In a new bulletin, the Office of the Comptroller of the Currency (OCC) outlined its updated “policy and framework for determining the effect of evidence of discriminatory or other illegal credit practices” on the Community Reinvestment Act (CRA) rating of a bank.

What happened

OCC 2017-40 sets forth the two principles in the agency’s Policies and Procedures Manual 5000-43 with respect to CRA ratings. The CRA regulations provide that the OCC’s evaluation of a CRA performance is adversely affected by evidence of discriminatory or other illegal credit practices—but also grant the agency the discretion to determine how the CRA rating should be impacted.

“The regulation states that in determining the effect of evidence of discriminatory or illegal credit practices in a bank’s CRA lending activities on the bank’s evaluation and assigned CRA 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, if applicable) has taken or has committed to take, including voluntary corrective actions resulting from self-assessment; and any other relevant information,” the OCC explained.

A CRA rating is meant to be a tool to achieve the underlying purpose of the statute, the bulletin added: “to encourage banks to help meet credit needs by lending, serving, and investing in the communities in which they operate, across income levels and geographies.”

To aid banks in that purpose, the OCC shared the two principles on which it bases CRA ratings, beginning with the requirement of a “logical nexus” between the assigned ratings and the evidence of the discriminatory or other illegal practices. This ensures that the CRA evaluation “does not penalize a bank for compliance deficiencies or illegal credit practices unrelated to its CRA lending activities,” the OCC said.

Examiners will assess the extent and strength of evidence of discriminatory or other illegal credit practices to determine whether it is appropriate to lower the CRA composite and/or component rating of the bank, considering the bank’s actual CRA performance under the relevant performance tests and the volume of customers harmed and the egregiousness of the discriminatory or other illegal credit practice(s) related to CRA lending activities, according to the bulletin.

For example, “limited, technical, or immaterial instances of discriminatory or illegal credit practices directly related to CRA lending activities in the context of otherwise good-to-excellent performance under each of the performance tests may be the basis for taking some action to reflect adverse effect on an evaluation such as criticizing the practice in the CRA,” the OCC said. “By comparison, more material instances of discriminatory or other illegal credit practices in the context of average-to-good performance may be the basis for lowering a component performance test rating by one level.”

For the second principle, the bulletin declared that “[f]ull consideration is given to the remedial actions taken by the bank.” Examiners weigh the corrective actions taken by the bank, including the cumulative impact of supervisory or enforcement actions taken against it, the progress to remediate the issues underlying such actions, and whether the actions are directly related to the bank’s CRA activities and performance.

“Thus, as a general matter, if the bank has remediated or taken appropriate corrective actions to address the evidence of discriminatory or other illegal credit practices, the ratings of the bank should not be lowered solely based on the existence of the practice prior to commencement of the CRA evaluation,” the OCC said. “This principle ensures that the CRA rating does not penalize a bank for compliance deficiencies or illegal credit practices that have been, or are substantially being, addressed by the bank because such penalties unnecessarily distract and divert the bank’s resources from lending, investing, or serving the relevant communities and thereby frustrate the CRA’s purposes.”

To read the OCC’s bulletin, click here.

Why it matters

Based on the two principles set forth in the OCC’s bulletin, examiners will need to find a “logical nexus” between the evidence of discriminatory or other illegal credit practices and the assigned CRA ratings and give “full consideration” to the remedial actions taken by the bank, meaning that a step down in ratings is not automatic when an illegal credit practice occurs.