Regulators begin process of undoing 2023 CRA regualtion

Federal regulators have formally begun the process of nullifying their 2023 update to implementing regulations for the Community Reinvestment Act, a Civil Rights-era anti-redlining law that requires banks to invest in the communities they serve.

The Federal Reserve Board, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency issued a proposal on Wednesday to rescind changes they implemented to the Community Reinvestment Act just two years ago.

If finalized, the rule change would revert the agencies to their 1995 CRA framework.

The move comes as the CRA reforms face ongoing litigation from bank groups and as President Donald Trump’s appointees to the banking agencies chart a new course for bank oversight. 

Agency heads had announced their intentions to roll back the 2023 CRA changes earlier this year, but unlike other Biden-era bank policies — some of which were never finalized while others were issued as guidance — undoing them requires conducting a formal notice-and-comment process.

The Federal Reserve Board voted unanimously in favor of rescinding the rule change. It is the first rule proposal to garner support from all seven board members this year, as Fed Gov. Michael Barr has dissented from many regulatory initiatives since stepping down as vice chair for supervision in February. Fed Gov. Adriana Kugler has joined him in voting no or voicing concerns on a few matters, too, but both supported this effort without comment.

Current Fed Vice Chair for Supervision Michelle Bowman, in a written statement released alongside the announcement, said the 2023 revisions were ill-conceived, unnecessary and likely illegal. 

“As I noted at the time, the 2023 final rule likely exceeded the statutory authority of the agencies and was unnecessarily complex, overly prescriptive, and contained disproportionately greater costs than benefits, adding significantly greater regulatory burden for all banks, but especially for community banks,” Bowman said. “The rule was premised on an assumption that banks were not doing enough to meet the credit needs of their communities. Yet, banks have a deep commitment to supporting their communities and continue to meet the letter and spirit of the CRA statute.”

Congress passed the CRA in 1977 in response to de facto lending discrimination against underserved Americans, predominantly among communities of color. The law directs agencies to grade banks on how equitably they are lending to low- and moderate-income customers and neighborhoods in their service areas — areas that are determined based on where banks have branches and deposit-taking automated teller machines. Banks seeking to merge or acquire other firms must receive a satisfactory mark in order to receive regulatory approval.

During the Biden administration, the federal banking regulators finalized the first comprehensive overhaul of regulations implementing the 1977 law since 1995 — expanding assessment areas, clarifying eligible community development activities and introducing more rigorous evaluations for large banks. 

The proposed standards would have required banks to lend to lower-income communities in areas where they have a concentration of mortgage and small-business loans, rather than strictly where they have physical branches — a change that aimed to account for an increasingly mobile banking ecosystem. The rules were also delayed by pending litigation challenging the proposed rewrite.

Several banking trade groups — including the American Bankers Association, Independent Community Bankers of America, the U.S. Chamber of Commerce, the Texas Bankers Association and the Independent Bankers Association of Texas — filed a lawsuit in February last year in the Northern District of Texas attempting to block the final rules. The suit argued the agencies exceeded their statutory authority when they finalized their amendments. 

In April 2024, a federal judge in Texas issued a preliminary injunction against enforcing the new rules pending the outcome of the banking groups’ case. While the Biden administration asked the 5th Circuit to lift the stay, arguing that the injunction was unwarranted and that the lower court erred in its interpretation of the underlying statute, the litigation was left unresolved at the time of President Trump’s election in November.

Regulators announced their intention to rescind the Biden-era Community Reinvestment Act rules in March, citing the litigation and the 5th Circuit agreed to pause the case while the agencies worked to unwind the revisions to the rules shortly after the announcement.

The 90s-era CRA rules — which have been in effect even after the 2023 update was finalized because of the banks’ lawsuit — had not had a major effect on household credit access, according to a 2023 study by the Federal Reserve Bank of New York. While the study showed the act’s implementation drove more mortgage activity overall to low-income areas, this did not drive greater borrowing outcomes — saying banks fulfilled CRA obligations by purchasing loans from CRA-exempt nonbanks rather than expanding credit. 

Critics have also decried “double-counting” under the current CRA — cases in which multiple banks receive credit for the same loan — and have called for giving more weight to loan originations than loan purchases, as well as applying CRA standards to nonbanks. With 98% of banks passing CRA exams, experts say the law lacks teeth and transparency without substantial reforms.

Ongoing litigation has prevented the new rules from going into effect. Because of this, the proposal notes, the impacts of reverting to 1995 standards are expected to be “de minimis.”

The proposal will be open for public comment for 30 days following publication in the Federal Register.