Modernizing the regulatory framework

OCC looking at updates to CRA, BSA/AML and technology

By Troy Thornton

For more than a year, the Office of the Comptroller of the Currency has set a direction to modernize and enhance the regulatory framework of the federal banking system. While there are a number of efforts underway — innovation, changes to examinations and a community bank leverage ratio among them — two of the most discussed are Community Reinvestment Act and Bank Secrecy Act rules.

CRA modernization

CRA remains an important tool to promote community revitalization and encourage banks to meet the credit needs of underserved geographies and populations. The OCC began the initiative to improve the implementation of the CRA by seeking comment in August from all stakeholders on the best ways to make the CRA work more efficiently and effectively and promote more activity in the areas of greatest need.

Stakeholders submitted 1,500 comments. Almost all support modernizing CRA regulations to make the process more objective and transparent and to preserve CRA activity that helped meet the needs of low- and moderate-income people and geographies.

The agency is working with other federal regulators and expects to issue a proposed rule for comment on an interagency basis later this year.

BSA/AML

The Bank Secrecy Act and the anti-money laundering regulations present another opportunity to make regulation work more efficiently and effectively in the 21st century. BSA/AML laws and regulations help protect the nation’s banks from illicit and terrorist financing activities.

It is possible to better protect the country’s banks and make complying with BSA/AML rules simpler for everyone involved.

The OCC sees an opportunity to update and enhance the nearly 50-year-old BSA/AML regime to take advantage of modern tools and technology. In 2018, the OCC took the lead to coordinate discussions with the Federal Deposit Insurance Corporation, Board of

Governors of the Federal Reserve System, National Credit Union Administration, the U.S. Department of the Treasury and the Financial Crimes Enforcement Network.

These agencies formed a working group to promote innovative and proactive approaches to identify, detect and report financial crime and meet BSA/AML regulatory obligations. The working group expects to focus on a risk-based rather than a zero-tolerance-based approach to examinations, supervision and enforcement.

Activity to modernize the BSA/AML regulatory regime is well underway. On Sept. 28, 2018, the agencies, with the concurrence of FinCEN, issued an order granting an exemption from the requirements of the customer identification program rules.

The affected loans are those extended by banks and their subsidiaries to commercial customers to facilitate purchases of property and casualty insurance policies. These are generally referred to as insurance premium finance lending or premium finance loans. The agencies determined, and FinCEN concurred, that providing this relief is consistent with the purposes of the BSA and safe and sound banking.

The agencies also issued a joint statement (Bulletin 2018-36 Interagency Statement on Sharing Bank Secrecy Act Resources) that describes the benefits of resource sharing and provides examples of how the use of shared human, technological and other resources in a collaborative arrangement related to BSA compliance reduces costs, increases operational efficiency and leverages specialized expertise.

Technological innovation

Technology generally has been used across the financial sector to increase customer convenience. New technologies such as artificial intelligence and machine learning offer banks opportunities to better manage their costs and increase the ability of their monitoring systems to identify suspicious activity. Further, evolving technology offers the prospect of reducing the number of false positive alerts and investigations.

The OCC encourages banks to explore technology that allows them to maintain their risk focus and gain process and system efficiencies. To that end, the agency is actively engaged in discussions with banks and other stakeholders regarding ways to explore enhanced technology usage while maintaining the current strong protections for the financial system.

There is a commitment to modernize the regulatory regime in ways that encourage institutions to dedicate resources to the areas of highest risk for illicit finance activities.

Trends in examinations

The OCC is also working to reduce the burden on banks during examinations. One way the agency is working to do this is to provide secure remote access through a variety of means to the examiners rather than have a bank upload or transfer the information. The effort is part of the FFIEC Examination Modernization Project begun in 2017 as an extension of the EGRPRA process. Much of the effort has been specifically focused on community banks.

Historically, transmitting information from the bank to the examiners consisted of the examiners sending a request letter to bank management for copies of documents needed to perform an examination. The bank would photocopy the requested information and mail the material to the examiners to prepare for the onsite examination. In recent years, information was transferred via a DVD but still using mailed envelopes or packages.

As technology advanced, banking regulators developed file transfer systems allowing banks to transfer files electronically in a secure manner directly to the examining agency. While using file transfer systems to exchange data between the bank and examiners is the primary way information for an examination is transferred today, this too is changing. Some banks are providing examiners remote access to imaged loan files and audit reports and allowing examiners to retrieve the information.

Web-based applications providing secure remote read-only access to information designated by the bank (i.e., imaged loan files) has allowed an increase in the number of examiners working offsite during an examination. 

For the OCC’s larger banks that are under ongoing supervision, some banks have provided examiners secured restricted access to bank email and systems. Again, this allows examiners to be included on internal routing of emailed reports (i.e., loan review reports, audit reports, etc.) and allows examiners to retrieve the information they need versus the bank having to upload or send them the documents.

Community bank capital

The Economic Growth, Regulatory Relief and Consumer Protection Act directs the federal banking agencies to develop a community bank leverage ratio (CBLR) requirement of between 8-10% for qualifying community banks with total consolidated assets less than $10 billion.

The OCC, together with the other federal banking agencies, proposed that a community bank would be eligible to elect the CBLR if it has less than $10 billion in total consolidated assets, limited amounts of higher-risk assets and off-balance sheet exposures and a community bank leverage ratio greater than 9%.

A qualifying community bank that chooses the proposed framework would be considered to have met the risk-based and leverage capital ratio requirements necessary to be well capitalized for the agencies’ prompt corrective action rules.

The proposed CBLR is a simple alternative method to measure capital adequacy for qualifying community banks that would simplify calculations and shorten reporting schedules and provide material regulatory relief while maintaining safety and soundness in the banking system.

The OCC is committed to supporting a tailored regulatory framework that provides capital, credit and financial services to the consumers, businesses and communities they serve across the country.

Troy Thornton is the Deputy Comptroller for the Southern District in the Office of the Comptroller of the Currency. In this role, Thornton oversees the supervision of more than 390 national banks, federal savings associations and trust companies and 28 technology service providers spread across nine states from Texas to Florida.