Extracted from Law360
On March 28, the Federal Deposit Insurance Corp., Federal Reserve Board and the Office of the Comptroller of the Currency announced their intent to rescind the 2023 Community Reinvestment Act final rule and to reinstate the CRA framework that existed prior to the final rule.
On April 7, the federal banking agencies issued a bulletin providing additional information on their intent to rescind the final rule.
Community Reinvestment Act
The CRA was enacted in 1977 to address systemic inequities in access to credit in response to concerns that banks were engaging in redlining to deny credit to customers in low-income, minority areas. The CRA requires federal bank regulators to evaluate a financial institution's record of meeting the credit needs of a given community, with separate evaluations for each area where the bank maintains a branch office, placing a particular focus on low- and moderate-income communities.
Notably, the CRA applies to credit practices of banks, and there is no statutory language authorizing the federal banking agencies to apply the CRA to bank deposit-taking activities.
Given changes in technology and financial products since the CRA's enactment, there have been several failed attempts over the past 30 years to revise and modernize CRA regulations. Before the 2023 CRA final rule, the last significant interagency revision to the regulations occurred in 1995.
The most recent attempt to modernize the CRA prior to 2023 was in 2020 under the first Trump administration, when the OCC notably went solo and finalized a new rule without the FDIC or Federal Reserve participating. The OCC rescinded that rule in 2021 by promulgating a new rule to reinstate the 1995 framework, as amended.
Criticisms of the Final Rule
The banking agencies' stated purpose for the final rule was to modernize the CRA to address technological innovations and new product offerings in banking. However, many within the industry asserted that the final rule was contrary to the plain language of the CRA and congressional intent.
The final rule fundamentally altered the determination of a bank's assessment area, requiring inclusion of areas where the bank does not maintain any physical presence. The final rule set forth new tests, applicable to different banks based on asset size. Application and scoring under these tests were complicated and difficult to apply.
Additionally, the final rule sought to evaluate banks' deposit practices in addition to lending and investment activities. For example, the final rule required banks to lend to low- and moderate-income communities in areas where they have a concentration of mortgage and small business loans, even in locations where they do not have physical branches. This was meant to account for online lending, especially from new branchless banks, which were nonexistent at the time of the 1995 CRA revisions.
Industry participants and trade groups asserted that the final rule would drastically and unnecessarily increase the regulatory burden placed on banks. The final rule could require banks to use deposits gathered from their local communities to make loans in places potentially thousands of miles away. The formulaic approach to scoring could result in decision-making divorced from the actual convenience and needs of a bank's community.
Banks also argued that the unnecessarily complex evaluation could force them to close branches or reduce product offerings.
In February 2024, a number of prominent bank trade groups sued in the U.S. District Court for the Northern District of Texas to block the new rule from coming into effect. In Texas Bankers Association v. OCC, U.S. District Judge Matthew Kacsmaryk ruled in the trade groups' favor and blocked the final rule, finding that it surpassed its statutory authority.
Noting that the final rule was "'by far the longest rulemaking' that the [FDIC] has ever issued," the court found that the regulators exceeded their authority by expanding the lending test to evaluate banks in geographic areas where they did not maintain physical branches. Moreover, the court rejected the agencies' contention that credit needs could be construed more broadly to include deposit products.
The final rule has been on hold since the court's ruling, and the federal banking agencies' notice of intent to rescind the rule puts an end to it from a practical perspective.
Return to Prior Framework
In light of this litigation and the change in presidential administration, the federal banking agencies decided to rescind the 2023 CRA final rule and return to the 1995 framework. The OCC has clarified that this prior framework includes the CRA final rule promulgated by the OCC in 2021 (rescinding the Trump-era OCC rule promulgated in 2000).
Federal agencies rescind rules through the rulemaking process under the Administrative Procedure Act. The April 7 bulletin explained that federal banking agencies will issue a proposal to rescind the final rule and seek public comment on reinstating the prior CRA framework.
Once the federal banking agencies formally rescind the final rule, banks will not be required to comply with the more stringent and complex tests that the final rule would have required. However, it is important to note that the problems that the final rule sought to address still remain. The old framework still struggles to address the innovations and changes in the banking industry, including internet and mobile banking.
Future of Federal Regulatory Oversight
The second Trump administration has signaled many changes for the future of federal regulatory oversight of financial institutions, so the future of the CRA is unclear. It is possible that the federal banking agencies may return to the 1995 framework and leave it as is, seek to reinstate the OCC's 2020 CRA rule, or propose new changes.
Rescission of the final rule follows a larger pattern of the new administration seeking to reverse regulatory actions taken under the Biden administration and reduce federal regulatory oversight. So far, the most significant efforts have been made by the Consumer Financial Protection Bureau under Acting Director Russell Vought.
In recent months, the CFPB dropped several lawsuits against large banks, announced that it will not enforce certain provisions of the payday lending rule and filed a motion to vacate a 2024 rule on credit card late fees. Many more changes in the federal regulatory landscape are likely to follow.
Implications
Covered financial institutions should monitor further developments and confirm that the federal banking agencies do formally rescind the final rule. Banks should also evaluate their compliance with the existing CRA framework;[1] keep abreast of new efforts to modernize CRA regulations moving forward; and continue to devote time, resources and energy to development and implementation of effective CRA practices. The current CRA framework consists of a lending test, a service test and an investment test, as well as certain assessment areas.
The lending test evaluates a financial institution's record based on its lending activity, geographic distribution, borrower characteristics, community development lending, innovative or flexible lending practices, and third-party loans.
The service test evaluates a financial institution's record by analyzing the availability and effectiveness of a financial institution's systems for delivering retail banking services and the extent and innovativeness of its community development services according to certain retail banking and community development services.
The investment test evaluates a financial institution's record based on qualified investments that benefit its assessment areas, or a broader area that includes the assessment areas, according to the:
- "Dollar amount of qualified investments";
- "Innovativeness or complexity of qualified investments";
- "Responsiveness of qualified investments to credit and community development needs"; and
- "Degree to which the qualified investments are not routinely provided by private investors."
Note that activities considered under the lending or service tests are not considered under the investment test.
Finally, financial institutions must delineate one or more assessment areas within which the appropriate federal banking agency evaluates the financial institution's record of helping to meet the credit needs of its community. Assessment areas generally:
- "Must consist only of whole geographies";
- "May not reflect illegal discrimination";
- "May not arbitrarily exclude low- and moderate-income geographies, taking into account the financial institution's size and financial condition"; and
- "May not extend substantially beyond a [metropolitan statistical area] boundary or beyond a state boundary unless the assessment area is located in a multistate MSA." If a financial institution "serves a geographic area that extends substantially beyond" a state or MSA boundary, the financial institution should "delineate separate assessment areas for the areas in each state," or outside the MSA.
Federal banking agencies assign a financial institution a rating — e.g., outstanding, satisfactory, needs to improve or substantial noncompliance — based on its performance under the lending, service and investment tests. Note that evidence of discriminatory or other illegal credit practices are considered in CRA evaluations. Performance standards will also vary based on the size of the financial institution.
For example, there is a separate community development test for wholesale or limited-purpose banks and saving associations, and separate performance standards for small banks and savings associations. As of Jan. 1, a small bank must have assets less than $1.609 billion. Large banks are banks with assets of $1.609 billion or greater.
A financial institution's performance in its CRA evaluations is important because such evaluations are made public and can have material impacts on the business operations of a financial institution. Federal banking agencies take such performance into account when considering applications for the establishment of domestic branches; the relocation of a main office or branch; the merger, consolidation or acquisition of another depository institution requiring approval under the Bank Merger Act; the conversion of a depository institution to a national bank or federal savings association; and certain acquisitions under the Home Owners' Loan Act.
[1] https://www.federalregister.gov/documents/2021/12/15/2021-27171/community-reinvestment-act-regulations.