JPMorgan Chase & Co. : J.P. Morgan's Community-Lending Grade Cut
01/02/2013| 08:16pm US/Eastern
Regulators twice in the past six months disclosed downgrades of J.P. Morgan Chase & Co.'s community-lending practices, a rare occurrence for any large U.S. bank.
The Office of the Comptroller of the Currency lowered J.P. Morgan Chase's primary deposit-taking bank and credit-card-lending unit to "satisfactory" from "outstanding" after examining their performance under a law designed to encourage banks to lend to low- and moderate-income neighborhoods. Regulators examine banks' compliance with this law, called the Community Reinvestment Act, every few years.
J.P. Morgan, the largest U.S. bank by assets, is the only one of the four biggest commercial lenders to have a "satisfactory" CRA rating attached to its primary bank as well as its credit-card operations. The main deposit-taking banks at Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. all scored "outstanding" in their most recent exams. Bank of America's credit-card unit, FIA Card Services NA, also scored a "satisfactory."
"It's got to be embarrassing for them," said Ken Thomas, a Miami-based banking consultant. A downgrade "is pretty serious, especially for a big bank."
A J.P. Morgan Chase spokeswoman said "we continue to make the loans and investments that strengthen communities -- and will strive to regain our "outstanding" rating." During the period examined by the OCC, she said J.P. Morgan contributed more than $500 million in financing and tax credits for affordable housing and economic-development projects in low- and moderate-income communities.
The downgrades are the latest sign of a more aggressive approach from the OCC, the primary national-bank regulator.
The OCC has warned all big banks that it is going to be tougher when enforcing rules that prohibit practices considered unfair or deceptive to customers.
For J.P. Morgan, it also is preparing two formal enforcement actions designed to remedy operational weaknesses. One is expected to target the lapses in risk controls that allowed a small group of London-based traders to rack up losses of more than $6 billion in 2012, according to people familiar with the company's discussions with regulators. The other will address alleged weaknesses in the bank's antimoney-laundering systems and require the bank to beef up those procedures, said people close to the discussions. The OCC declined comment.
The OCC released the rating change for J.P. Morgan Chase's Newark, Del., credit-card lending unit, Chase Bank USA NA, Monday. The exam covered a period from November 2008 through December 2011. The OCC's assessment of the credit-card lending unit cited "evidence of illegal credit practices inconsistent with helping to meet community credit needs' as reason for the change in the rating.
The downgrade of its primary bank, New York-based JPMorgan Chase Bank NA, was disclosed in early August and covered a period from 2007-2010.
Both exams found fault with the bank's behavior under the Federal Trade Commission Act that prohibits "unfair and deceptive acts and practices." The assessment of the larger bank released last August referred to an incident that resulted in a OCC fine of $2 million. The OCC levied the fine in 2011 after finding that J.P. Morgan used high-pressure sales tactics and made false statements in the marketing of a credit-protection product sold by its car-loan division.
The product, in exchange for a monthly fee, promised to cancel some or all of a borrower's outstanding debt if the borrower fell into trouble. The bank didn't admit or deny wrongdoing but consented to the $2 million penalty and said it would distribute nearly $25 million to affected customers.
The OCC's exam of J.P. Morgan's large bank also cited the bank's actions in the servicing and modification of mortgages, foreclosures and its compliance with the Servicemembers Civil Relief Act, which stops foreclosures for active-duty service members. Even though J.P. Morgan and Chief Executive James Dimon emerged from the financial crisis in better shape than peers, they still struggled with large loan losses, scrutiny over document errors and the disclosure that the bank foreclosed on homes owned by active-duty military members. J.P. Morgan acknowledged the errors after conducting an internal audit.
Victoria McGrane and Alan Zibel contributed to this article.
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