Will the CRA political football be kicked to the Supreme Court?

The bank regulatory revolutionary war is at a critical inflection point.

Bankers in America’s most heavily regulated industry drew a line in the sand when the Community Reinvestment Act, which has been working fine since 1995, was poisoned with politics and denigrated to a national credit allocation scheme.

Like everything, CRA has become a very divisive Trump vs. Biden/Harris issue, so much so that it pitted red vs. blue states and bankers vs. regulators in federal court.

Banks have always complained about the regulatory burden of safety and soundness and compliance requirements like capital rules and the Bank Secrecy Act, or BSA, but they were devoid of politics. Bankers comply with capital rules regardless of their political persuasion, and we go after money launderers whether they are conservatives or liberals.

The 1977 CRA has always been an apolitical law, even when reformed in 1995. I had the honor then to work with Senator Proxmire, the “father” of CRA, and the Office of the Comptroller of the Currency on what we now refer to as the “Proxmire CRA,” because he was involved with and endorsed it. 

The 1995 Proxmire CRA, in effect today, has worked fine. Communities receive approximately $500 billion annually, community groups obtain $100 billion agreements with merging banks and 98% of banks pass their CRA exams.

Everything changed with the 2016 election of President Trump, who brought in bankers to run the Treasury Department and the Office of the Comptroller of the Currency. Instead of addressing BSA, the costliest compliance regulation, they decided to overhaul CRA, far down the list, because their previous banks had serious community group CRA problems.

They justified their regulatory overreach by using the modernization argument as a Trojan horse. Everyone agreed CRA should be updated to address branchless banks, since they were engaging in modern-day redlining or “weblining” of our big cities to the tune of about $40 billion annually.

The “Trump CRA,” a 372-page final rule produced in 2020, was criticized by the increasingly politicized Federal Reserve and its community group friends, who challenged it in a San Francisco federal district court.

President Biden rescinded  the Trump CRA and replaced it with the “Biden CRA,” a 1,494-page final rule, the most complicated and convoluted regulation in the history of American banking.

It was the handiwork of Fed Ph.D. economists, the vast majority of whom are registered Democrats, based on a reform proposal created by a Biden-appointed Fed vice chair who is now heading the White House’s National Economic Council.

The Trump CRA included a variant of the 5% deposit reinvestment rule to prevent weblining, but the Biden CRA ignores it. That “Robin Hood” rule requires banks to reinvest in the low- and moderate-income neighborhoods of any market generating at least 5% of deposits.

The Biden CRA backwardly focuses on where banks make loans rather than where they get deposits, thus ignoring CRA’s reinvestment purpose … and middle name.

Banks usually pass their CRA exam with at least a 50% loan-to-deposit ratio, assuming the majority of loans benefit their entire local community, including its LMI segment. Where and how a bank lends the remaining deposits outside its community is the bank’s business … until the Frankenstein final rule began evaluating and rating nationwide lending.

This credit allocation scheme takes these lending decisions out of a bank’s board room and puts it in the hands of Washington bureaucrats. A colossal shift from private to public decision making, pushing our capitalist banking system closer to a socialist one.

The Biden CRA punitively increases the current 2% CRA exam failure rate fivefold to 10%, with the Fed’s retail lending test projections driving the overall rating. Banks over $10 billion, many of which lend nationwide, will see their outstanding ratings shrink from 40% to just 10% based on these same Fed projections. Outstanding ratings at the largest banks over $50 billion will plummet from nearly 60% to 0%.

There’s no need for such a radical change to the Proxmire CRA, when all that is needed is the simple weblining fix. Regulators proselytize about fairness to bank customers, but a just economy also requires fairness to bankers.

The Biden CRA’s politically charged and unfair final rule left bankers no choice but to take their prudential regulators to court, the first time ever on such a large scale. Using terms like “misstate and misapply,” “miss the mark” and “misconstrue,” a federal district court’s injunction was highly critical of  regulators.

The regulators appealed, and supporting amicus briefs were filed by a “blue state” coalition, various community groups and a San Francisco area activist bank owned by a nonprofit. The industry countered with supporting amicus briefs filed by a “red state” coalition, an industry trade group and this author.

Misinformed members of Congress predictably supported the regulators’ appeal. In a blatant intimidation effort, they demanded names of banks supporting the legal challenge and amounts pledged.

‘Tis the season for fake CRA news.

The Fed, which cannot comment on litigation, is cleverly using its community groups and other friends to bash banks for supporting the litigation at recent and upcoming CRA conferences. The agency has denied this author’s requests to present an opposing view at these events. If you can’t convince a judge, then why not use your friends to convince bankers?

The circuit court’s decision can be appealed to the Supreme Court. A reelected President Trump, meanwhile, could rescind the Biden CRA, the same way President Biden rescinded the Trump CRA.

The best public policy solution, however, is a nonpartisan one keeping the current successful and apolitical Proxmire CRA but modernizing it with the 5% deposit reinvestment rule to eliminate weblining. This would allow bankers to get out of the courtroom and get back in their boardroom serving their communities and shareholders.