Federal Lawsuit Delays New Community Reinvestment Act Rules, Leaving Banks in Limbo

Sylvia C. Brown, in blue with megaphone, marched at a King Day eventin Hope. A social impact advocate and public policy strategist, she believes a Community Reinvestment Act update would benefit many Arkansans. [Steve lewis]

A federal legal battle has held up long-awaited rules to update the Community Reinvestment Act for nearly a year, leaving banks in uncertainty.

Since Jimmy Carter signed it in 1977, the CRA has required federal agencies to review thousands of banks’ efforts to meet the credit needs of their communities, particularly low- and moderate-income areas. Congress passed the law to address redlining, a once-common practice of refusing credit in areas deemed “too risky.” Most often, “risky” borrowers were minority borrowers.

The new CRA rules, published Feb. 1, 2024, were set to be the first significant update of community banking requirements since 1995.

But the Texas Bankers Association, joined by the American Bankers Association, the U.S. Chamber of Commerce and others, filed suit only nine days later to stop enforcement of the new rules.

The most recent enforcement deadline is Jan. 1, 2026, but first, the courts must decide whether the rules will even survive as written.

In March, U.S. District Judge Matthew Kacsmaryk of Amarillo granted a preliminary injunction enjoining the federal agencies from enforcing the banking rules until the case can be heard.

The Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp. appealed the injunction in July, and the plaintiffs in September asked the 5th U.S. Circuit Court of Appeals to uphold the injunction.

Meanwhile, the three defendant agencies are continuing to assess banks under the old rules, which community groups and nonprofits consider ripe for an overhaul.

“The CRA was created to make sure that banks are participating in the communities where they have branches, and that we have a certain amount of community development loans, services like volunteer hours, and investments,” said Ashley Roach, senior vice president and compliance officer for Stone Bank in Little Rock. “We have to have investments that qualify under the law to help these low- and moderate-income areas.”

Roach and other bankers praise the law as it has been enforced. Kacsmaryk’s order cites evidence that in 2022 alone, “banks provided more than $227 billion in capital to low- and moderate-income individuals and businesses.” The order also noted that in the same year, banks granted “an additional $151 billion in community development loans.”

But the industry fears the proposed rules will bring costly new compliance burdens. The complex requirements also go beyond the law’s language, opponents say.

The lawsuit plaintiffs argue that the CRA requires banks to be tested only on their performance in the communities where they accept deposits; the revisions would expand the assessment areas to “other geographic areas where a bank conducts retail lending.”

Kacsmaryk, who is known for his conservatism, found that the plaintiffs had a “substantial likelihood of success” in challenging the agencies’ “entire community” reading.

He also agreed with the plaintiffs’ objection that the new rules would give regulators unlawful new powers to score banks on how their deposit products benefit low-income areas. The judge’s injunction order found that the CRA covers banks’ credit activities, not their deposit practices.

Roach, of Stone Bank, hopes that new final rules will offer clarity on compliance, but that is not certain. The lawsuit plaintiffs suggest that the final rule, if it survives challenge, would add a new level of red tape for compliance professionals.

FDIC Director Jonathan McKernan dissented when his agency voted in favor of the final rules in 2023.

In his dissent, he said the “approximately 60,000 words of rule text (including appendices), which contains more than 40 benchmarks and 20 metrics, are enough to preclude anyone from comprehending the rule as a whole.”

He added that far from being final, “big chunks of the rule remain works in progress.”

Social impact advocates and policy strategists like Sylvia C. Brown of Hempstead County support CRA modernization. She called the challenged new rules “an effort to add the intersections of community health and community development” to the scope of the lending law.

For one thing, extending the CRA’s purview to digital banks could fuel investment in lower income communities, businesses and projects, Brown said.

“The new rule pertaining to the Community Reinvestment Act is trying to modernize a 30-plus-year- old regulation,” she said. “It’s trying to allow regulators to respond to a changing financial industry landscape where there’s more access to digital banking, and seeking ways to ensure that digital banking institutions are also investing in the communities where they are claiming customers.”

The delayed final rule includes broadband projects as a “primary purpose” for community development investments. The change would put broadband on equal footing with affordable housing, economic development, community support and essential community infrastructure as a staple of CRA lending and investment. The new rule would also emphasize broadband project loans in the CRA’s “community development finance” test.

Brown wants CRA efforts “to be more intentional and long-term in investments that really change the lives of and outcomes in communities.” She urges banks to look beyond simple philanthropy, to go beyond sponsoring community programs or youth sports leagues.

“Let’s really look at the health of our community and at how that community can thrive,” she said. To address housing inequities, CRA bankers could “dig deeper into having some real impact, becoming critical partners in the long-term health of communities with their investments.” Embracing innovation would be a good first step.

Brown worked in the early 2000s for former U.S. Sen. Blanche Lambert Lincoln and former U.S. Rep. Mike Ross, so she knows the power of advocacy. She said south Arkansas must confront a “housing gap” and seize opportunities for home rehabilitation, energy-efficiency upgrades and new affordable housing developments.

CRA lenders need to partner with organizations like the Women’s Business Enterprise Network and the U.S. Black Chamber of Commerce on community projects in Arkansas, she suggested.

The CRA lawsuit is a touchy subject for some bankers.

Officials at Arvest Bank of Fayetteville declined to be interviewed for this article “because the new CRA rule is being challenged in the courts,” spokeswoman Tara Muck told Arkansas Business in an email. Other banks also declined to comment, and some did not respond to interview requests.

The industry groups in the lawsuit — the ABA, U.S. Chamber, Independent Community Bankers of America, Texas Bankers Association, Independent Bankers Association of Texas, Amarillo Chamber of Commerce and Longview Chamber of Commerce — issued a joint statement welcoming the pause in implementing the new rules.

“While we strongly support the goals of CRA, the Final Rules exceeded the banking agencies’ regulatory authority and created disincentives for banks to lend in low- and moderate-income communities that need access to credit the most,” the statement said. “We look forward to litigating this matter to a final judgment.”

Roach said the CRA has been good for Stone Bank because it serves distressed and underserved areas.

“We have a branch that’s in a distressed area up north,” she said. “So a lot of the loans that we make up there qualify [as CRA loans] for that reason.”

She said there’s no question that CRA uncertainties are a headache for banks’ compliance officers. “It’s very time-consuming and difficult,” she said. “It’s a burden, definitely. But it’s also job security.”