- The OCC has finalized a rule that many critics, from banking trade groups to ESG investors and legal scholars say was rushed, poorly reasoned, poorly written, and could be subject to legal and congressional challenges.
- Brian Brooks, viewed by critics as acting as a Trump political appointee, finalized the Fair Access to Financial Services rule the morning after announcing his resignation.
- The rule would subject the largest banks to scrutiny when they deny services to any customer based on risk factors that cannot be quantified, such as environmental, social and governance risks, as well as reputational risks.
- Approximately 35,000 public comments in response to the rule came in by the deadline of Jan 4. The regulator, which is required to review all public comments before finalizing rules, issued it eight business days after that deadline.
A pedestrian passes the seal of the Office of the Comptroller of the Currency (OCC) displayed outside the organization's headquarters in Washington, D.C., U.S., on Wednesday, March 20, 2019.Andrew Harrer | Bloomberg | Getty Images
The Office of the Comptroller of the Currency finalized a rule on Thursday that Wall Street's largest banks have strongly opposed since its proposal in November. The OCC's Fair Access to Financial Services rule was finalized a day after current OCC head Brian Brooks announced his resignation. The rule seeks to require banks to provide quantitative metrics proving the risks that lead them to deny services to potential clients.
While some conservative think tanks and segments of industries that feel threatened by issues over which banks have increasingly denied services including lending — such as in energy, arms manufacturing, and agriculture — supported the rule, Brooks' last move on his way out the door is not just opposed by the largest banks, but faced widespread opposition from legal scholars and environmental, social and governance experts. Critics have referred to it as the "gunmaker's and oil drillers rule."
The rule was proposed in November and public comments were due in by Jan. 4, a timeline that is shorter than the standard one of 60 to 90 days and that critics contend resulted in a poorly written rule which seeks to score political points rather than create effective bank regulation. The OCC indicated that it had considered more than 35,000 public comments that came in by the Jan. 4 deadline, which was a level of public interest in the proposed rule that had led several OCC watchers to say it was unlikely the rule could be finalized before the change in administration. Only eight business days later, the OCC has finalized the rule.
The OCC declined to make an official available for comment when contacted earlier this week about the proposed rule, saying it was not providing any comments during the review period, though a spokesman said many critics mistake the rule as prohibiting banks from discontinuing service and credit to risky business. "That's wrong. The proposal requires large banks to show their work and conduct objective risk assessments of individual customers regarding the provision of services consistent with previous guidance issued by the Office of the Comptroller of the Currency," he wrote via email.
It sent CNBC the formal rulemaking on Thursday without further comment.
The OCC said in the release that the rule codifies more than a decade of OCC guidance stating that banks should conduct risk assessment of individual customers, rather than make broad-based decisions affecting whole categories or classes of customers, when provisioning access to services, capital, and credit. The rule applies to the largest banks with more than $100 billion in assets that "may exert significant pricing power or influence over sectors of the national economy."
The rule requires covered banks to make products and services available to all customers in the communities they serve, based on consideration of quantitative, impartial, risk-based standards established by the bank.
"We are disappointed the Acting Comptroller chose to fast-track the final approval of this hastily conceived and poorly constructed rule on his last day in office. The rule lacks both logic and legal basis, it ignores basic facts about how banking works, and it will undermine the safety and soundness of the banks to which it applies," said Bank Policy Institute president and CEO Greg Baer in a statement, which represents the largest banks in the U.S. "Its substantive problems are outweighed only by the egregious procedural failings of the rulemaking process, and for these reasons it is unlikely to withstand scrutiny."
The American Bankers Association, which represents the broader banking industry, called the rule "arbitrary and capricious" in a comment letter to the OCC filed last month and said it lacked "clear statutory authority, its inconsistency and potential conflict with longstanding and widely accepted risk management and supervisory practice."
Legal challenges are expected.
University of Iowa law professor Christopher Odinet, who has studied the OCC, said courts will be asked to overturn the rule on the basis that OCC didn't have the authority to issue it, or even if it did, OCC violated the Administrative Procedures Act (APA) by doing it so quickly (issuing the final rule 10 days after receiving thousands of comments suggests the agency did not consider the comments as the law requires).
A new OCC head could move to repeal the rule when appointed by President-elect Biden — current COO Blake Paulson is now acting head — which would require going through the APA process and could take time, but is a potential way to proceed. Or Congress could repeal it within the next few months under the Congressional Review Act by a simple majority vote in both houses.
"In any case, this rule isn't long for this world," Odinet said, who described the OCC under Brooks as "constantly overreaching and aggressive."
The rule, which is scheduled to take effect on April 1, speaks to the intersection of political and corporate philosophies that are changing and dictated by new factors such as environmental, social and governance (ESG) risk factors.
Climate is an example of where these tensions are playing out. While other major regulators including the Federal Reserve and Commodities Futures Trading Commission have been more vocal about the systemic risks that climate change poses to the market, the OCC move could subject banks to legal challenges if they deny financial services based on climate risks that cannot be precisely quantified. At a broader level, any risk assessment a bank uses to deny service to a customer which cannot be quantified could result in legal action based on the OCC rule.
The industries that voiced a position on the rule were widespread, and some of the comments do reveal the extent to which more industries fear a socially responsible movement that will disadvantage them, for example, the National Association of Egg Farmers, which expressed the concern in a comment letter that the animal rights' movement could lead to its inability to access financing in the future.
But banking and ESG experts say the rule goes too far in undercutting the basic working model of risk assessment in the financial industry.
"This rule says banks should not be in the business of assessing risk. That is what banks do every day," said Steve Rothstein, head of the Ceres Accelerator for Sustainable Capital Markets, a sustainability investment advocacy group. "The ones that do well make healthy loans, and we are seeing clearly a trend for more awareness and engagement with ESG," he said.