Federal regulators’ move to rescind recently-revisited Community Reinvestment Act rules marks a setback for community lenders and dims prospects for a durable overhaul to the way regulators think about banks’ obligations to the communities they serve.
But while the rollback puts a drawn-out legal fight over the revamped CRA rules to rest and provides banks with certainty, it also abandons parts of
“This — now about to be rescinded — final rule had components that expanded, to a certain extent, what banks could be credited for in the CRA — like renewable energy. Trying to expand what can be counted, without it becoming punitive, could be useful,” said Greg Lyons, a partner with Debevoise & Plimpton. “However, I do think the industry does well with fairly clear, bright line rules that aren’t too burdensome, so I think [returning to a system based on] where the branches are, makes sense.”
Congress passed the CRA in 1977 as a way to address de facto lending discrimination against communities of color. The act requires that banks be graded on how equitably they are lending to low- and moderate-income customers and neighborhoods in their service areas, typically determined by where they have branches and deposit-taking automated teller machines. Banks need to receive a satisfactory mark in order to merge with or acquire other banks.
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The industry-led suit argues that the Federal Reserve, the FDIC and the OCC exceeded their statutory authority when they
The heads of the Trump administration’s banking agencies have taken steps to rescind a number of regulations enacted in the last administration, including the new CRA rules. The Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. in March announced plans to rescind the 2023 overhaul amid legal challenges from industry groups, signaling a retreat from one of the Biden administration’s major financial inclusion reforms. Acting Comptroller of the Currency Rodney Hood has argued the move will put the legal battle to rest while they can contemplate more sensible changes to update the current rules, which are over two decades old.
“We wanted to move forward with the litigation without creating uncertainty for the regulated entities who were still wondering which standard to follow,” Hood said in an interview. “So now they’re following the 1995 version of the rule — what we’re doing now gives more certainty.”
Hood, who before public service was previously a CRA officer at NationsBank — now part of Bank of America — drew on his experience overseeing community reinvestment from the bank’s Charlotte headquarters to defend the rollback, saying the move provides clarity amid ongoing litigation.
“I’m a full proponent of the Community Reinvestment Act. I know what it’s like to help a bank serve its community through the investment portion, the service portion, and the lending portion and those are all critically important,” he said. “And essentially, what we’re doing is we’re going back to the existing standards until perhaps CRA gets reexamined.”
Bank industry trade group the Bank Policy Institute celebrated the rule’s rollback, saying the move was sensible and signaling the industry prefers the status quo over a rule they argue is onerous.
“[The] action signifies a welcome return to the longstanding approach to the CRA,” BPI said in a statement. “The 2023 rule went beyond the statute set by Congress and risked exerting undue influence on how banks allocate credit and undermining the goals of the CRA.”
However, some community-minded bankers like Randell Leach, CEO of Beneficial State Bank, voiced concern with the rollback, noting the financial sector waited years for a clearer regulatory framework that also accounts for modern banking practices.
“This regulatory rollback means we continue to operate under an outdated framework designed for a banking system that no longer exists,” Leach said. “We urge regulators to swiftly develop a new modernization proposal that builds on the strengths of the 2023 rule while addressing its limitations.”
Despite its mission to reverse discriminatory lending, the Community Reinvestment Act rules — last updated in 1995 — have not had a major effect on household credit access, according to a
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 weighting loan originations more than purchases as well as applying CRA standards to nonbanks. With 98% of
The CRA’s current implementation has been criticized by the banking industry and community groups alike for not applying to nonbank lenders or credit unions, which have become significant sources of residential mortgage loan originations. Hood says that could be part of any further discussions of a slimmed-down CRA revamp.
“There are those that may think that as we have emerging technologies and new fintechs getting engaged in the lending space, that perhaps they too should be engaged with the Community Reinvestment Act, and I would tend to support that,” Hood, who served as the Chair of the National Credit Union Administration board during the first Trump administration. “If you are a deposit-taking institution, then there should be that component.”
Lyons pointed out that the 2023 CRA rule had included some sensible and useful provisions that banks supported, like more flexibility and clarity about which types of activities qualified for CRA credit. For now, he says, the lawsuit is likely to stall until regulators formally rescind the rule once and for all.
“I do think there are areas that you could focus on, for example if institutions are engaged in various renewable energy programs — I mean, maybe that’s something that could be improved upon,” he said. “The lawsuit, I think, will continue until the because there’s always a concern that somebody changes their mind and the rule stays in place … the basis of the lawsuit becomes moot when the rules are kind of more formally rescinded.”
With the prospect of a modernized CRA now uncertain, advocates for community financial health like Jesse Van Tol, President of the National Community Reinvestment Coalition are reconsidering where reform can take place. He suggests that the evolving landscape of CRA could shift from Washington to state capitals, where local governments have more flexibility to address issues specific to their communities.
“I think one avenue for thinking about how CRA needs to change and evolve will happen through state-level action,” Van Tol explained, adding that several states — including Illinois and New York — have their own CRA statutes, and others like California and Maryland are considering similar measures.
Leach of Beneficial State says he’l continue to call for a sensible and durable remedy that modernizes federal anti-redlining regulations is good for banks and communities alike.
“Despite the previous opposition of the banking lobby to these reforms, I hope financial sector leaders will join Beneficial State Bank in advocating for a simpler, more effective CRA that better serves all communities,” he said. “A strong, modern CRA that expands access to financial services will ultimately benefit banks’ bottom lines, while generating economic growth and prosperity across the country.”