U.S. regulator set to fail Wells Fargo on community lending test - sources

By Patrick Rucker

WASHINGTON (Reuters) - A U.S. bank regulator is ready to fail Wells Fargo on a national scorecard for community lending, sources familiar with the decision said on Wednesday, in a move that could limit near-term expansion for the bank.

Wells Fargo is due to be deemed a bank that "needs to improve" under the Community Reinvestment Act (CRA), a law meant to promote lending to poor neighborhoods.

The move is a two-notch downgrade from the "outstanding" tag Wells Fargo has held since 2008 and the change would give regulators a greater say on day-to-day matters like whether they may open new branches.

The ruling from the Office of the Comptroller of the Currency, the main regulator for national banks, is due by early January, said the sources with knowledge of the plans.

A Wells Fargo spokesperson declined to comment. A spokesman for the OCC also declined to comment.

Wells Fargo has struggled since September to overcome its admission that employees wrongly created as many as 2 million accounts without customer authorization.

A downgrade on the bank's community service score could further tarnish the reputation of the San Francisco-based lender at a time when it hopes to move beyond the scandal.

Wells Fargo may win an appeal to the downgrade through an independent arm of the regulator but no decision has yet been made, said sources familiar with the process.

Consumer advocates have faulted the OCC for letting eight years pass between reviewing Wells Fargo's commitment to community development.

"Regulators could have downgraded Wells Fargo years ago and maybe that would have stopped some of this wrongdoing," said Paulina Gonzalez, head of the California Reinvestment Coalition.

Following the 2008 housing market collapse, the OCC faulted several national banks for their community lending.

Bank of America Corp lost its "outstanding" grade in 2011 when the OCC faulted the lender for "discriminatory or other illegal credit practices." JPMorgan Chase & Co also slipped one notch from "outstanding" to "satisfactory" in 2013.

But industry and regulatory sources said they knew of no other case where a national bank had slipped two notches in a single review of CRA compliance.

(additional reporting by Dan Freed in New York)