On October 12, 2017, the Office of the Comptroller of the Currency (“OCC”) issued a Policies and Procedures Manual (“PPM”) outlining the framework to be used by examiners to determine whether an OCC-regulated bank should receive a downgrade of its Community Reinvestment Act (“CRA”) performance rating based on evidence of discriminatory or other illegal credit practices.  The PPM signals that the OCC intends to depart from the federal banking agencies’ recent practice of downgrading a bank’s CRA composite rating by one or two levels in virtually any circumstance in which the bank has entered into a consent order related to a consumer compliance violation.

The CRA regulations of the OCC and the other federal banking agencies provide that the agencies’ evaluation of a bank’s CRA performance is adversely affected by evidence of “discriminatory or other illegal credit practices” in any geography by the bank or in any assessment area by any affiliate whose loans have been considered as part of the bank’s lending performance.  Yet, as discussed below, the regulations do not contemplate that a CRA rating downgrade would be automatic in all instances where there has been a consumer compliance violation, and the agencies have significant discretion to determine whether to downgrade the bank’s rating.

In this connection, the PPM addresses the following issues:

• Types of Consumer Compliance Violations.  The CRA regulations list several examples of applicable laws and regulations the violation of which could form the basis for a CRA rating downgrade: anti-discrimination provisions of the Equal Credit Opportunity Act and the Fair Housing Act, the Home Ownership and Equity Protection Act, section 5 of the Federal Trade Commission Act, section 8 of the Real Estate Settlement Procedures Act, and provisions of the Truth in Lending Act relating to a consumer’s right of rescission.  The PPM states that, as a guiding principle, OCC examiners should only downgrade a bank’s CRA rating if they find a “logical nexus” between the assigned rating and the evidence of discriminatory or other illegal credit practices in the bank’s CRA lending activities.  The PPM further states that the evidence of discriminatory or other illegal credit practices must be “directly related” to the bank’s CRA lending activities to form a basis for a downgrade.

• Remediation and Self-Identification.  The CRA regulations provide that in determining the effect of evidence of discriminatory or other illegal credit practices, the agencies are to consider, among other things, the policies and procedures that the bank has in place to prevent the practices, and any corrective action that the bank has taken or has committed to take, including voluntary corrective action resulting from self-assessment.  Yet, the banking agencies in recent years have very infrequently refrained from downgrading a bank’s CRA rating based on remedial action.  The PPM provides that, as a guiding principle, OCC examiners should give “full consideration” to the bank’s remedial action, and 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.  Additionally, the PPM states that a downgrade may not be warranted if a bank self-identifies violations and voluntarily takes corrective actions in a timely manner.

• Double Downgrades.  The federal banking agencies, including the OCC, have occasionally downgraded a bank’s CRA rating by two levels as a result of a consumer compliance violation.  The PPM states that the OCC’s policy will be not to lower a bank’s CRA composite or component rating by more than one rating level.

Finally, the PPM provides that when examiners identify discriminatory or other illegal credit practices, they should discuss each of the relevant potentially mitigating factors from the regulation in the bank’s CRA Performance Evaluation, and must provide a full explanation as to why those practices resulted in a downgrade.  This procedural guidance, together with the PPM’s substantive provisions described above, appears likely to reduce the incidence of CRA ratings downgrades based on consumer compliance violations.