It isn’t often that we report on the Community Reinvestment Act in Jumbo Rate News as it does not directly affect CD rates or the strength and stability of the bank. And, when we have reported on CRA ratings, it was generally from a perspective of pending acquisitions (JRN 24:27) which could be squelched given an unsatisfactory CRA rating.
The Community Reinvestment Act (CRA) was originally established in 1977 under the Carter Administration. The idea behind the act was simple: reduce the ability of urban banks to redline inner-city neighborhoods and attempt to provide fair credit standards to all. CRA was a response to accusations that urban banks were using inner-city deposits to further growth in the more desirable suburbs. However, the original act was not much more than lip service. All that was needed under Carter’s plan was a “perceived” effort to try to reach the inner-city neighborhoods.
It wasn’t until 1995, under President Clinton, that the Act became a force to be dealt with. No longer was the measure of CRA compliance subjective; it was now an objective measure. Examiners were instructed to use federal home loan data, broken down by neighborhood, income and race, to rate banks.
In order to gain approvals for mergers, acquisitions or branch openings, federally insured banks, thrifts and savings banks now needed a passing CRA score.
Then, about a year ago (JRN33:32) we learned the Consumer Financial Protection Bureau (CFPB) was hiring mystery shoppers to determine whether banks were discriminating in their lending. BancorpSouth, MS was the first to have charges brought against it based on what these shoppers experienced, i.e. Redlining and Unfair Pricing.
BancorpSouth’s CRA rating was downgraded (retroactively) from Satisfactory to Needs to Improve. Not only would this affect pending acquisitions, it also cost Bancorp-South $10.6 million in settlement charges. The CFPB was clearly getting more serious about CRA. Still, that pales in comparison to what ****Wells Fargo Bank, NA, Sioux Falls, SD is now facing.
On March 28, 2017, Wells Fargo announced the Office of the Comptroller of the Currency (OCC) had downgraded its CRA rating from “Outstanding” to “Needs to Improve”. This is the first time since the ratings have been publicly disclosed that Wells Fargo has received a final rating of anything other than “Outstanding”.
Less than four months later, July 17, 2017, the city of Davenport, Iowa disclosed it was preparing to sever its 32-year relationship with Well Fargo. With nearly 32% of the deposit share in the Davenport market, Wells Fargo had been a logical choice for city funds, until now. Davenport’s policies require that institutions have “satisfactory” CRA ratings both in their Metropolitan Statistical Area (MSA) and nationwide in order to be eligible to receive city deposits.
Both ****US Bank, Cincinnati, OH and *****Quad City B&T, Bettendorf, IA are under consideration to take Wells Fargo’s place. Both have “Satisfactory” CRA ratings. Quad City has a slightly higher share of the market with 25.8% of deposits to U.S. Bank’s 23%, but Quad City is a small, community bank and may not have all of the bells and whistles the city is accustomed to.
In the March 29th American Banker, Brian Kleinhanzl, an analyst at Keefe, Bruyette and Woods, was quoted regarding the CRA downgrade, “In general, it’s a nonevent”. But if other City/County Treasurers start pulling their accounts from the bank, it could be anything but.
According to the report: “The findings reflect an extensive and pervasive pattern and practice of violations across multiple lines of business within the bank, resulting in significant harm to large numbers of consumers.”
This is becoming an all too familiar story for Wells Fargo, which until recently had been one of the oldest, most respected banks in the nation. As its list of public relations nightmares continues to grow, one has to wonder what it can (or will) do to win back the nation’s trust.