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U.S. faults Santander for community lending; Wells Fargo move stalled

(Corrects spelling of Alvarez & Marsal in 13th paragraph)

By Patrick Rucker

WASHINGTON, Feb 28 (Reuters) - A leading U.S. regulator has given Santander Bank NA a failing grade for its performance in community lending, but sources said a similar move against Wells Fargo & Co was stalled.

Santander, a unit of Spain's Banco Santander, has been deemed a bank that "needs to improve" under the Community Reinvestment Act (CRA), a law meant to promote lending to poor neighborhoods.

On Tuesday, Santander said that it accepted the verdict from the Office of the Comptroller of the Currency (OCC), the leading regulator for national banks.

"We are working with leading community groups and expect that our rating will improve in our next exam," the bank said in a statement.

Santander had appealed the verdict to the OCC's internal auditor, or ombudsman, and lost.

Wells Fargo faces a similar downgrade but its appeal is still pending, according to industry and regulatory sources.

In September, Wells Fargo admitted that its employees opened as many as 2.1 million phony accounts without customer approval. With that in mind, sources said, examiners sought to give the bank a failing grade for community investment.

Wells Fargo appealed, and the OCC ombudsman was due to rule on the matter by earlier this month, according to the agency's internal timeline. But that verdict has been stalled over whether the "needs to improve" label is too harsh, according to sources.

Banks that fail CRA tests do not face sanctions, but they must clear more hurdles to open branches or otherwise expand. The label also brings scrutiny from regulators and lawmakers.

Wells Fargo in December appealed the CRA downgrade, according to sources. A company spokesperson on Tuesday declined to comment.

A spokesman for the OCC, Bryan Hubbard, declined comment.

In the case of an impasse, the OCC ombudsman may hear directly from bank executives about the dispute, said Sam Golden, who was the first to hold the position created in 1993.

"The ombudsman is mean to give fresh eyes to these issues," said Golden, of consulting firm Alvarez & Marsal.

But agency rules grant the Comptroller of the Currency, Thomas Curry, the last word on industry appeals.

The Wells Fargo verdict may be one of the last major decisions to come from Curry, who was appointed by President Barack Obama and whose term ends in early April.

(Reporting by Patrick Rucker; Editing by Cynthia Osterman and James Dalgleish)