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The OCC Stands Up for Fossil Fuels, Gun Makers, Opioid Manufacturers, and Payday Lenders

posted by Adam Levitin

Those wascally wabbits at OCC are back at it again in the waning light of the Trumpshchina. The OCC has proposed a rule on "Fair Access to Financial Services." 

The gist of the rule is that banks cannot deny service to business based on the bank's opinion of "the person's legal business endeavors, or any lawful activity in which the person is engaging or has engaged."  Instead, the bank may deny service only based on "quantified and documented failure to meet quantitative, impartial, risk-based standards established in advance by the covered bank".  

This means that if a bank has moral qualms about financing the fossil fuel industry, opioid manufacturers, firearm manufacturers, payday lenders, reproductive health services, pornographers, gay conversion therapy, fur farming, makers of drug paraphernalia, the private prison industry, or businesses involved in the deportation of immigrants, to give a range of examples of businesses that pose serious reputational risk to banks (and very direct financial risk in some instances), well, too bad. Unless the bank can show that the borrower doesn't meet quantitative, impartial, risk-based underwriting standards, it must lend because these are all legal industries. Is it like that any bank will ever have "quantitative, impartial, risk-based underwriting standards" regarding a particular disfavored industry? The standard for denial of service is near impossible to meet, as it seems to require some sort of empirically grounded underwriting by industry that banks are unlikely to have. 

Put another way, the OCC's proposed rule says reputation risk doesn't matter. That's insane. It's a quite reasonable business decision for a bank to say that it doesn't want to be known as the bank that financed school shootings or consumer lending products that it would never offer itself. A bank might reasonably fear that it would lose a chunk of its deposit base if it became known as the go-to bank for a controversial industry. If you don't think reputation risk matters, look at the law firms that have been dropping President Trump's election appeals like a hot potato. They are terrified that they are going to lose other clients who don't want to be associated with those efforts. All the more so with a bank, where depositors are literally financing the loans.  

And this doesn't even address the possibility of a closely held bank (and many community banks are family owned), where the owners have personal moral objections to certain industries. For example, a bank owned by an evangelical Christian family could not refuse financing to Planned Parenthood under this proposed rule. And a bank based in a vulnerable coastal community could not refusing financing to activities that threaten to inundate the community (and destroy properties that are collateral for the bank's other loans).  Now to be fair, the rule only applies to "covered banks," and only banks with over $100B in assets are presumed to be "covered banks." So that creates a functional safe harbor for family-owned small banks. But it's not a formal safe harbor--it's just that there's no presumption that they are covered, and the well could be in covered in their particular geographic areas.

But that's the other strange thing here. There are only 22 bank holding companies with consolidated assets of over $100B. I'm not sure that translates into 22 individual banks with assets over $100B, and even then, not all are regulated by the OCC. Using 22 as our number, the OCC thinks that fair access is so important that is making the rule applicable in practice to less than 2% of the banks it regulates.  Hmm. 

Final thought. The legal authority the OCC claims for the rule is 12 USC 1(a):

There is established in the Department of the Treasury a bureau to be known as the “Office of the Comptroller of the Currency” which 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.

I'm skeptical that this is authority for the OCC to do anything in particular, but if it is, then the "fair treatment of customers" language is also actionable, and that opens the door to the OCC doing all sorts of things, from a usury regulation to elimination of all sorts of "gotcha fees," etc. If Republicans were freaked out by the CFPB's supposedly uncheck "abusive" power, this open-ended grant of authority should be far more frightening. 


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