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2017-11-15 14:37:03
Under Trump, Banking Watchdog Trades Its Bite for a Tamer Stance

After the financial crisis in 2008, the Obama administration turned one of the banking industry’s friendliest regulators into one of its toughest. But that agency is now starting to look like its old self — and becoming a vital player in the Trump administration’s campaign to roll back regulations.

The regulator, the Office of the Comptroller of the Currency, which oversees the nation’s biggest banks, has made it easier for Wall Street to offer high-interest, payday-style loans. It has softened a policy for punishing banks suspected of discriminatory lending. And it has clashed with another federal regulator that pushed to give consumers greater power to sue financial institutions.

The shift, detailed in government memos and interviews with current and former regulators, is unfolding without congressional action or a rule-making process, but is happening instead through directives issued at the stroke of a pen by the agency’s interim leader, Keith A. Noreika.

Mr. Noreika, a lawyer who previously represented big banks, made the new direction clear to staff members at a meeting over the summer when he told them that the agency was returning to what he called its natural state, according to one of those who attended.

The shift could help revive some of the policies and practices that arose on the agency’s watch amid the financial crisis and banking scandals of a decade ago — and that led congressional investigators to accuse it of “systemic failures.”

The recent changes under Mr. Noreika are part of a concerted effort by the Trump administration to unwind Obama-era rules and install a set of regulators who come from the financial industry itself.

President Trump’s nominee for the position now occupied by Mr. Noreika, Joseph Otting, who is expected to be confirmed by the Senate as soon as Wednesday, is a former chief executive at OneWest Bank. The bank, where Mr. Otting worked with Steven Mnuchin, the Treasury secretary, attracted the scrutiny of regulators for its aggressive foreclosure practices.

Mr. Trump, who has called the Dodd-Frank Act, the regulatory overhaul passed in 2010, a “disaster,” nominated a former banking industry lawyer and private-equity executive to fill the top regulatory job at the Federal Reserve. The head of the Securities and Exchange Commission is also a former industry lawyer.

Congress is pursuing its own unwinding of Dodd-Frank. In the latest effort, a group of senators that included Republicans and Democrats proposed legislation on Monday that would lessen the scrutiny of big regional banks.

Some senators, including Sherrod Brown, Democrat of Ohio, oppose the legislation. They have also expressed concerns about Mr. Noreika’s decisions and have voted against Mr. Otting’s nomination in the Senate Banking Committee.

It is unclear whether Mr. Otting will fully embrace the interim leader's policies, but the approach of both men contrasts sharply with that of Thomas J. Curry, an Obama appointee, who instituted measures intended to bolster the agency’s regulatory power. Mr. Curry, a longtime regulator, helped push through stricter capital requirements for banks and extracted a number of large fines from Wall Street institutions.

By removing Mr. Curry, the Trump administration pleased banking lobbyists and lawyers who felt that the agency had treated them unfairly on his watch.

“It shows a clear path toward a less confrontational approach,” said Douglas Landy, a partner specializing in financial institutions at the law firm Milbank, Tweed, Hadley & McCloy. The new tack, he said, meant “more working it out together instead of slamming each other.”

Before the crisis, some banks shopped around for the friendliest possible regulator, often landing at the Office of Thrift Supervision, which was later merged with the Office of the Comptroller of the Currency under Dodd-Frank. With Mr. Curry in charge, the agency sought to avoid what is known as regulatory arbitrage, deciding that it would typically decline license applications from banks trying to escape state regulatory enforcement actions, according to current and former regulators.

Yet under the Trump administration, the agency recently granted a license to the Bank of Tokyo-Mitsubishi UFJ, a big Japanese bank that was fined $250 million by New York State’s financial regulator in a sanctions-violation case in 2013, and reached a $315 million settlement when accused separately of “misleading regulators.”

In a letter to Mr. Noreika’s office, the New York regulator complained that the agency had granted the application without input about the bank’s state regulatory problems, according to a copy of the letter.

Before Mr. Noreika joined the agency, that bank was one of his clients.

In a statement, an agency spokesman clarified that “Mr. Noreika observed a self-imposed recusal in this matter.” The spokesman added that the agency “had sufficient information to determine that the applicant met the standards for conversion” and that it had placed the bank “under substantively identical enforcement orders” to one still in effect in New York.

The softer approach is spilling into the ratings that banks receive from the agency, a crucial measure of their compliance with federal rules. Last month, the agency revised its procedures for downgrading a bank’s Community Reinvestment Act rating, a four-tiered evaluation of whether a bank discriminates against borrowers and how well it meets the credit needs of low-income neighborhoods in areas it serves.

The agency had previously downgraded some banks two levels at a time, but a footnote in a new manual says the policy is not to lower a bank’s rating by “more than one rating level.”

The new policy also suggested that downgrades could be avoided altogether, emphasizing that the agency must “fully consider the corrective actions taken by a bank.” If the bank has fixed its behavior, the manual said, “the ratings of the bank should not be lowered solely based on the existence of the practice.”

For banks, a high rating is not just a point of pride: A low one can scuttle merger plans.

The comptroller’s office has subtly changed that calculus. This month, the agency issued another manual stating that a low Community Reinvestment Act rating should not inherently block a bank’s plans to merge or expand. A low rating, the manual said, “is not a bar to approval of an application.”

Wells Fargo, which was downgraded two levels by the agency in Mr. Curry’s final weeks, would benefit from the shift. Its executives are also poised to gain personally from another new effort: The agency is working to accelerate the vetting of bonuses to departing Wells Fargo executives, according to people briefed on the matter. Wells Fargo was subject to scrutiny of the extra compensation because of a scandal involving the opening of millions of fraudulent accounts.

The effort could allow executives to get their payouts sooner, but the agency cannot act alone. The payments must also be approved by another bank oversight agency, the Federal Deposit Insurance Corporation, or F.D.I.C.

In a speech on Tuesday, the F.D.I.C. chairman, without naming the comptroller’s office, warned about a rolling back of regulations under the new administration.

“The danger is that changes to regulations could cross the line into substantial weakening of requirements,” said the chairman, Martin J. Gruenberg, a holdover from the Obama administration.

The comptroller’s office’s approach also diverges from that of the Consumer Financial Protection Bureau. Less than an hour after the consumer bureau unveiled the final version of rules to rein in the payday-lending industry, which charges triple-digit annual interest rates on short-term loans, the banking regulator effectively took the opposite route. It rescinded guidelines, adopted under Mr. Curry, that made it tougher for banks to offer similar loans tied to checking accounts. The consumer bureau’s rules still stand.

“In the years since the agency issued the guidance, it has become clear to me that it has become difficult for banks to serve consumers’ need for short-term, small-dollar credit,” Mr. Noreika said at the time.

It was not the first collision between the comptroller’s office and the consumer bureau, which has been led by Richard Cordray, an Obama administration holdover who said on Wednesday that he would leave this month. In July, soon after the consumer bureau adopted a rule that would let consumers band together in class-action lawsuits against financial institutions, Mr. Noreika asked Mr. Cordray to delay the rule’s publication, arguing that members of his staff needed more time to evaluate whether it threatened the safety and soundness of banks.

Mr. Noreika’s request echoed some of his former clients’ concerns. He joined the agency from the law firm Simpson Thacher & Bartlett, where he represented banks now regulated now by the Office of the Comptroller of the Currency.

Once Mr. Otting takes over, Mr. Noreika may return to the private sector. Because the Trump administration appointed him as a short-term “special government employee,” he might soon be able to represent clients before the agency, avoiding the tougher restrictions that appointees confirmed by the Senate face.

He did not, for example, need to sign the ethics pledge that requires Senate-confirmed appointees to refrain from lobbying their former agencies for five years. An agency spokesman said that for one year, Mr. Noreika would not communicate with or appear before agency staff members with the intent of influencing them “on behalf of anyone seeking official action.”

Mr. Noreika has adopted the ethos and messaging of Mr. Trump’s administration. He keeps a red “Make America Great Again” hat in his office, according to two visitors. A hat with the same slogan has been seen in a room at the F.D.I.C. that he keeps as a board member, a room that is otherwise empty.