In a new Policies and Procedures Manual (PPM) issuance (PPM 6300-2), the OCC establishes its framework for evaluating certain types of licensing applications when the applicant bank has an overall Community Reinvestment Act (CRA) rating of “Needs to Improve” or “Substantial Noncompliance.”  Both ratings are referred to in the PPM as a “less than satisfactory CRA rating.”  The PPM applies to all national banks, federal savings associations, federal branches of foreign banks subject to the CRA, and state-chartered institutions subject to the CRA seeking to convert to a federal charter.

By way of background, the PPM states that OCC regulations implementing the CRA provide that the OCC must consider a bank’s CRA rating when reviewing the bank’s application for any of the following (Covered Applications): branch establishment, branch relocation, main or home office relocation, a Bank Merger Act filing involving two insured depository institutions, conversion from a state to a federal charter, and conversion between federal charters.  The PPM also states that it provides clarity and guidance on the OCC’s longstanding practice of subjecting Covered Applications from banks with significant CRA issues to enhanced scrutiny.

The OCC’s framework set forth in the PPM applies to applicant banks filing Covered Applications in two situations: where the bank has an overall satisfactory or better CRA rating but has one or more geographic rating areas rated less than satisfactory and where the bank has an overall less than satisfactory CRA rating.

For a bank with an overall satisfactory or better CRA rating but a less than satisfactory rating in one or more geographic rating areas, the general presumption is that the CRA consideration is consistent with approval of the Covered Application.  However, the specific facts of a particular transaction may, on balance, result in a determination that the CRA consideration is not consistent with approval.

If a bank has an overall less than satisfactory CRA rating, the OCC will give enhanced scrutiny to the bank’s Covered Application.  As part of such scrutiny, the applicant bank will be required to submit with its application a description, and appropriate supporting information, of how it would meet CRA objectives in connection with the proposed transaction.  The bank must also describe in detail how approval of the Covered Application would allow the bank to improve its CRA performance.  The OCC would generally find that the CRA consideration is consistent with approval of a Covered Application if the bank demonstrates that approval, subject to conditions or otherwise, would help the bank to achieve its CRA objectives and would further the CRA’s public policy goals by encouraging the bank to help meet the credit needs of the communities it serves.

The PPM discusses four factors that the OCC will consider in assessing whether or not the CRA consideration is consistent with approval of a Covered Application by a bank with an overall less than satisfactory CRA rating.  The factors are:

• whether the overall less than satisfactory CRA rating was issued recently, the severity of the less than satisfactory CRA performance rating, and the progress made by the applicant bank to address the issues underlying the less than satisfactory rating.
• whether approval of the Covered Application would result in a material increase in the applicant bank’s size or the scope of its activities, and how such increase would affect the bank’s ability to help meet the credit needs of the communities to be served.
• whether the proposed transaction would benefit the communities to be served, as well as the nature and extent of such benefits.
• whether approving the Covered Application with conditions would (a) be sufficient to ensure that the pro forma organization will be able to achieve its CRA objectives, (b) clearly further the specific goals of CRA, or (c) significantly further fair access to banking services.

The PPM also states that, in certain circumstances, evidence of discriminatory or other illegal credit practices related to CRA lending activities can cause a bank to receive an overall less than satisfactory CRA rating, and that in such instances the same general framework and considerations apply.  Other topics discussed in the PPM are the timing of when the framework and considerations in the PPM will go into effect or no longer apply to a Covered Application, how the OCC handles a Covered Application when a bank has appealed a less than satisfactory CRA rating (either overall or in a particular rating area), and the content of OCC communications when the OCC notifies a bank that it has received such a rating.