By Chris Bruce
An Oct. 12 regulatory bulletin by the Office of the Comptroller of the Currency on Community Reinvestment Act (CRA) ratings marks an important policy shift that may help banks avoid downgrades.
The CRA, enacted in 1977, encourages banks to meet community credit needs. CRA ratings assigned by regulators can make or break a host of business plans by banks, including proposed mergers and acquisitions.
According to the bulletin, when considering downgrades, OCC examiners will ask whether evidence of other known problems, such as lending discrimination or other illegal loan practices, have a clear connection to the bank’s CRA effort.
“Generally, the OCC only considers lowering the composite or component performance test rating of a bank if the evidence of discriminatory or illegal credit practices directly relates to the institution’s CRA lending activities,” the bulletin said.
The bulletin marks a change from Obama-era policies that gave banks lower CRA ratings based on non-CRA factors, according to Warren W. Traiger, senior counsel with Buckley Sandler in New York who advises financial institutions.
“I think this directive is attempting to cut back on that and make CRA ratings mainly a function of how well a bank performs under the CRA, barring pretty serious evidence of discrimination,” Traiger told Bloomberg BNA. “For example, if your CRA rating is based largely on mortgage lending, evidence of mortgage redlining could result in a downgrade. But other factors might not mean a lower rating.”
It’s also significant that the OCC is moving on its own, he said. “Usually the CRA regulators take pain to act in unison,” Traiger said, referring to the Federal Reserve and the Federal Deposit Insurance Corp. “I see this as an effort by the Trump administration to take action on an issue that’s been bothersome for the industry for some time.”
According to the OCC, tying CRA ratings downgrades mainly to CRA activity will provide a clearer picture of actual CRA performance while still holding banks accountable for discriminatory practices.
Meanwhile, downgrades that are issued will have to have a robust rationale. “A downgrade of the composite rating should be supported by strong evidence of quantitatively and qualitatively material instances of discriminatory or illegal credit practices directly related to CRA lending activities that have resulted in material harm to customers,” the bulletin said.
According to Traiger, the bulletin could help encourage and reward good performance. “The CRA is essentially color-blind, and requires banks to serve communities and individuals of all different incomes, including lower income,” he said. “The CRA isn’t a fair lending law, but it’s been co-opted as one, which means it loses its uniqueness and can diminish banks’ incentive to comply, because they could be downgraded anyway based on non-CRA factors.”
To contact the reporter on this story: Chris Bruce in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com
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