The Office of the Comptroller of the Currency on Monday issued guidance and proposed rules geared toward easing the regulatory burden for community banks, as agencies push for more tailoring in regulation and supervision. 

Changes include refreshing the regulator’s examination procedures, including eliminating exam requirements for community banks that are not specifically laid out by statute. Rather, the OCC advises tailoring the exam scope and frequency to align with risk-based supervision, and only using core assessment standards within the OCC’s community bank supervision booklet to simplify the exam process for retail nondeposit investment products, the agency said Monday. 

The exam procedure changes, which take effect Jan. 1, give “more power to the on-site examiners to do the risk-based exams that they need, without having to comply with requirements that don't necessarily apply,” said James Stevens, an Atlanta-based partner at law firm Troutman Pepper Locke, who called Monday’s moves “consequential” for smaller banks.

The OCC said it’s “reaffirming the importance of examiners’ relying on quarterly monitoring and existing bank reports,” the bulletin related to the change noted. 

Additionally, the OCC said it was making clear its expectations that community banks have the flexibility to tailor model risk management practices in conjunction with the bank’s risk exposures, business activities, and the complexity and extent of its model use. Further, annual model validation is not required. 

The regulator also proposed a rule that would increase eligibility for expedited or reduced licensing procedures to community banks, intended to enable a rise in corporate activities and transactions by such banks, like branch or loan production office applications.

The OCC is considering additional steps “to enhance flexibility and reduce burden” related to model risk management. 

“This bulletin is just the first step in refining model risk management guidance for all of the OCC’s regulated institutions,” the agency said in its release.

“Community banks have an outsized impact on lending and are vital to the strength of the U.S. economy,” Comptroller of the Currency Jonathan Gould said in Monday’s release. “Today’s actions relieve these banks of regulatory burden and unproductive reporting requirements, so they are better positioned to support their communities and drive economic growth. The OCC will continue to tailor our risk-based supervision to focus on material financial risk.”

Community bank classification

The move comes a few weeks after the OCC announced changes to its organizational structure that created three distinct lines of business: one for large and global banks, a second for regional and midsize lenders, and a third for community banks, effective Oct. 1. The community bank group supervises banks with up to $30 billion in assets – notable because that label had typically been associated with banks with $10 billion in assets or less. 

The OCC regulates about 900 banks with assets of $30 billion or less, as of June 30, an agency spokesperson said Monday.

Having a specific supervision group dedicated to community banks “was really important to me,” Gould said last week at a conference in Salt Lake City. 

He noted the agency seeks to move quickly to offer community banks relief on regulatory and supervisory fronts, including by reducing the rates in the general assessment fee schedule by 30% for banks with up to $40 billion in assets.

Another proposal issued Monday involved rescinding the OCC’s Fair Housing Home Loan Data System regulation, to remove “largely duplicative” data collection requirements for national banks. The move, the agency said, is designed to remove regulatory burden for banks without compromising the availability of data the OCC needs to conduct fair housing-related supervisory activities. 

The OCC “will continue to prioritize reforms targeted to community banks ahead of broader reforms for the industry,” the regulator said in the release. Other work in progress involves adjusting the community bank leverage ratio framework and simplifying the strategic plan process for smaller lenders to comply with the Community Reinvestment Act, the agency said.

The moves offer welcome relief to smaller lenders, since the trickle-down of ever-increasing requirements meant “all too often, community bankers heard something along the lines of ‘[x] isn't required for a bank of your size, but best practices would suggest…’” said Brian Graham, co-founder and partner at financial services advisory and investing firm Klaros Group, in an email. 

“The OCC has taken some important steps to restore the balance for community banks, which obviously do not present systemic risk,” Graham said. 

Discretion can ‘cut both ways’

Because the OCC has moved more lenders into the community bank category, the changes “could have a material impact in the business, the regulatory expectations of those firms,” said Joe Silvia, a Chicago-based partner at law firm Duane Morris.

Silvia said he’ll be watching to see how the changes announced Monday play out in the long term, noting examiner discretion can “cut both ways.” 

It can be beneficial for banks, if an exam team is looking strictly at statutes, “but then you also have examiners who’ve been doing this for a long time, and for them to all of a sudden change their perspective on something, I would be surprised if that actually happens,” he said.

Examiner discretion “also can result in a dichotomy in interpretations and inconsistency of the implementation of regulation, with respect to the examination function, supervisory function,” Silvia added, “which I think that most banks would say is not the outcome that they would prefer.” 

Trade groups lauded the OCC’s moves. The Independent Community Bankers of America commended the OCC on “the meaningful steps it is taking” to lessen regulatory burdens on community banks, which “reflect a thoughtful and proportionate approach,” ICBA CEO Rebeca Romero Rainey said in a Monday statement. 

Guidance and proposed rules issued Monday “will help ensure that individual institutions are subject to supervision that is appropriate to the risks presented by their products and services and that regulators keep their focus on material financial risks that directly affect the safety and soundness of the nation’s banks and our financial system,” Rob Nichols, CEO of the American Bankers Association, said in a Monday statement. 

Stevens said he’s eager to see if the Federal Deposit Insurance Corp. and the Federal Reserve follow suit on such measures. 

Gould also said last week that the OCC and the FDIC seek to “hardwire” the definition of what constitutes an unsafe or unsound practice in regulation, to put the risk-based supervision approach both agencies are taking “on firmer ground.” 

He noted a forthcoming proposal from each agency, which “should make us much more focused on material financial risks,” rather than “burying bankers under a deluge of, at some points, what has become, I think, a distraction from focusing on things that really matter.” 

The FDIC issued a notice of proposed rulemaking related to the matter at a Tuesday meeting.