Wells Fargo failed its recent Community Reinvestment Act (CRA) examination, the bank announced Tuesday.

Federal examiners at the U.S. Office of the Comptroller of the Currency gave the bank a “needs to improve” rating, an exceptionally rare double downgrade from “outstanding,” which the bank received in its last rating in 2008. The rating means a number of hurdles or constraints on the bank until its next rating, including restrictions or constraints on new branch openings, branch closures, and any mergers and acquisitions.

The Community Reinvestment Act of 1977 outlawed the practice of denying loans based on a customer’s race or the fact that a person wanted to buy a home in a majority-minority neighborhood. (Many people in black and Latino neighborhoods across the U.S. are still working to overcome the legacy of that discrimination.) While the CRA has lost some of its teeth, it’s intended to hold banks accountable for meeting the needs of everyone in the communities where they do business. Examinations take place every three years for national banks, and there’s a four-tiered rating system: outstanding, satisfactory, needs to improve and substantial noncompliance.

“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. However, we are committed to addressing the OCC’s concerns because restoring trust in Wells Fargo and building a better bank for our customers and our communities is our top priority,” Tim Sloan, Wells Fargo’s CEO and president, said in the statement announcing the rating. “Wells Fargo is deeply committed to economic growth, sustainable homeownership and neighborhood stability in low- and moderate-income communities and will continue to invest above and beyond what is required by CRA.”

Tuesday was interesting timing for the announcement. Leaders and staff from many of the country’s most active bank watchdog organizations are assembled this week in Washington, D.C., at the annual conference of the National Community Reinvestment Coalition. News began to circulate about the announcement while Federal Reserve Chair Janet Yellen was addressing the conference. Today, U.S. Comptroller Thomas Curry addressed the convening for the final time; he’s worked closely with many at the conference to improve and strengthen CRA enforcement. Neither mentioned the downgrade, but Curry did remark on the CRA’s continued relevance.

“In the middle of such change, one thing that does not change is the OCC’s commitment to a safe and sound banking system that protects the rights of bank customers. That is a part of the bedrock of our mission, and has been so for 150 years,” Curry said in closing out his remarks.

Conference participants described their reactions as “surprised” and “floored” by the rare double downgrade. Many had suspected a single downgrade, as has happened recently with other large banks. The sticking point? Given the CRA’s four possible grades, some conceded that it might not have fit with broader expectations to give Wells Fargo a “satisfactory” due to a recent fake accounts scandal.

“It’s historic that the OCC is double downgrading a bank,” says Jaime Weisberg, senior campaign analyst at the NYC-based Association for Neighborhood and Housing Development. “I applaud Comptroller Curry in looking at the harm done by this bank in terms of damage to consumers and homeowners over the years. I think it’s important and necessary that regulators are taking into account the totality of what banks are doing in terms of their impact on communities.”

Some weren’t sure how to react because of Wells Fargo’s comparatively excellent track record on lending to minorities, in low-income communities and for community development. In fact, on the CRA exam itself, regulators gave the bank “outstanding” or “high satisfactory” on the three main performance areas of the exam: lending, investment, and services provided to low- and moderate-income areas.

No one I spoke to at the gathering could recall a time when a bank received high ratings across the board for its community reinvestment performance, and still received a failing grade overall.

Examiners cited “the extent and egregious nature of the evidence of discriminatory and illegal credit practices,” and “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,” as evidence justifying their rating.

Looking forward, NCRC President John Taylor is cautious of diluting the effectiveness of the CRA as an incentive for banks to invest in and lend and provide basic financial services to low- and moderate-income areas. While acknowledging the harm from Wells Fargo’s consumer credit practices, one challenge moving forward is making sure banks don’t lose focus on following Wells Fargo’s example of excellence on the reinvestment side of the CRA, which he says is its main purpose.

“I don’t want to throw the baby out with the bath water,” Taylor says “I want to reward and compliment lenders when they’re doing good, and I want to criticize lenders when they’re doing bad. You need to strike a balance.”

The OCC declined to comment at this time.

Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.

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