Appeal of "Needs to Improve" CRA Rating (First Quarter 2017)

Background

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

Discussion

The appeal asserted that the OCC assigns a "Satisfactory" or better rating when a bank performs adequately on its lending, service, and investments tests, but has faced discrete compliance issues. The appeal further contended that the OCC has reserved "Needs to Improve" ratings for banks that, while performing adequately in each of the three CRA tests, engage in pervasive predatory or discriminatory practices with respect to core consumer offerings. The appeal stated that the consumer harm associated with the bank's discriminatory or illegal credit practices was discrete in scope, and the deficiencies were not reflective of systemic unfairness, deception or discrimination at the bank.

The appeal acknowledged that the bank's third-party risk management during the evaluation period was not effective in detecting and responding to misconduct by third parties. However, the appeal contended the supervisory office (SO) misapplied 12 CFR 25.28 by downgrading the CRA rating based on third-party oversight deficiencies by the bank that resulted in predatory or discriminatory conduct. The appeal also asserted that the quality and effectiveness of a bank's third-party risk management policies and procedures cannot be relied on as evidence of discriminatory or other illegal credit practices by the bank. The appeal further stated that third-party risk management framework is not a credit practice even if some of the bank's third-party relationships facilitate its lending activities; therefore, failure to comply with the third-party guidance does not equate to noncompliance under 12 CFR 25.28(c).

The appeal stated that 12 CFR 25.21(b)(5) makes clear that the supervisory office should have evaluated the bank's CRA performance "in the context of...the performance of similarly situated lenders," and thus should have accounted for the fact that similarly situated lenders have uniformly received satisfactory CRA ratings.

Supervisory Standards

The Ombudsman conducted a comprehensive review and primarily relied on 12 CFR Part 25, "Community Reinvestment Act and Interstate Deposit Production Regulation." The Ombudsman also relied on OCC Bulletin 2001-47,¹ "Third-Party Relationships: Risk Management Principles," November 1, 2011 (third-party guidance) that was in effect during the evaluation period for the PE and "Interagency Questions and Answers Regarding Community Reinvestment," July 2016 (Interagency Q&A).

Conclusion

The Ombudsman concurred with the SO's "Needs to Improve" rating because the bank's CRA performance was adversely affected by evidence of the bank's discriminatory or other illegal credit practices. 12 CFR 25.28(c)(l).

The Ombudsman determined that "discrete" and "systemic" are not factors used to describe evidence of discriminatory or other illegal credit practices under CRA laws, regulations, or guidance. 12 CFR 25.28(c)(2) states, "In determining the effect of evidence of practices described in paragraph (c)(1) of this section on the bank's assigned rating, the OCC considers the nature, extent, and strength of the evidence of the practices; the policies and procedures that the bank (or affiliate, as applicable) has in place to prevent the practices; any corrective action that the bank (or affiliate, as applicable) has taken or has committed to take, including voluntary corrective actions resulting from self-assessment; and any other relevant information."

The Ombudsman concluded that the nature of the discriminatory or illegal credit practices adversely impacting the bank's CRA rating was due to failure by the board and management to implement appropriate internal controls to manage third-party relationships to ensure compliance with fair lending and other consumer protection laws and regulations and the subsequent violations of laws and regulations by the third parties. The extent of the practices was reflected by the number of areas in which discriminatory or illegal credit practices were identified, the number of individuals affected by these practices, and the amount of restitution. The strength of evidence was the enforcement actions or matters requiring attention issued to implement appropriate corrective actions.

The Ombudsman concurred with the SO that the bank's CRA performance was adversely affected by evidence of discriminatory or other illegal credit practices resulting from third-party oversight deficiencies. 12 CFR 25 provides no "safe harbor" provision for products or services offered through a third-party vendor. As outlined in the third-party guidance, "A bank's use of third parties to achieve its strategic goals does not diminish the responsibility of the board of directors and management to ensure that the third-party activity is conducted in a safe and sound manner and in compliance with applicable laws. Many third-party relationships should be subject to the same risk management, security, privacy, and other consumer protection policies that would be expected if a national bank were conducting the activities directly."

The third-party guidance stated that the bank is required to monitor the third-party's compliance with Bank Secrecy Act, fair lending, and other consumer protection laws and regulations. The discriminatory or other illegal credit practices identified, in connection with the products or services offered by the third-parties on behalf of the bank, are a reflection of the failure of the board and management to appropriately manage third-party relationships to ensure compliance with fair lending and other consumer protection laws and regulations. In addition, while the third-party risk management framework is not a credit practice, the discriminatory or illegal practices associated with bank products or services outsourced to third parties were related to credit.

Regarding the issue of similarly situated lenders, the Ombudsman determined that the effect of evidence of discriminatory or other illegal credit practices on the CRA rating is not comparative. 12 CFR 25.21 provides performance context factors that the OCC should consider when evaluating a bank's performance under the relevant tests and standards (the lending, investment, and service tests). These factors are already considered before the ratings are assigned under 12 CFR 25.28(c). The Interagency Q&A explains how examiners should consider the performance of similarly situated lenders as follows:

"The performance context section of the regulation permits the performance of similarly situated lenders to be considered, for example, as one of a number of considerations in evaluating the geographic distribution of an institution's loans to low-, moderate-, middle-, and upper-income geographies. This analysis, as well as other analyses, may be used, for example, where groups of contiguous geographies within an institution's assessment area(s) exhibit abnormally low penetration. In this regard, the performance of similarly situated lenders may be analyzed if such an analysis would provide accurate insight into the institution's lack of performance in those areas."