Regulator is critical of USAA Bank

Failing grade over its ‘credit practices’

USAA Federal Savings Bank has received a failing grade from a bank regulator over evidence of “discriminatory or other illegal credit practices.”

The Office of the Comptroller of the Currency lowered the San Antonio-based bank’s overall Community Reinvestment Act performanceevaluation rating from“satisfactory” to “needs to improve” after uncovering evidence of 600 violations involving customers.

The CRA, enacted in 1977, requires regulators to assess a bank’s record of helping to meet the credit needs of the community, including in low- and moderate-income neighborhoods.

The OCC found evidence of 546 violations of the Servicemembers Civil Relief Act, including failure to provide protections to military reservists as the act requires, wrongful repossession of vehicles and the filing of “inaccurate” affidavits in default judgments in civil court cases.

The act providesprotections for service membersinthe event their militaryserviceimpedes their ability to meet financial obligations. Among other things, it protects them from default judgments.

The regulator also found evi

dence of 54 violations of the Military Lending Act relating to collection of past due amounts from members. The act protects service members and their families from lending practices that could pose a threat to military readiness and hurt service member retention.

“We are committed to serving every USAA member with excellence and in accordance with all applicable laws and regulations,” USAA spokesman Matt Hartwig said in an email Monday.

“The rating by the OCC does not reflect ourongoing commitment to lend to and invest in local low- and moderate-income communities,” he added. “Our mission calls us to help ensure the financial security of all our members. We have higher expectations of ourselves and are focused on restoring our CRA ratings to previous levels.”

The OCC oversees all national banks and federal savings associations. It is an independent bureau of the U.S. Treasury Department.

USAA Bank had about $100.8 billion in assets as of June 30, which places it among the 35 largest banks in the country.

The OCC completed its evaluation of USAA Bank last year, but the findings were released only last week. The bank is a subsidiary of insurance and financial services giant USAA, which has about 13 million members made up of current and former members of the military and their families.

Kenneth H. Thomas, a Miami banking analyst who is president of Community Development Fund Advisors, said USAA Bank’s CRA evaluation was “rare” and “surprising” because only 2 percent of banks receive a failing grade.

USAA gets an “A” for its ubiquitous television advertisements to bring in members of the military as customers but gets an “F” for compliance with regulations, Thomas said. The ads tout that it’s “doing right by its members.”

“They’re spending a lot of money on TV ads, huge amounts of money,” he said. “They need to spend a lot more money in the area of compliance. We’re in banking. We’re the most heavily regulated industry in the world. That regulation means you’ve got a license, and as part of that license, you’ve got to go along with the compliance laws. They’re just not doing a good job of that.”

The violations were “especially egregious” because of the number and those who were affected — members of the military, Thomas said. The bank needs to be held to a higher standard, he added.

“It’s not just a big bank — it’s a big bank that takes care of our military,” he said. “We always talk about vulnerable populations now. This is a very vulnerable population not just because there are a lot of minorities, (but many are of ) low to moderate income. For that reason, we have to be extra careful in dealing with them.”

Blue Star Families, a nonprofit organization that supports military families, conducted a survey in 2018 that found enlisted servicemen and servicewomen experience financial barriers, including lower wages than the civilian population. That hurts their ability to save for emergencies, manage debt and qualify for loans. The survey, sponsored by USAA, was mentioned in the OCC’s report.

The failing grade marks the latest black eye for USAA Bank.

Earlier this year, as the federal government sent stimulus checks to Americans as a small financial cushion during the widening coronavirus crisis, USAA Bank kept portions of the checks deposited into some customer accounts that were overdrawn or had negative balances.

Criticism of USAA Bank’s harsh stance erupted on social media after news reports, leading the bank to reverse course. It said it would allow members with negative account balances to access the full amount of their stimulus checks. For members with overdrawn accounts at the bank, it said it would postpone collection for 90 days from the date the stimulus check was deposited.

Last year, the bank had two run-ins with regulators, including the OCC.

In January 2019, about two months before the CRA evaluation of USAA Bank, the OCC issued a cease-and-desist order against the bank for “engaging in unsafe and unsound practices.”

USAA Bank’s internal controls and information systems did not comply with certain guidelines, the OCC determined. The bank also failed to implement and maintain a “Risk Management Program” equivalent with its size and risk profile.

That action followed by days the Consumer Financial Protection Bureau directing the bank to pay a $3.5 million penalty and $12 million in restitution to settle charges that it violated banking laws.

The bank failed to honor customers’ stop-payment requests on electronic fund transfers and had reopened customers’ previously closed deposit accounts without their authorization, the CFPB found.

The bank and the consumer protection watchdog agency entered into a consent order to settle the matter. The bank did not admit or deny the agency’s findings in agreeing to settle.

USAA Bank’s CRA evaluation wasn’t all bad. Its lending levels reflect an “excellent responsiveness” to credit needs in its assessment area, the OCC found. The bank ranked in the top1 percent of all lenders in originating home mortgage loans.

But the OCC concluded that USAA Bank’s geographic distribution of consumer loans was “poor” during the evaluation period in 2017 and 2018. The proportion of vehicle loans in low- and moderate-income communities was well below the proportion of such households in those areas, the OCC said.