Land of the Free & the Fair: Fair Access Banking Rule
Fair lending has been a regulator focus for a few decades; however, fair banking has only become relevant in more recent years. In 2013, in regard to the importance of the Servicemembers Civil Relief Act (SCRA), it appeared that regulators were moving toward a fair banking regulation package. The SCRA was enacted to provide certain legal protections that are not provided to the general public; the Military Lending Act (MLA) was enacted to provide certain legal protections as well, but it also imposes an interest rate cap and certain disclosures to be provided for consumer credit. One of the ideals behind both acts was to reduce personal worries of service members and their families when service members are actively serving, sacrificing, and fighting for our freedom. Despite the special protections service members receive by these acts and through the efforts of the U.S. Department of Defense, Federal Trade Commission, and other regulators, some financial institutions continue to have blanket policies refusing to extend credit to service members due to the operational burden the SCRA and MLA place on them.
A few years later, the Home Mortgage Disclosure Act increased its required reporting fields by almost 300 percent to, in part, assist regulators and financial institutions in finding any weaknesses in fair lending programs or evidence of overt discrimination. Three years later in spring and summer 2020—across a pandemic-ridden nation in an election year—citizens protested officer-involved shootings, resulting in a call for civil equality making front-page news from coast to coast. Alleged inequalities in the banking industry were rampant, and a social movement began: #BankingWhileBlack. In July 2020, BKD presented a regulatory compliance program that included editorial comments on this movement. Banks were being named as defendants in lawsuits of discrimination, banking accounts were not being opened, customer funds were being held, police were being called to bank lobbies, and banks across the country were being accused of racial profiling. There was a resurgence of the hashtag #BankingWhileBlack, which was used as a platform for financial services customers to share their own stories of potential unfair treatment. We called attention to this movement in our July compliance program to allow our clients and others in the industry to understand what risks were present during that time, and our main guidance or editorial comments were to simply bring awareness to staff, particularly those who have the most interaction with customers. Management and staff needed to be aware that fair treatment was important, attention to bank procedures was imperative, and above all, that they should simply respect everyone, and this should help the reputational and compliance risk that had been enhanced due to this current social movement.
On November 20, 2020, the Office of the Comptroller of the Currency proposed a rule to aid in the fair banking initiative, under the leadership of Acting Comptroller Brian P. Brooks. This proposal requires national banks, federal savings associations, and federal branches and agencies of foreign bank organizations with more than $100 billion in assets to make its products and services available to all customers in the community it serves, based on a consideration of quantitative, impartial, and risk-based standards established by the bank. On Brooks’ last day in office, January 14, 2021, this rule was finalized, almost in its entire proposal form, with its share of proponents and opponents. One opposing perspective is that a bank should be able to understand its own customer base and region(s) it serves to know what businesses it will service. This new rule takes away some of the discernment an institution would have in knowing its customer base best to affect “fair access” across the largest banks in the nation. This rule is effective as of April 1, 2021.*
As noted in the previous paragraph, this newly enacted rule does not apply to the majority. However, financial institutions and other financial service companies, including fintech companies, should consider our words from our July 2020 compliance program noted above: Management and staff need to be aware that fair treatment to all potential and existing customers is important, attention to procedures is imperative, fair banking training for customer-facing (frontline) personnel and others should be conducted frequently, and above all, personnel should simply respect everyone. With this article in mind, encourage your executive management or board to develop and implement a fair banking program. In the future, larger community institutions may hear regulators urging them to use special purpose credit programs or alternative data to determine creditworthiness. Those who follow regulatory compliance within the financial industry will recall regulators using guidance, bulletins, and similar items to express their opinions on subjects, with proposed rules likely following months or years after those publications. This speculation we have had in the last six months is based on what we have seen repeatedly on other topics, but do understand it is speculation and purely recommendations at this point.
BKD National Financial Services Group has dedicated trusted advisors who are regulatory compliance professionals with varying backgrounds, including bankers, former service members, previous examiners, former attorneys, and more. The breadth of our expertise and communication among our firm offices weave a rope of knowledge throughout the nation, which helps us provide our clients and colleagues in the industry with knowledge-based guidance. We pride ourselves on the caliber of services we can provide on regulatory compliance for clients ranging from small to large, traditional banking to fintech, and local to international.
For questions on developing and/or implementing a fair banking program for your institution, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below. We can help guide you through regulatory compliance uncertainty.
*As of January 28, 2021, the OCC has paused publication in the Federal Register, which will delay the effective date of this new rule.