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Consumer regulator's prosecutions raise risk of fair-lending downgrades

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Consumer regulator's prosecutions raise risk of fair-lending downgrades

News reports last week suggested Wells Fargo & Co. would see a sharp cut to its fair-lending rating. SNL Financial data show the bank would be, by far, the largest bank in recent history to receive such a downgrade.

While a slashing of Wells Fargo's fair-lending rating would be unique, it might also be part of a wave of poor results for large banks. Two superregional banks received downgrades over the past year. Both banks passed the fair-lending tests but received a negative rating because of certain enforcement actions. Since a relatively new consumer protection agency has secured consent orders with many U.S. banks, including all four with more than $1 trillion in assets, more downgrades could be on the horizon.

Reuters reported Dec. 7 that the Office of the Comptroller of the Currency would slash the bank's rating to "needs to improve," two steps below its current "outstanding" rating. A poor fair-lending rating can prevent a bank from engaging in deal activity or even from opening a new branch. According to SNL data, only 20 banks have received a two-notch downgrade since 1990. Of those, just six had more than $1 billion in assets and none had more than $10 billion in assets. Wells Fargo has $1.942 trillion in assets.

Wells Fargo has been plagued by an unauthorized accounts scandal that resulted in $185 million in fines. That could play a role in its fair-lending rating, also known as a CRA rating since it is largely based on tests required by the Community Reinvestment Act. The law requires banks prove they are serving moderate- and low-income communities by investment, lending and service tests. A bank's CRA rating can also be lowered due to a violation of a separate law, such as the Equal Credit Opportunity Act, said Warren Traiger, a senior counsel with BuckleySandler LLP. There have been some media reports suggesting Wells Fargo's fake accounts scandal targeted the elderly, a protected class under federal law.

"It's atypical to get a double downgrade just based on evidence of noncompliance with another law. Although with a particularly egregious case, they're not limited to a single downgrade," Traiger said.

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The Consumer Financial Protection Bureau, the leading prosecuting agency in Wells Fargo's accounts scandal, has been particularly aggressive in prosecuting banks. CFPB cases triggered the two recent downgrades at superregional banks, constituting two of the three "needs to improve" ratings since 1990 among banks with more than $50 billion in assets.

Fifth Third Bancorp's fair-lending rating was lowered in July, but the bank's CRA report showed above-average marks on all three tests, including an "outstanding" rating on the investment test. The bank's CRA rating was downgraded due to violations of the Equal Credit Opportunity Act, Fair Housing Act and a law banning deceptive acts and practices. Similarly, when Regions Financial Corp. received word in the 2015 fourth quarter that its CRA rating had been relegated to "needs to improve," the bank passed all three tests but was downgraded because of an April 2015 consent order with the CFPB regarding overdraft fees. The CFPB was involved in two of the three enforcement actions cited in Fifth Third's case.

The CFPB has landed enforcement actions against all four U.S. banks with at least $1 trillion in assets. The regulator has levied millions in fines for inappropriate sale of credit card add-on products against all the money-center banks, settling with JPMorgan Chase & Co. in 2013, Bank of America Corp. in 2014 and Citigroup Inc. in 2015. One of the three enforcement actions cited in Fifth Third's downgrade was inappropriate sale of credit card add-on products.

For both Regions and Fifth Third, regulators lowered ratings because of enforcement actions that occurred more than a year after the exam date. Wells Fargo's consent order for its fake-accounts scandal occurred roughly four years after its CRA exam, but regulators often take years after the exam date to process a CRA rating, Traiger said.

"These things can be generally three, four, five years that they're looking at it … and then there's some back-and-forth at the end and all that can hold up the eventual release on the website," Traiger said. "So, it's not uncommon, and sometimes it's inexplicably long."

Wells Fargo's rating has been in the works for a while, and a spokesperson for its regulator suggested a result should be released before year-end. The bank's South Dakota subsidiary, which holds the vast majority of the company's deposits, was most recently examined in November 2012, the results of which have not been published.

"The combined [compliance supervision, compliance risk and community affairs] team has already made great strides in working through the agency's existing backlog of CRA performance evaluations, many of which had been delayed for far too long, and we expect to issue most of those older evaluations by the end of the year," the spokesperson said in an email.

A Wells Fargo spokesperson declined to comment on the report of a CRA downgrade but defended the bank's fair-lending compliance, noting that it has originated more home loans in low-income and minority communities than any other bank in recent years. The bank's 2009 examination resulted in "outstanding" ratings on all three tests.

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