On January 14, 2021, the U.S. Office of the Comptroller of the Currency (OCC) issued its controversial final rule (Rule)1 to establish a new requirement for covered banks to provide “fair access” to financial services to both natural persons and legal entities.2 The preamble to the Rule explains that it is intended to address situations in which large banks have denied access to financial services on the basis of a prospective customer’s industry affiliation or connection with a politically unpopular, but lawful, activity. The Rule instead requires, among other things, that access to all financial services at covered banks be provided on the basis of a person’s individual characteristics evaluated under quantitative, impartial risk-based criteria. The OCC claims that these fair access standards do not, however, require that a covered institution provide any specific type of financial service, do business with a particular person or industry, or operate in a particular market. Nonetheless, in part because of the perception that the Rule will impair the ability of banks to take into account issues like climate change in making underwriting decisions, the fate of the Rule under the Biden administration remains uncertain.
For the most part, the Rule remains unchanged from the proposal described in our December 1 client Update.3 For example, the definition of “covered bank” is unchanged and is based on the ability of the bank to either (i) raise the price that a person has to pay for a financial service or (ii) significantly impede the business of one person in favor of another. The defined term “covered bank” is designed to provide a measure of whether the subject institution is able to exercise “market power” warranting application of the proposed fair access mandate. While pricing power is a commonly used element of antitrust analysis, the focus here is only on the ability of a bank to raise prices, while ignoring the critical related element necessary to analyze market power — what impact the pricing change would have on the bank’s sales volume of the financial service at issue. This fundamental flaw renders the definition effectively meaningless; a bank that can raise prices only with a significant loss of business can hardly be said to have market power.
In response to comments4 regarding the assumption that “large” institutions generally have market power in all financial services, and therefore banks with $100 billion or more in total assets should be considered “covered banks” while banks with less than $100 billion in total assets would be presumed not to meet the definition, the OCC stated that it examined the costs for different-sized banks to comply with the Rule and determined that such costs would be lower for large banks. The OCC also asserted that the $100 billion asset threshold is supported by empirical literature that shows that such institutions have the ability to disproportionately influence market outcomes for small businesses and middle-market borrowers in local markets. Finally, the OCC determined not to include a separate presumption based on the percentage of the national market share of a financial service held by an institution because it has included the $100 billion threshold, which it believes effectively captures those banks that meet the standards set forth above regarding the ability to raise prices or significantly impede a person’s business activities.
For institutions that satisfy the definition of a covered bank, the following standards for fair access to financial services apply:
(1) make each financial service it offers available to all persons in the geographic market served by the covered bank on proportionally equal terms
(2) not deny any person a financial service the covered bank offers unless the denial is justified by such person’s quantified and documented failure to meet quantitative, impartial risk-based standards established in advance by the covered bank
(3) not deny, in coordination with others, any person a financial service the covered bank offers
These standards reflect the only two noteworthy changes from the notice of proposed rulemaking (NPR). First, the Rule eliminates the requirement that a covered bank “not deny any person a financial service the bank offers when the effect of the denial is to prevent, limit, or otherwise disadvantage the person (i) from entering or competing in a market or business segment, or (ii) in such a way that benefits another person or business activity in which the covered bank has a financial interest.” While the elimination of this requirement removes one of the problematic elements of the fair access standards from the Rule, the scope and remaining standards remain potentially overbroad and ambiguous.
Second, in response to criticism that the breadth of the Rule could conflict with bank obligations under other laws (e.g., laws on credit, capital, liquidity, and interest rate risk), the OCC added the caveat “except as necessary to comply with another provision of law.”
Nonetheless, as finalized, the fair access standards continue to raise a number of questions. For example, it is unclear how the geographic market under clause (1) would be determined. Would it be based on where the covered bank offers a particular financial service or where the bank offers any financial services? The preamble to the NPR indicates that this provision is intended to prohibit covered banks from “engaging in geography-based redlining,” which suggests that any geographic differentiation is prohibited, regardless of how broadly a geographic market might be defined, an open-ended concept that has potential application much more sweeping than under existing fair lending jurisprudence.
The OCC provided some additional guidance on the meaning of the phrase “proportionally equal terms,” stating in a footnote that the term comes from the “Robinson-Patman Act (15 U.S.C. 13 et seq.), which generally requires that a seller treat all competing customers in a proportionately equal manner.” The matter of what is considered “proportionately equal” under Robinson-Patman has been the subject of litigation and Federal Trade Commission opinions for decades. The term generally applies in limited circumstances to promotional allowances and provision of promotional services to resellers. It is unclear what can be gleaned from this reference by the OCC as to the origins of the use of the concept of providing financial services on proportionately equal terms and how covered banks will determine how they should make such proportionality determinations.
Under clause (2), the standard suggests that a covered bank should not include qualitative factors, as that would not be a “quantitative, impartial, risk-based standard.” It remains unclear to what extent the OCC would continue to permit historical judgmental underwriting systems under this restriction. In response to comments on this standard, the OCC states that “all legitimate risks can be quantified, albeit with different degrees of precision,” including reputational risks.
Finally, clause (3) is the most potentially overbroad. For example, it is unclear what is meant by “in coordination with others.” Presumably it was intended to capture coordinated efforts among banks to restrict access to financial services to a particular industry group, but the phrase could easily also capture any involvement of a third party, for example, a model developer or credit bureau, that provides inputs to a bank’s underwriting decisions. The overbreadth of clause (3) is particularly significant because a misstep under any one of the standards at clauses (1)-(3) arguably would result in a violation.
Indeed, perhaps in reliance on this language, the preamble to the Rule indicates that the OCC may attempt to apply the “fair access” standard in connection with covered bank participation in payment systems: “The OCC also received numerous comments about the refusal of payment processors to process payments for customers availing themselves of lawful businesses. To the extent that such payment processors are either (1) covered banks or (2) payment processors whose refusal to process payments is the result of a covered bank’s refusal to provide fair access to financial services to the payment processor, this rule applies to the bank decision refusing access.” Because all payment systems have some form of acceptable use policies, it’s unclear how this guidance might apply if the refusal to process payments is a function of payment system policy rather than a bank-driven decision.
Although outgoing Acting Comptroller Brian Brooks has finalized the Rule, an incoming Comptroller appointed by President-elect Biden may choose to attempt to revamp it. Further, with the change of power that will occur in the Senate, Democrats may attempt to repeal the Rule through the Congressional Review Act. Finally, those the Rule affects may litigate the Rule, which could delay its effectiveness.
1 Final Rule — 12 CFR Part 55, Office of the Comptroller of the Currency (Jan. 14, 2021); https://www.occ.gov/news-issuances/federal-register/2021/nr-occ-2021-8a.pdf.
2 The Rule defines “financial services” to include both financial services and financial products. Natural persons and legal entities are referred to below as “persons.”
4 Although the preamble to the Rule lists a number of comments that were made, the OCC responded to only a few of them, primarily in relation to (i) the OCC’s authority to issue the Rule and (ii) its compliance with applicable administrative law standards.