It's not uncommon for a bank to shout about a stellar regulatory rating that it wins for its community lending activities. It's quite another thing for a bank to advertise a low score.

But Puget Sound National Bank of Tacoma, Wash., issued a press release last week announcing that it received a grade of "needs to improve" under the 1977 Community Reinvestment Act, which mandates that banks make loans and other commitments to low-income communities.

The rating is the second-lowest of four ratings that range from "outstanding" to "substantial noncompliance."

By publicizing the rating, Puget Sound apparently sought to preempt criticism while implicitly criticizing the criteria used to make the rating.

Marketed as Local Institution

Puget Sound, the largest independent commercial bank in Washington, has long marketed itself as a community-minded institution with a strong local orientation.

For example, it promoted its environmental conscience with a program that contributed money to fund protecting the Puget Sound whenever a customer used its automated teller machines.

Focus of Exam Questioned

Nevertheless, the bank said that regulators from the Office of the Comptroller of the Currency faulted its CRA record.

The problem, the bank said, is not the lack of lending in low-income neighborhoods but the failure to establish a sound administrative structure to document its CRA activities.

"The 'needs to improve' is certainly not indicative of our community reinvestment activities or impact or interest in the community," said David Miller, Puget's community reinvestment officer. "It's a reflection of the OCC's focus on technical issues and documentation."

Puget Sound thus joins a growing roster of banks that have been critizing regulators for focusing more on technicalities than on substance when evaluating CRA compliance.

Nevertheless, Puget Sound is taking the regulatory admonition to heart. Besides hurting the bank's pride, a low CRA score poses practical problems.

Takeovers Are Pending

Puget Sound's parent company, Puget Sound Bancorp, has two pending acquisitions, and regulators frequently curtail expansion until CRA records improve.

"We don't know whether the current examination findings are going to hold up that merger acquisition," Mr. Miller said. "I guess time will tell."

Mr. Miller said Puget Sound is improving the way it determines and documents community needs. It also plans to ask the Comptroller's office to return early next year to take another look at its CRA program.

Documentation Is Vital

Puget Sound's action again shows that -- whether banks like it or not -- documentation is "the real substance of CRA because that's the way the examiners see it," said Jeanine Catalano, a San Francisco-based CRA consultant and a former regulator.

Banks, she said, must have a written plan for their community] reinvestment programs, a detailed record of how they ascertain community needs, and a record of how they market their lending programs. Otherwise, they may not receive full credit for their programs.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.