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Appeal of "Needs to Improve” Community Reinvestment Act Rating (First Quarter 2017)

Background

A bank supervised by the Office of the Comptroller of the Currency (OCC) appealed to the OCC’s Ombudsman the Community Reinvestment Act (CRA) performance rating of “Needs to Improve” assigned in a recently completed performance evaluation (PE).

Discussion

The appeal argued the rating of “Needs to Improve” is substantially inaccurate. The appeal acknowledged the evidence of discriminatory or other illegal credit practices would adversely affect the CRA performance rating, but contended a rating of “Satisfactory” was more appropriate due to mitigating factors such as corrective actions taken by the bank and the implementation of new policies and procedures. The appeal further contended the PE does not address the “nature, extent, and strength of the evidence” of the practices considered in determining the effect on the CRA rating. The appeal asserted that enforcement actions are not strong evidence of discriminatory or other illegal credit practices because they do not contain an admission of wrongdoing or a finding of liability.

The appeal further asserted the “Needs to Improve” CRA rating would impose double punishment by restricting corporate and other banking activities when the bank has already been subject to enforcement actions and settlement agreements, paid restitution, and made changes to policies and procedures due to the evidence of discriminatory or other illegal credit practices. The appeal asserts the “Needs to Improve” rating does not reflect the bank’s record of meeting the credit needs of its community. Further, the appeal stated the “Needs to Improve” rating requires the bank to disclose how it will improve its rating, yet the supervisory office (SO) did not identify improvements needed under any of the performance tests.

Standards

The Ombudsman conducted a comprehensive review of information provided by the bank and the SO, and primarily relied on 12 CFR 25, “Community Reinvestment Act and Interstate Deposit Production Regulation” and the “Interagency Questions and Answers Regarding Community Reinvestment,” (July 15, 2016).

Conclusion

The Ombudsman concurred with the SO’s conclusion of a “Needs to Improve” CRA performance rating. The SO adhered to the CRA regulation when assessing the effect of discriminatory or other illegal credit practices on the bank’s CRA rating and considered all mitigating factors noted in 12 CFR 25.28(c)(2), including any corrective actions and new policies and procedures the bank implemented. The bank’s CRA performance rating was adversely affected by the number of enforcement actions and fair lending violations, as well as the volume of fines and reimbursements. The SO appropriately determined that the discriminatory or other illegal credit practices resulted in significant harm to a significant number of consumers warranting a “Needs to Improve” CRA performance rating.

The Ombudsman determined that the OCC does not consider as a mitigating factor, new policies and procedures developed as remedial actions in response to public and non-public supervisory actions. The policies and procedures were ineffective to prevent violations and many of the corrective actions implemented by the bank were in response to regulatory findings. Under 25.28(c)(2), the OCC may consider as a mitigating factor, a bank’s adequate policies and procedures when discriminatory or other illegal credit practices occur despite the bank having those policies and procedures in effect at the time the discriminatory or other illegal credit practices were identified. In addition, although the OCC considers corrective actions as a mitigating factor, it places a greater emphasis on corrective actions initiated in response to bank-identified violations.

The Ombudsman determined that the SO did not impose double punishment by assigning the “Needs to Improve” rating. 12 CFR 25.28(c) requires the OCC to consider the adverse effect of evidence of discriminatory or other illegal credit practices in any geography by the bank or in any assessment area by an affiliate whose loans have been considered as part of the bank’s lending performance when concluding the overall CRA rating. The CRA regulation gives the SO the authority to evaluate the evidence of discriminatory or other illegal credit practices and adjust the CRA rating downward, if warranted.

The Ombudsman determined that OCC rating assignments under 12 CFR 25.28 involve two distinct processes. First, under 12 CFR 25.28(a), the OCC assigns a rating for a bank’s performance using the three performance tests (lending, investment, and service). Second, under 12 CFR 25.28(c), the OCC can adjust ratings downward when there is evidence of discriminatory or other illegal credit practices. In this appeal, the Ombudsman concurred with the SO’s decision to adjust the rating downward based on evidence of the bank’s discriminatory or other illegal credit practices.

Lastly, the Ombudsman determined that engaging in discriminatory or other illegal credit practices does not serve the entire community and is not consistent with the safe and sound operation of the bank. Banks with less than satisfactory ratings are required to include in their public file a description of current efforts to improve their performance in helping to meet the credit needs of their entire community. Banks can disclose in their public file any planned changes or other implementation of policies and procedures to prevent future fair lending-related and other illegal credit practice violations.