NCRC analysis of OCC bulletin 2018-17
Supervisory Policy and Processes for Community Reinvestment Act Performance Evaluations
OCC bulletin 2018-7 describes a number of technical and methodological issues concerning designation of assessment areas, data used on Community Reinvestment Act (CRA) exams, and scheduling of exams. While this may seem technical in nature, the examination procedures outlined in the bulletin can have a profound impact on the rigor of CRA exams and ratings. Some of these changes are beneficial such as the treatment of assessment areas, but others like stretching out time periods for exams and consideration of penalties for discrimination can result in less bank accountability for CRA and fair lending compliance.
Schedule of exams: This is the worst change and will reduce incentives for consistent CRA performance. In the bulletin, the OCC describes a 48 month cycle for large banks with more than 30 rating areas and 36 months for those with less than 30 areas. This is a stretch out for OCC banks with more than 30 areas. The Treasury Department documented that OCC time periods for all large banks was previously 36 months. This was already on the high end compared to the other agencies that had time periods ranging from 12 to 36 months for large banks. Less frequent CRA exams reduce accountability and incentives for banks to perform in a consistently vigorous manner in fulfilling their CRA obligations. A four year time period between exams can cause banks to relax their CRA efforts in the first two years of the next exam cycle and step up their efforts in last two years. In contrast, the tendency to reduce effort during a three yearexam cycle would probably affect a shorter time period, perhaps the first year into the next cycle.
Fair Lending Investigations: If a fair lending investigation is complex and would delay release of a final CRA exam by more than 90 days, the CRA exam will be released before the investigation is completed according to the OCC bulletin. If the investigation uncovers discrimination, then that finding will be noted and possibly impact the next CRA exam. Instead, NCRC has argued for a retroactive downgrade to the recently released CRA exam (the FDIC, for example, downgraded the rating of BancorpSouth Bank after an investigation uncovered egregious discrimination). NCRC has acknowledged the issue of exam release being delayed for years because of complex fair lending investigations and that such delays impedes enforcement, especially during merger reviews. When the release of a CRA exam is significantly delayed, the CRA exam has data that is several years old, which does not provide a useful guide to recent CRA performance for either the federal bank agencies or community groups when they are considering recent CRA performance during merger reviews.
A retroactive downgrade is far preferable to a downgrade on the subsequent exam because consequences for invidious discrimination must be experienced as closely as possible to the illegal and abusive behavior in order for penalties to serve as effective deterrence. In contrast, a penalty in the form of a lower rating on a subsequent exam would not be experienced by a bank until a number of years into the future. In addition, the CRA examiner might be more reluctant to downgrade on a future exam since the conduct was in the distant pass instead of more recent. Finally, the OCC exam stretch out to once every four years for the largest banks makes the future downgrade even more distant and less likely.
Full scope and limited scope assessment areas (AAs): The OCC bulletin states that at least one AA in each state will be full scope but more than one AA can also be full scope (FS). A FS AA receives more scrutiny and more weight in a CRA exam than a limited scope (LS) AA. Factors to be considered in determining whether an area will be FS include public comments on the bank’s performance in the AA and how important the bank is to the area (for example, even if a very large bank makes relatively few of its loans in the AA, the AA can still be FS when the bank is a major lender in the AA). Both of these factors will help make underserved and smaller areas FS areas. Moreover, the OCC bulletin states that FS areas will rotate over time and one area may not be FS for multiple consecutive exams. This rotation will also help smaller areas and will help disperse community development lending and investment throughout AAs rather than being concentrated in the largest metropolitan areas. Finally, a bank’s evaluation cannot only factor performance in FS AAs; performance in limited scope AAs can also impact ratings. This elevates the importance of LS areas and will be helpful for smaller metro and rural areas that are most likely to be LS areas.
Use of Home Mortgage Disclosure Act (HMDA) data: The bulletin states that examiners are expected to note and address any significant differences in bank performance among different types of home mortgage loans. This procedure is most likely geared to addressing banks’ concerns about new home equity line of credit (HELOC) data which may make CRA performanceappear to be weak since middle- and upper-income borrowers may disproportionally use HELOCs. While the sentence in the bulletin does not require that different loan types and purposes will be analyzed separately, it implies that differences in performance across different loan types and purposes will be considered in determining the rating on the lending test. NCRC has advocated for separate analyses for different types of lending since usage by low- and moderate-income borrowers does vary and since home purchase lending, particularly for first time homebuyers, is of paramount interest to communities.
Analyzing Retail Lending Outside of AAs: An existing Question and Answer (Q&A) in the Interagency Q&A document on CRA allows examiners to consider retail lending outside of AAs, but retail lending outside of AAs does not compensate for poor performance inside the AAs. Implied in this is that outside AA lending can elevate a Satisfactory rating but will not impact a bank’s performance if it has failed its lending test. NCRC would rather have AAs expanded to include areas outside of branches that have high lending volumes. While not what NCRC ultimately wants, the fact that the OCC explicitly adds this Q&A to its bulletin elevates this particular Q&A and possibly could serve as a precedent for expanding AAs.
Consideration of Overall Lending Activity: The bulletin suggests that overall lending volume cannot compensate for poor performance in the percentage of loans to low- and moderate-income borrowers or census tracts. This is positive in that it holds banks accountable to actually lending to low- and moderate-income borrowers.
Demographic data: The bulletin suggests that low percentages of owner occupied housing units in low- and moderate-income tracts does not excuse low levels of lending in these tracts if the numbers of owner occupied housing units in the tracts are high. Likewise, high poverty rates do not necessarily excuse low levels of lending to low- and moderate-income borrowers. This is good guidance in that it is telling the examiners to dig deeper and rigorously evaluate the demographic data before reaching conclusions. The bulletin makes a reference to considering lending to investors in low- and moderate-income tracts. This one liner needs to be further developed because not all investors are created equal; some are malevolent actors and house flippers while others might be nonprofit entities interested in long term housing affordability.
Branch proximity: The bulletin states that any conclusions that a branch outside of low- and moderate-income areas actually serves low- and moderate-income customers needs to be supported by evidence that such branches are actually serving low- and moderate-income customers. This is postive because NCRC had flagged the increasing tendency for OCC exams to count branches near low- and moderate-income areas as serving low- and moderate-income areas and customers.
Conditional merger approvals and CRA exams: The agencies issue conditional merger approvals requiring banks to submit CRA plans with measurable goals when banks have weaknesses in their CRA or fair lending performance. The OCC bulletin directs examiners to consider bank progress on these plans when developing component test ratings and overall ratings on CRA exams. This is the first time such explicit directions have been issued, which is a positive development further linking merger reviews to CRA exams and providing for more opportunities for public comment and participation.
MSAs (Metropolitan Statistical Areas) that have more than one MD (Metropolitan Division): The OCC bulletin states that CRA tables are to present data at the MSA level even when banks have designated AAs at the MD level. However, examiners can consider “MD-level performance context factors.” Overall, this is a step backward. The OCC is most likely thinking about exam efficiency in the case of large banks with several AAs, but MDs have different needs, demographics, and economic conditions than the MSAs of which they are part. Particularly when banks have designated MDs as separate AAs, a more rigorous exam would consider performance at the MD level. The awkward phrasing about consideration of MD-level performance context factors may allow examiners discretion to consider community group comments about performance at the MD level.
Even if an agency writes terrific and rigorous examination procedures, it will not mean much if they do not train and oversee their examiners in a rigorous manner. Thus the advances in FS and LS AA procedures will only be as good as the implementation of these procedures. The bulletin took steps backwards in consequences for discrimination, exam time periods, and MSA level consideration. NCRC will advocate changes to these aspects of the exam procedure during the Advance Notice of Proposed Rulemaking (ANPR) process that will commence soon. Moreover, NCRC urges the OCC to refrain from any additional significant changes to CRA exam procedure and implementation until the ANPR and Notice of Proposed Rulemaking (NPR) process runs its course and results in interagency changes to the CRA regulation.
 See Treasury memo, page 17: https://home.treasury.gov/sites/default/files/2018-04/4-3-18%20CRA%20memo.pdf.
 See https://www5.fdic.gov/CRAPES/2013/11813_131001.PDF for a copy of the BancorpSouth Bank CRA exam.