Consumer Finance Insights
October 23, 2017

OCC Provides Guidance for Downgrading Banks’ CRA Ratings

On October 12, 2017, the OCC published the section of its policy and procedures manual, PPM 5000-43, entitled “Impact of Evidence of Discrimination or Other Illegal Credit Practices on Community Reinvestment Act Ratings.”  The Policy’s purpose is to provide guidance to OCC examiners in determining whether (and by how much) to lower a national bank, federal savings association, or insured federal branch’s (collectively referred to here as “banks”) Community Reinvestment Act (CRA) rating upon finding that a bank committed discriminatory or other illegal credit practices.  The Policy directs its examiners to take a holistic approach, and to take into consideration a bank’s CRA compliance efforts in its entirety—and not just the egregiousness of a particular offense—in determining whether to downgrade the bank’s CRA rating.

The Policy enumerates two guiding principles that OCC examiners must apply in considering whether to downgrade a bank’s CRA rating.  First, the examiner must ensure that a bank’s CRA rating is aligned with its actual CRA performance, in view of the discriminatory or illegal credit practice at issue.  This is, in effect, a balancing test in which the examiner should take a broad view of the bank’s overall CRA compliance record.  As an initial matter, the examiner must determine whether the illegal practice is related to CRA lending activities.  If it is, then the examiner must take into account both the egregiousness of the individual offense, the number of consumers harmed, and the results of the bank’s recent CRA performance tests.  The purpose of this guidance is to avoid punishing banks for technical CRA violations, and to reward banks for consistently scoring well on CRA performance tests.  A good CRA test performance history could justify not downgrading a bank’s CRA rating at all, or reducing a downgrade’s severity.

Second, the examiner must take into account the bank’s actions to remedy illegal conduct in the past.  The Policy instructs examiners to consider banks’ corrective actions taken to remedy previous CRA violations (including the bank’s level of compliance with orders and consent decrees issued or agreed to in previous enforcement actions), and the extent to which other violations relate to the bank’s CRA compliance.  The goal of this guidance is to avoid punishing banks for compliance deficiencies that a bank has already remedied, or is in the process of remedying.

Where an examiner determines that a CRA rating downgrade is warranted, the Policy requires examiners to provide a full explanation in the bank’s performance evaluation explaining why the OCC lowered the bank’s CRA rating, and how the examiner applied the Policy.  Given the importance of CRA compliance, the Policy is a helpful tool to guide banks’ understanding of the OCC’s CRA evaluation process.  In particular, banks should note the Policy’s emphasis on consistent good faith compliance with the CRA and any related enforcement orders or consent decrees.  A good CRA compliance history may make the difference in the OCC examiner’s decision about whether to downgrade a bank’s CRA rating.