Auto lending practices draw regulatory scrutiny for USAA

USAA Federal Savings Bank is once again in hot water with regulators over discriminatory practices in its auto lending unit.

The San Antonio-based bank is now the first with more than $100 billion of assets to receive low marks on consecutive Community Reinvestment Act performance exams. And, according to the report from the Office of the Comptroller of the Currency — USAA’s primary regulator — things appear to be heading in the wrong direction.

In 2019, the OCC downgraded USAA’s CRA rating from “satisfactory” to “needs to improve, ”  the second-lowest grade in the system, after identifying 600 violations of laws aimed at protecting military members. In the 2022 report, the OCC noted 6,477 violations of a different statute and again issued a “needs to improve” rating.

“There are only 34 banks with over $100 billion [of assets], we expect all of them to be outstanding,” Kenneth H. Thomas, president of Miami-based consulting group Community Development Fund Advisors LLC, said. Outstanding is the highest grade achievable on the exam. “Satisfactory we’ll accept … but they almost never go below that. Only four banks have done that and each of those times, they’ve upgraded themselves in the next round.”

The other four large banks that have been given “needs to improve” ratings are Centennial, Colo.-based Countrywide Bank in 2008, Sioux Falls, S.D.-based Wells Fargo National Bank Association in 2012, Cincinnati-based Fifth Third Bank and Birmingham, Ala.-based Regents Bank, both in 2014, according to a digital database maintained by the Federal Financial Institutions Examination Council. 

No bank that size has ever received the CRA exam’s lowest rating, substantially noncompliant, but Thomas said that might have been warranted for USAA. 

“If you have the same bad results, you’ll get the same low rating, but they actually got worse. They were 10 times worse. They went from 600 violations to 6,000,” he said. “I don’t know why they did not get substantial noncompliance. That’s the absolute lowest grade and we only get a handful of those each year.”

USAA declined to comment about its CRA exam results. But in a written statement, a company spokesperson said the bank considers its latest result an improvement over its previous examination — despite its rating remaining unchanged — because it received a “high satisfactory” rating on the lending portion of the performance test, up from “low satisfactory” in 2019.

“USAA FSB received an overall CRA rating of satisfactory based on CRA performance, consistent with our commitment to the financial security of all members, including those in low-to-moderate income communities,” the spokesperson wrote. “Our overall rating was lowered due to regulatory concerns that have been addressed and were related to a product that USAA discontinued in 2020.”

The USAA spokesman declined to disclose the name of the since-discontinued product line where the violations originated, citing concerns about disclosing confidential supervisory information. 

In Feb. 2020, USAA announced that it was ending its digital car buying business and severing its relationship with the online auto pricing website TrueCar, Inc.

Enacted in 1977, the CRA was designed to encourage bank investment in underserved communities. OCC-regulated banks are subject to CRA exams roughly every three years. During these reviews, the agency inspects the lending activity, investment activity and services provided by a bank to ensure they are meeting performance standards in each category.

USAA received passing grades in each of the three performance categories in the 2022 exam but still received the “needs to improve” rating because of its illegal lending practices, the OCC report notes.

Fair lending and consumer protection advocates see the unprecedented second failing grade as a sign of both the severity of USAA’s malpractice and a growing willingness for regulators to be tougher on banks. 

“What is encouraging about all this is that we’ve called for the OCC and all the bank regulators to pay more attention when there are consumer protection violations,” said Adam Rust, senior policy advisor at advocacy group National Community Reinvestment Coalition. “Typically that would be the work of other agencies, but for them to consult one another is good.”

Those in and around the banking sector view the action more skeptically. 

Alan Wingfield, a partner with the law firm Troutman Pepper who defends banks in consumer protection disputes, said the specific law the OCC accused USAA of violating  — Section 5 of the Federal Trade Commission Act, which relates to Unfair and Deceptive Acts and Practices, or UDAAP — is open to broad interpretation. 

During the Biden administration, Wingfield said, the Consumer Financial Protection Bureau has used UDAAP provision of the Dodd-Frank Act to expand its reach beyond previously assumed statutory bounds. He sees the OCC and other regulators following suit.

In USAA’s 2019 CRA report, 546 of the violations cited by the OCC were under the Servicemembers Civil Relief Act, which bars military members from being sued while on active duty overseas, and the rest were under the Military Lending Act, which establishes financial protections for servicemembers. For the 2022 report, all the violations were under UDAAP.

Wingfield said it was hard to tell how squarely the latest violations fell under UDAAP, because of the limited details disclosed in the CRA report. But he said it was something the industry is on high alert for.

“The regulators are reaching for that UDAAP power as their magic wand to be able to do whatever they want to do,” he said. “That has definitely been viewed quite negatively in the industry.”

Still, others see the issuance of a second failing grade to USAA as a sign of the statutory limitations of the CRA.

“It shows that one of the big problems with CRA is that unless a bank is trying to merge, the CRA doesn’t really have teeth,” said Todd Phillips, an independent consultant and former Federal Depository Insurance Corp. lawyer. “Going from 600 or so violations to more than 6,000 is really, really bad. But unless USAA is trying to buy another bank or open a new branch at a time when most banks are closing branches, it doesn’t really have a lot of impact on the bank’s operations.”