This week saw a number of notable developments related to climate risk and other environmental, social and governance (ESG) issues:
The climate finance plan, leaders summit and Secretary Yellen’s intentions for the Treasury Climate Hub are emerging elements of the Biden Administration’s bold plan for managing climate change. The stated emissions goals are highly ambitious and it is not yet clear how quickly or easily these targets will be met. By any measure, achieving these goals will require transformations in the fundamentals of many sectors including transportation and energy - which could mean an acceleration of transition risks as well as opportunities for financial institutions. As such, financial institutions should be identifying and quantifying their exposures to high-carbon industries as they determine their strategies for managing transition risk in those sectors as well as developing financing solutions to support clients in the transition to a low carbon economy.
With Yellen’s comments and support from a major industry group, the growing momentum behind TCFD-aligned disclosures is undeniable. Mandatory standardized climate disclosures would allow for greater transparency and increase pressure for businesses to commit to climate plans and track their progress. As the industry trends toward more mature “investor grade” climate disclosures, firms will need to make their own investments to develop an ESG reporting architecture that is based on reliable data. This will involve setting clear disclosure objectives; defining key metrics using recommendations from TCFD and SASB; identifying underlying data sources; and embedding climate-related information into their data governance models and management processes. Firms will also need to continue growing their ESG expertise to address increasingly nuanced questions around adverse impact as they use climate scenarios to identify material risks that should be disclosed to investors.
Last week, OCC Acting Comptroller Blake Paulson sent a letter to Senate Banking Chair Sherrod Brown (D-OH) and Ranking Member Pat Toomey (R-PA), urging them to consider the “adverse impact” of reversing the “true lender” rule before voting to do so. The true lender rule is part of a series of actions recently taken by the OCC regarding fintech-bank lending partnerships. Last May, the agency finalized a rule permitting nationally chartered banks to transfer loans to other firms including fintechs even if state interest rate caps would prohibit the transferee from issuing the loan. However, that rule left open the question as to which organization is deemed the “lender” in bank partnerships, with some critics expressing concerns that nonbank lenders could use their bank partners as cover in order to avoid state requirements. To answer that question, the OCC issued the true lender rule last October, which provides that a bank is the true lender in loans issued by partnerships with fintechs if, on the date of origination, it (1) is listed as the lender in the loan agreement or (2) provides the funding for the loan. The rule also clarifies that in situations where one organization is listed as the lender and another provides the funding for the loan, the organization listed as the lender will be considered the true lender.
The rule was met with disapproval from Democrats, with 22 state attorneys general urging the agency to reconsider the rule, the attorneys general for New York, California and Illinois suing the agency, and Chair Brown introducing a resolution to repeal the rule through the Congressional Review Act (CRA). In response, Acting Comptroller Paulson’s letter argues that repealing the rule would create legal and regulatory uncertainty for loans made under fintech-bank partnerships, and it would also preclude the OCC from issuing a similar rule in the future. He also explains that banks that enter into these partnerships remain subject to the OCC’s regulatory expectations, including credit risk management, model risk management and third party risk management, noting that the true lender rule helps bring fintech lending in line with these expectations.
Acting Comptroller Paulson’s letter comes one week before the Senate Banking Committee is scheduled to meet in a session entitled “The Re-emergence of Rent-a-Bank?”
The true lender rule was met with fierce opposition from many Democrats including Chair Brown, but considering the overall relatively rare use of the CRA and the Democrats’ slim Senate majority, it remains to be seen whether it will ultimately meet its end in Congress. In the case that it does get repealed, the issue of determining who the “true lender” is would likely be determined by state-by-state court decisions with potentially uneven results. As such, the Administration’s new yet-to-be-named Comptroller would likely prioritize early in their agenda the development of a new framework that balances the need for regulatory and legal clarity with consumer protection. If Chair Brown does not get the support he needs to overturn the rule, it is likely that the new Comptroller will revisit it to add additional guardrails, potentially by revising the criteria around meeting the definition of “true lender”. With fintech-bank lending partnerships only increasing as a subject of heated debate, expect this topic to play a significant role in President Biden’s selection of a new Comptroller and the resultant confirmation hearings.
It is also important to note that Acting Chair Paulson’s letter included a reference to a Supervision Tip - an OCC internal document disseminated to all of the agency’s examiners - providing guidance for examining lending relationships. As examiners are now equipped to support examining fintech-bank partnerships, expect heightened examiner focus while the issue is being resolved politically.