OCC’s Hsu: fairness as important to bank health as safety and soundness

Acting Comptroller of the Currency Michael J. Hsu called on the industry to put the priority of fairness in banking on an equal footing as safety and soundness concerns, even at a time when financial risks have consumed the public in recent weeks.

“It is precisely during times like these — when the world is fixated on financial and systemic risks — that issues of fairness can get pushed to the bottom of the pile and ignored,” Hsu said in his prepared remarks before the National Community Reinvestment Coalition’s Washington summit Thursday. “We need to be able to walk and chew gum at the same time — i.e., maintain a laser focus on effective financial risk management and work to ensure fairness.”

Just like financial risks, Hsu said, non-financial risks like persistent inequality can create systemic hazards when they marginalize consumers because they can drive customers to seek less regulated entities like shadow banks. He notes the OCC’s most recent quinquennial strategic plan prioritizes elevating fairness, particularly for the underserved and financially vulnerable.

The acting Comptroller indicated the agency’s fairness initiatives include addressing two particular junk fees — a term the Biden administration has coined and embraced as a political issue — that are of the greatest concern.

“Overdrafts can present a variety of risks, including compliance, operational, and

reputational risks,” Hsu noted. “We have identified two practices in particular that present heightened risk: ‘authorize positive, settle negative’ and ‘representment’ fees.”

The former refers to the industry practice of authorizing transactions when a customer’s balance is sufficient, but arranging those transactions and posting them in a way that overdraws the account intentionally in order to impose overdraft fees.

Representment fees, by contrast, are assessed when a bank receives a check or inter-bank transfer from a customer account which has insufficient funds, and often results in the bank imposing a nonsufficient funds fee.

He said regulators are concerned when banks impose an additional fee each time a third party resubmits the same transaction, piling on multiple fees for the same transaction, and said murky disclosure of such practices could be considered deceptive under federal anti-discrimination laws. Hsu said he is also concerned that at many banks, customers can accrue unlimited cumulative fees, luring them into high-cost debt traps and heightening compliance and reputational risks.

“Disclosures may be deceptive if they do not clearly explain that multiple or additional fees may result from multiple presentments of the same transaction,” Hsu said. “Even when customer disclosures explain that a single check or ACH transaction may result in more than one fee, a bank’s practice of assessing fees on each representment may also be unfair if consumers cannot reasonably avoid the harm and the other factors for establishing unfairness are met.”

Hsu also spotlighted three areas OCC is focused on to tackle discrimination and bias in the industry: lending, appraisals, and risks posed by artificial intelligence. 

The OCC has strengthened its supervisory processes and resources for compliance with fair lending laws, and he said the OCC published a comprehensive update to its Fair Lending Booklet of the Comptroller’s Handbook in January 2023 that guides its fair lending examinations. 

Hsu noted the updated version provides new details on examination scenarios, additional clarity and expanded risk factors, new explanations of risk management and third-party controls and further details on applicable legal standards. He said the OCC has also updated its annual process for screening mortgage lending activities to leverage new data fields pursuant to the Home Mortgage Disclosure Act for non-redlining screens.

The Acting Comptroller also indicated OCC is keen to tackle appraisal bias because it exacerbates inequality and perpetuates the racial and ethnic wealth gap. He highlighted the significance of the interagency PAVE Task Force initiative, which is working to evaluate the causes, extent, and consequences of appraisal bias. He also said the OCC would update its supervisory methods and utilize emerging research to identify discrimination in appraisals and  take steps to ensure that consumers know their rights.

He wrapped up his remarks by discussing the potential risks of AI adoption and the importance of developing controls to prevent discrimination and bias in AI models, something he thinks is critical for building public trust in the banking system’s use of AI. Despite its potential uses, he said, AI may inadvertently reinforce or exacerbate old biases.

“The un-explainability of model outputs, the limits of training data, and risks from updates involving little to no human interaction (i.e., machine learning). Unless we proceed carefully, AI adoption may inadvertently reinforce or exacerbate old biases and discriminatory practices from the past and prevent growth and progress toward a fairer system.” he noted in his remarks.

Hsu also called attention to two of OCC’s efforts to expand financial inclusion and opportunity: Strengthening and modernizing the Community Reinvestment Act through their recent proposed rule — with input from industry comment letters — and advancing their Roundtable for Economic Access and Change, also known as project REACh.

“We are working hard to incorporate and respond to feedback provided via comment letters to the Notice of Proposed Rulemaking,” he assured the audience.

He said OCC is proud of their work on project REACh — created in 2020 following the murder of George Floyd — and that the agency will continue to leverage its function to create a more inclusive banking system.

“REACh has notched a number of important successes: facilitating pilot programs to make those without credit scores visible to lenders, securing pledges from two dozen banks to revitalize and support minority depository institutions, promoting homeownership for the underserved and those on tribal lands, and supporting minority small businesses’ awareness of special purpose credit programs,” his remarks noted. “The challenge for us going forward is building on REACh’s momentum and institutionalizing it — building it into our DNA and processes — while maintaining the magic of bringing highly motivated individuals together to collaboratively and creatively break down key barriers to inclusion and equal opportunity.”

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