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Appeal of "Needs to Improve" Community Reinvestment Act Rating (First Quarter 2018)

Background

A bank supervised by the Office of the Comptroller of the Currency (OCC) appealed to the Ombudsman the “Needs to Improve” Community Reinvestment Act Performance Evaluation (CRA PE) rating assigned by the supervisory office (SO). In addition, the bank appealed the overall “Needs to Improve” ratings assigned to the Lending and Community Development (CD) tests, which contributed to the bank’s overall CRA rating.

Discussion

The appeal disagreed with the CRA PE’s “Needs to Improve” Lending Test rating, stating that the SO did not properly consider the Performance Context standards when evaluating the rating. Specifically, the appeal asserts that the Lending Test rating should consider the bank’s prior CRA evaluations/performance, the bank’s third-party loan origination business strategy, and the lack of retail origination capacity. The appeal also notes that the bank should receive credit for all lending outside of the assessment areas (AA) and that the bank’s intent to sell all of its branches within one of the state’s AAs should be considered as Performance Context even though the sale eventually did not take place.

The appeal disagreed with the weighting applied to the performance of each of the bank’s states when assigning the Lending Test rating. The appeal stated that one state’s performance should be weighted more heavily than the performance in other states because the majority of the bank’s deposit volume is concentrated in that state.

The appeal disagreed with the “Needs to Improve” CD test rating, asserting that the bank’s total CD activity during the evaluation period exceeded the activity in the bank’s prior PE. The appeal also contested the CD ratings assigned to the other states noting that the bank did not receive credit for two CD loans and one CD investment.

Lastly, the appeal disagreed with the overall “Needs to Improve” CRA rating contending that the rating would be different if the Lending and CD performance test ratings were different.

Supervisory Standards

The Ombudsman conducted a comprehensive review of the information submitted by the bank and primarily relied on the supervisory standards outlined in 12 CFR 195, “Community Reinvestment”; and OCC Bulletin 2005-29, “Community Reinvestment Act: Interagency Examination Procedures,” dated August 24, 2005.

Conclusion

The Ombudsman concurred with the SO’s conclusion of “Needs to Improve” for the Lending Test rating. The Ombudsman determined that the SO considered the bank’s prior CRA performance, the bank’s business strategy, and mode of operations when assessing the bank’s performance context. 12 CFR 195 communicates the scope of the Lending Test, which is to evaluate a bank’s record of helping meet the credit needs of its AAs through its lending and CD activities. Per the regulation, the CRA PE cannot consider or expand the Lending Test to include lending activities outside of the bank’s AAs. The Ombudsman reviewed other factors such as institutional capacity and constraints as performance context that may affect the bank’s ability to lend and did not identify any constraints affecting the bank’s capacity to meet the credit needs of its AAs. The Ombudsman also determined that the bank’s intent to sell the branches and exit the market in one of the states did not constrain the bank’s ability to originate or purchase loans within those AAs. The scope of the Lending Test would have been adjusted, however, if the bank had sold the branches.

The Ombudsman agreed with the SO that the bank’s CD test rating is “Needs to Improve.” While the total CD activity in the subject evaluation period exceeded the activity in the prior evaluation period, nearly all of this activity was in one state. This activity supported a “Satisfactory” CD test rating for that state, but not for the bank’s overall CD test performance. The Ombudsman also determined that the bank did not adequately meet the CD needs within other AAs. Per the regulation, a bank cannot receive consideration for CD activities that benefit the broader statewide area, if the bank did not adequately meet the needs of the AA. The bank did not receive credit for two CD loans and a CD investment in the other states because the assets were located outside the bank’s AAs.

The Ombudsman determined that the SO appropriately weighted the bank’s performance in each state, taking into account the significance of the bank’s activities in each state compared to the bank’s overall activities. While one state had the majority of the bank’s deposit volume during the evaluation period, another state had the majority of the bank’s lending volume, and both lending and deposit volume are considered a significant part of the bank’s overall banking activities.

The Ombudsman determined that the SO appropriately rated the bank’s overall CRA performance as “Needs to Improve.” The regulation defines rating criteria, stating that no bank may receive an assigned overall rating of “Satisfactory” unless it receives a rating of at least “Satisfactory” on the Lending Test and the CD Test. “Needs to Improve” ratings for both the Lending Test and CD Test warrant a “Needs to Improve” overall CRA rating.