A congressional watchdog determined a federal agency responsible for overseeing national banks — the Office of the Comptroller of the Currency (OCC) — has followed procedures “inconsistently” and used “outdated” and “unclear” guidance when examining banks for potential instances of redlining.
Democratic lawmakers Rep. Joyce Beatty of Ohio, Rep. Gregory Meeks of New York and Rep. Emanuel Cleaver of Missouri asked the Government Accountability Office (GAO) to review the OCC’s fair lending oversight. The GAO found that the regulator followed policies when it reviewed banks’ underwriting, including credit decisions, and interest rates and fees. But when it came to redlining exams, the congressional watchdog found irregularities.
“Our review of selected examinations found that examiners followed procedures inconsistently when assessing potential redlining, and OCC’s examiner guidance is outdated and unclear on the steps examiners need to take when conducting redlining reviews,” the GAO wrote.
The GAO also tracked the number of fair lending examinations the OCC performs each year, finding they have dropped off significantly since 2018. In the seven years leading up to 2018, the OCC performed about 140 exams, on average, per year. In the years since, that has declined to 50 per year, on average, with only 23 exams performed in 2021.
The decline in fair lending examinations coincided with changes the OCC made to the way it screened banks for potential lending disparities. Before 2018, any banks with a statistically significant number of potential lending disparities evident in its public mortgage lending data disclosures wound up on the screening list. Starting in 2018, however, the OCC only included banks with potential disparities for three consecutive years.
In 2018, the OCC also stopped randomly selecting lending activities for annual screening lists.
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The GAO report said, “while OCC’s updated process contributed to more targeted examinations, it also led to fewer opportunities to examine smaller banks’ fair lending practices and identify deficiencies.”
In a statement, an OCC spokeswoman said the 2018 changes allowed the agency to be more efficient.
“The changes made to our annual process for screening bank retail lending activities enabled the agency to provide more targeted examinations and to better deploy resources to identify weaknesses and wrongdoing,” an OCC spokeswoman said. “This risk-based approach has resulted in more focused examinations on activities that have an elevated fair lending risk.”
In response to the GAO report, the OCC said it would update guidance for redlining examinations and develop examiner training. The training will include live, multi-part, agency-wide webinars, which it will hold by the end of September. The OCC also said it would develop a centralized process and procedures to analyze fair lending activities, including examination selection decisions and outcomes, by year end.
Addressing the legacy of redlining, which was formally outlawed more than 50 years ago, recently has become a key focus of federal housing policy discussions.
In recent years, community groups such as National Community Reinvestment Coalition have negotiated community benefits agreements with banks totaling $500 billion since 2016, by seizing on regulatory reviews of mergers to allege the banks redlined.
The federal government also has signaled it will intensify its focus on redlining enforcement. The Department of Justice, the OCC and the Consumer Financial Protection Bureau in October 2021 announced a joint effort to combat “modern-day redlining.”
The DOJ also has begun pursuing redlining enforcement actions, without first waiting for a banking regulatory agency to make a referral, according to reports from Inside Mortgage Finance.
Regulatory changes that could address the affects of redlining also are underway.
All three federal banking regulatory agencies recently proposed a major update to the Community Reinvestment Act, which originally was passed to combat redlining. It would be the first significant update to the law in decades.