing and well-established bank risk management practices. For example, the Proposal would appear on its face to prohibit a bank from setting caps on its lending to a particular geographic region or industry, and any denials of credit must be made solely on the creditworthiness of an individual client regardless of economic conditions in one regional market versus another. The Proposal also does not define the geographic market served by a covered bank, which could make compliance challenging for banks that offer different financial services in different markets (e.g., local deposit taking and national mortgage lending) or through different channels (e.g., consumer loans online and commercial loans from certain offices).
Further, the Proposal on its face would prevent a bank from denying credit even to a customer who otherwise would be denied credit based on its individual risk profile if the denial of credit would hinder the customer's ability to compete in a market (which presumably would occur with a customer who has a sufficiently high risk profile that no bank would otherwise lend to the customer). The broad language of the Proposal will also fuel the ongoing debate over the proper role of environmental, social, and corporate governance ("ESG") principles in corporate decision-making as it would likely restrict covered banks from using ESG principles and other corporate values as a basis for lending decisions.8
If implemented as a final rule, the Proposal would have the effect of law, meaning that institutions found not to be making lending and pricing decisions on "proportionately equal terms" could be subject to examination criticism and potential enforcement actions. Additionally, a rule might provide the basis of new litigation against banks by customers who believe they were improperly denied loans or other financial services. Furthermore, the Proposal does not contemplate a transition period to allow institutions to modify risk management policies and procedures prior to the effective date.
1 NR 2020-156, Proposed Rule Would Ensure Fair Access to Bank Services, Capital, and Credit (Nov. 20, 2020), https://occ.gov/news-issuances/news-releases/2020/nr-occ-2020-156.html. This Legal Update refers to entities for which the OCC is the appropriate federal banking agency as a "bank." See n.4.
2 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 314, 124 Stat. 1376, 1523 (codified at 12 U.S.C. § 1) ("Dodd-Frank Act").
3 The proposal defines "financial service" to include both a "financial product and service."
4 It is unclear whether a subsidiary of a covered bank would be covered by the fair access requirement as an extension of the covered bank or would need to independently satisfy the $100 billion presumption to be covered.
5 Notably, the OCC has employed different thresholds in other contexts. E.g., 12 C.F.R., pt. 30, app. D ($50 billion), app. E ($250 billion); § 101.4(c) ($20 billion).
6 See OCC, Bull. 2020-100 (Nov. 16, 2020) ("the generally recommended time for comment is 60 days").
7 See OCC, Bull. 2020-100 (Nov. 16, 2020) ("the public had notice of the proposal for 60 days beginning on March 5 when the OCC provided notice of the proposal on its website").
8 The Proposal does not indicate how its requirements would interact with state corporate governance laws that explicitly authorize banks to consider societal factors or other ESG frameworks. E.g., Nev. Rev. Stat. § 78.138(4); Press Release, Business Roundtable Redefines the Purpose of a Corporation to Promote "An Economy That Serves All Americans" (Aug. 19, 2019); EC, What is Sustainable Finance? https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance/overview-sustainable-finance_en
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