National Bank Appeals Process:
Appeal of "Needs to Improve" CRA Rating- Lending to LMI Individuals (First Quarter 1999)

The regulation's preamble provides some clarification of this part by adding that examiners consider this data in order to understand the context in which the bank's perfor­mance should be evaluated.  Additionally, the regulation and CRA examination procedures focus examiners' atten­tion on residential real estate, small business, small farm, community development, and to a much lesser degree consumer loans, not commercial loans.  While the regula­tion does not require that lending match assessment area demographics, examination procedures direct examiners to compare the ratio of loans made to LMI families to the percentage of LMI families within the assessment area.

Based on the bank's business strategy, product offerings, and the lack of previous CRA issues, the stock-purchase loans should be considered in the evaluation of the bank's CRA performance.  However, this arrangement is also an appropriate "performance context" issue.  Other than the stock-purchase loans, the data reviewed indicated that the bank's other lending activities during this evaluation period was consistent with past evaluation periods.  The bank's real-estate-related lending had also increased over past periods.

The bank's real-estate-related loans and total consumer lending to LMI individuals and families provide a reason­able distribution by borrower income level.  Since the ex­aminers found the bank's performance reasonable in the remaining performance criteria, the rating was upgraded to "satisfactory."

However, because of the bank's growth strategy, the board was strongly encouraged to reconsider the size of its as­sessment area.  It was determined that while the regulation does grant some flexibility in designating an assessment area smaller than a metropolitan statistical area (MSA) or political subdivision, the bank's strong capital, earnings, and lending record support its ability to reasonably serve a larger area than its current assessment area boundaries.

Appeal of "Needs to Improve" CRA Rating- Violations of ECOA - (First Quarter 1999)

Background

A designated limited purpose bank filed an appeal con­cerning its composite CRA rating of "needs to improve record of meeting community credit needs" (NTI).  The bank received a "satisfactory" rating under the community de­velopment test, but the overall rating was down-graded to NTI based on an alleged substantive violation of the Equal Credit Opportunity Act (ECOA) and Regulation B.  In par­ticular, the bank claims that the OCC examiners did not appropriately credit its subsequent efforts, during the on-site examination and shortly thereafter, to address the fair lending issues raised during a concurrent fair lending ex­amination in determining its CRA performance rating.

Examiners found differences in the treatment of Spanish-lan­guage and English-language applicants/cardholders in one of the bank's designer label credit cards and determined that a reason to believe a substantive violation of ECOA had occurred.  The underlying cause of the alleged violation was deficient internal control systems.  After a thorough review of the alleged fair lending violation, the OCC referred the case to the U.S. Department of Justice for further investigation.  The bank appealed that decision, but the ombudsman's of­fice concluded that there was sufficient information to sup­port the examination findings. Subsequently, the OCC re­ferred the matter to the Department of Justice.

Discussion

While the bank maintains that it did not violate the ECOA or Regulation B, it acted quickly and initiated a number of prospective and retrospective actions to address the examiner's fair lending findings.  After discussions with the examiners, the bank began implementing actions that were largely completed during or shortly after the comple­tion of the fair lending examination.  Regarding retrospec­tive actions, the bank voluntarily:

1)     merged the application handling for Spanish-lan­guage and English-language programs under one underwriting process;

2)      reviewed all Spanish-language applicants denied credit to determine if they would have been approved under the English-language program and then of­fered them credit;

3)     increased credit lines of Spanish-language appli­cants who had received lower lines than similarly situated English-language applicants; and

4)     offered a special balance consolidation promotion to Spanish-language cardholders who had previ­ously not received such offers.

Prospectively, the bank voluntarily:

1)     conducted fair lending training for pertinent employ­ees;

2)     instituted a policy that all new employees in the risk,

3)     marketing, and credit departments receive fair lend­ing training;

4)     mandated fair lending recertification of employees annually;

5)     improved internal controls and oversight systems;

6)     established procedures for legal and compliance program reviews; and

7)     improved audit review of fair lending issues.

Evidence of discriminatory or other illegal credit prac­tices adversely affects the OCC's evaluation of a bank's performance.  In determining the effect on the bank's assigned rating, the OCC considers the nature and extent of the evidence, the policies and procedures that the bank has in place to prevent discriminatory or other illegal credit practices, any corrective action that the bank has taken or has com­mitted to take, particularly voluntary corrective ac­tion resulting from self-assessment, and other rel­evant information.

At issue is whether the examiners appropriately consid­ered the bank's corrective actions in arriving at the bank's CRA performance rating.

Conclusion

The "needs to improve" rating was upheld and the exam­iners appropriately considered the bank's efforts to ad­dress the fair lending violation in arriving at that rating.  However, the bank's substantial action to correct the vio­lation did not mitigate the other factors OCC considers in such cases.  The extent of the evidence regarding the treatment of individuals under the Spanish-language prod­uct was material, supporting a "reason to believe" that a pattern or practice of disparate treatment existed.  Fur­thermore, the bank, at the time, did not have sufficient internal controls, policies, and procedures in place to pre­vent such practices.  The ombudsman acknowledged the merits of the bank's actions to address this issue.  The benefit of such should positively affect the bank's CRA performance during future evaluation periods.