By Patrick Rucker
WASHINGTON (Reuters) - A U.S. bank regulator is poised to fault Spanish lender Banco Santander SA <SAN.MC> <SOVBAN.UL> for doing too little to reach poor neighborhoods and will fail the bank on a test of community lending, according to sources familiar with the situation.
The decision by the Office of the Comptroller of the Currency (OCC) is due by early 2017, said the sources, who spoke on background because they were not authorized to talk about the pending action.
They said Santander would be listed as a bank that "needs to improve" under terms of the Community Reinvestment Act, which was enacted in the 1970s to help end discriminatory lending.
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Such as listing would mean that Santander will face more regulatory hurdles if it wants to open more branches or seeks to merge.
The OCC and Santander both declined to comment.
Santander, which has about $85 billion in assets in the United States, is counted among the largest global lenders. In June, the bank failed a U.S. stress test meant to ensure the largest firms on Wall Street can weather a future financial crisis.
Santander's U.S. bank was the first to fail the test three years in a row.
The Federal Reserve, in its review of Santander, faulted the bank for poor risk management and financial planning rather than a lack of capital.
Consumer advocates said they were glad to see community concerns about Santander rise to the highest level of regulatory attention.
"Banks have an obligation to blue collar communities but they haven't always seen it that way," said John Taylor, head of the National Community Reinvestment Coalition.
Earlier this week, Reuters reported that Wells Fargo was also due be downgraded to 'needs to improve,' under terms of the Community Reinvestment Act.
The label means a bank must seek approval from the OCC before acting on many day-to-day management issues. Such banks are also expected to outline how they will expand credit to the poor.
Earlier this month, Thomas Curry, the head of the OCC, said he expected the agency to clear a backlog of Community Reinvestment reviews in the weeks ahead.
Officials have "already made great strides in working through the agency's existing backlog of CRA performance evaluations," he told a gathering of the National Association of Affordable Housing Lenders.
(Reporting by Patrick Rucker; Editing by Steve Orlofsky and Tom Brown)