Wells Fargo's steep CRA downgrade could cost it clients, hamper growth

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Federal banking regulators sharply downgraded Wells Fargo’s score on the Community Reinvestment Act, citing a pattern of violations that go well beyond the sales scandal that has badly damaged the firm’s reputation.

In a report released Tuesday, the Office of the Comptroller of the Currency found that the San Francisco-based bank “needs to improve” its compliance with the 1977 law, which requires banks to meet the credit needs of the communities in which they operate.

Previously, Wells Fargo had an “outstanding” rating from the OCC, so its downgrade was substantial.

The new rating, which puts Wells in the bottom tier of banks, is not only a black eye in terms of public perception. It could also have substantial negative consequences for the megabank’s ability to grow and compete for business.
“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,” the OCC stated.

“The bank failed to implement an effective compliance and risk management program designed to properly prevent, identify and correct violations. Further, bank management instituted policies, procedures and performance standards that contributed to several of the violations for which evidence has been identified.”

The report cited 10 legal cases that show evidence of discrimination or illegal credit practices at Wells. Among them is the company’s recent blockbuster $190 million settlement with the Consumer Financial Protection Bureau over the creation of roughly 2 million fake accounts by more than 5,000 branch employees.

Also included on the list is an agreement by Wells in 2012 to pay $175 million to settle charges with the Department of Justice that the company discriminated against black and Hispanic mortgage borrowers during the housing boom by steering them into costly subprime loans.

Additionally, the report cited a 2011 settlement with the Federal Reserve, which accused Wells of falsifying mortgage applications and steering prime borrowers into higher-rate subprime loans in the run-up to the financial meltdown.

The cases demonstrate that Wells failed to effectively monitor its various businesses for discrimination and other legal risks, the OCC said in its report, describing the violations as “egregious.”

The exam covered 2009 through 2012, though the OCC’s new report also considered more recent regulatory actions against the bank.

Wells Fargo noted in a securities filing Tuesday that the low rating imposes a wide range of regulatory restrictions.

For example, the score could hurt the bank’s ability to engage in certain nonbank mergers and acquisitions. In addition, regulators consider CRA performance when reviewing applications to establish branches and in considering proposed bank mergers and acquisitions.

Wells also said that the low rating could affect its relationships with states, municipalities and other public agencies, to the extent that those entities are restricted from doing business with banks that score poorly.

In a press release Tuesday, Wells said that the new report marks the first time since 1994, when exam results were first publicly disclosed, that it received any score other than “outstanding” for its overall compliance with the Community Reinvestment Act.

“We are disappointed with this rating given Wells Fargo’s strong track record of lending to, investing in and providing service to low- and moderate-income communities,” CEO Tim Sloan said in the press release.

Sloan also indicated that Wells will seek to get its score revised upward as quickly as possible.

“With more than four years having passed since the end of our last CRA evaluation period, Wells Fargo intends to ask the OCC to accelerate the timing of its next exam so that we may continue to serve most effectively the low-and moderate-income communities in which we operate,” he stated.

More than 95% of banks receive at least a “satisfactory” rating on their exams, the California Reinvestment Coalition said Tuesday.

“This should be a wake-up call to the board of directors at Wells that the status quo isn’t working, that regulators like the OCC expect better, and that the bank has a long road ahead of it in repairing trust with its customers and with communities,” Paulina Gonzalez, the California group’s executive director, said in a press release.

The steep downgrade came despite the fact that Wells Fargo scored well on several components of the exam.

The $1.9 trillion-asset bank received an “outstanding” score on the regulators’ lending test, which looks partly at banks’ provision of credit to borrowers with low incomes, as well as on the investment test, which considers banks’ community development efforts.

Wells Fargo received a “high satisfactory” score on the regulators’ service test, which evaluates whether banks are operating branches in places where people with low incomes live.

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