In recent weeks, the Office of the Comptroller of the Currency has positioned itself as a defensive line between banks and financial services firms and the restrictive rulemaking of the Consumer Financial Protection Bureau. Now, amid inter-agency battles about payday lenders and mandatory arbitration Senate Democrats are questioning the legal status of Acting Comptroller Keith Noreika.
On Oct. 16, Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio) and Senators Chris Van Hollen (D-Md.), Elizabeth Warren (D-Mass.), Robert Menendez (D-N.J.), Jack Reed (D-R.I.), and Catherine Cortez Masto (D-Nev.) wrote to the Department of the Treasury’s Office of the Inspector General, asking it to initiate an investigation into the misapplication of Special Government Employee (SGE) status with regard to Noreika.
An SGE is an officer or employee who is “retained, designated, appointed, or employed to perform temporary duties, with or without compensation, for not more than 130 days during any period of 365 consecutive days.”
“We’ve expressed repeated concerns to the OCC about Secretary Mnuchin’s decision to bypass the Senate confirmation process and install Mr. Noreika into the position, but we are now facing a more immediate issue,” the senators wrote. “On Sept. 12, 2017, Mr. Noreika served his 130th day in office; as of today, he has served 164 days. Unlike most SGEs, he serves as the head of a major agency and has obligations outside of normal business hours. We believe that Treasury’s interpretation counting only business days towards his service limit is in violation of the law governing SGEs.”
Under a plain-text reading of 18 U.S.C. § 202, they claim that Noreika has reached the deadline for either becoming a permanent federal employee or stepping down from his position at the OCC.”
Questions posed by the senators in their letter:
Is the Department of Treasury and the OCC misapplying the status of SGE to Mr. Noreika?
As an SGE, Mr. Noreika began his service without his ethics forms being certified, and the President’s ethics pledge does not apply to him. When his forms were certified numerous conflicts were cited on his forms. What possible conflicts arose in the five months that Mr. Noreika has served as an SGE?
What key decisions has Mr. Noreika participated in since September 12, 2017?
Has the Treasury Department installed any other SGEs under Secretary Mnuchin, or is there any plan to do so?
Joseph Otting, former CEO of OneWest Bank, is President Trump’s nominee for comptroller. The Senate has yet to act on his nomination.
A backdrop to the concerns expressed in the letter are Democrats’ frstrations with the OCC being a continual thorn in the side of the CFTPB and director Richard Cordray.
For example, on Oct. 5, the CFPB finalizes a controversial payday lending rule “aimed at stopping payday debt traps by requiring lenders to determine upfront whether people can afford to repay their loans.”
Under the new rule, lenders must conduct a “full-payment test” to determine upfront that borrowers can afford to repay their loans without re-borrowing. For certain short-term loans, lenders can skip the full-payment test if they offer a “principal-payoff option” that allows borrowers to pay off the debt more gradually.
The rule caps the number of short-term loans that can be made in quick succession at three. In determining ability to repay, lenders can reasonably rely on borrowers’ stated income if further verification evidence is unavailable and can reasonably rely on borrower’s stated rental housing expenses before making a loan.
Just one hour after the CFPB rule was made public, the OCC reacted by rescinding the agency’s “Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products” that was published in the Federal Register back in November 2013.
“The final rule regarding short-term, small-dollar loans submitted to the Federal Register by the CFPB necessitates revisiting the OCC guidance. The OCC may consider issuing new guidance in the future,” Noreika wrote in an accompanying statement. “The continuation of the OCC’s guidance would subject national banks and federal savings associations to potentially inconsistent regulatory direction and undue burden as they prepare to implement the requirements of the CFPB’s final rule.”
“In the years since the agency issued the guidance, it has become clear to me that it has become difficult for banks to serve consumers’ need for short-term, small-dollar credit,” he added. “As a result, consumers who would rely on highly regulated banks and thrifts for these legitimate and well-regulated products to meet their financial needs turn to other, lesser regulated entities, which may result in consumer harm and expense. In ways, the guidance may even hurt the very consumers it is intended to help, the most marginalized, unbanked and underbanked portions of our society.”
The OCC, continues to encourage banks to offer responsible products that meet the short-term, small-dollar credit needs of consumers, the statement says.
Banks were instructed to consider a prescribed set of core principles when offering short-term, small-dollar loan products:
All bank products should be consistent with safe and sound banking, treat customers fairly, and must comply with applicable laws and regulations.
Banks should effectively manage the risks associated with the products they offer, including credit, operational, compliance, and reputation.
All credit products should be underwritten based on reasonable policies and practices, including guidelines governing the amounts borrowed, frequency of borrowing, and repayment requirements.
The OCC and CFPB, through Noreika and Cordray, have also squared off over the latter’s efforts to ban the use of contractually mandated arbitration agreements. This summer, it issued a rule prohibiting efforts by financial companies to prohibit class action lawsuits by aggrieved consumers.
The OCC, critical of the rule to the point of threatening legal challenges, released a report on the rule in September. It detailed alleged flaws and hidden costs.
“Consumers face significant risk of a substantial rise in the cost of credit. This analysis also identifies some shortcomings of the approach given the characteristics of the data,” it says.
Noreika escalated matters during am Oct. 5 speech before the Midsize Bank Coalition of America.
“Our economists found that despite the CFPB’s statement that analysts could not find any evidence to indicate that banning mandatory arbitration agreements would increase costs to consumers, the Bureau’s data actually shows that there is an 88 percent chance of the total cost of credit increasing, and the expected increase is almost 3.5 percentage points,” he said. “That means a consumer, living week to week, could see the average credit card rate of 12.5 percent jump to nearly 16 percent. That 25 percent increase in the consumer’s cost of credit is a significant economic impact, particularly when it is unclear that the rule will achieve its ultimate goal of greater compliance and fairer treatment of consumers by financial institutions.”
“I continue to hear from community bankers that the increased costs of fighting spurious lawsuits shrink their already tight margins. I am told that such legal costs, and the mere threat of such legal costs, could threaten the very existence of small banks that do not have the same financial and legal resources of large institutions—all because a rule could unleash frivolous, but costly litigation risk,” he added.
In an Oct. 13 letter to Sen. Sherrod Brown, the lead Democrat on the Senate Banking Committee, Cordray shot back.
“The CFPB’s Office of Research analyzed the OCC review and found that it is based on flawed statistics and is contradicted by publicly available historical data that the OCC did not consider,” he wrote. “Additionally, recent public remarks by the acting comptroller misstate the effects of the arbitration rule on community bans.