When the Supreme Court decided in favor of the plaintiff in Loper Bright Enterprises et al vs. Gina Raimondo it overruled its decision in Chevron v. Natural Resources Defense Council, the so-called “Chevron Decision” which has been in effect for more than 40 years and has deferred authority to federal bureaucrats regarding a federal agency’s interpretation of law when the statute is ambiguous. Chevron made it very difficult to successfully challenge an agency’s questionable application of a federal regulation and consequently vested incredible power in the federal bureaucracy. Effectively, it helped expand the federal administrative state.
The reversal of the Chevron ruling means it is very possible, if not likely, the 2023 rule pertaining to the Community Reinvestment Act (and Section 1071 of Dodd Frank which was saved by a presidential veto of a bipartisan Congressional Resolution to reject the new 1071 regulation – what better indication that regulators went too far in their regulatory version of Section 1071?) is doomed because the federal regulators made radical changes to the CRA rule and to Section 1071 that are arguably inconsistent with the statutes and with the agencies’ own history of enforcement of the CRA itself.
While I am not an attorney, I’ve been consulting about CRA matters for 30 years. I am completely familiar with the regulation and the agencies’ enforcement record. I’ve also read the complaint filed by the Texas Bankers Association, et al and find that facts cited in the complaint substantiate the complaint’s legal claims which indicates a very strong legal argument.
The 2023 version of the Community Reinvestment Act not only made radical changes to the CRA regulations, but it also mandates revisions that contradict how the statute has been interpreted and applied by the agencies for nearly 50 years.
What are the vulnerabilities of the 2023 Community Reinvestment Act regulation?
There are at least 2 major vulnerabilities of the new regulation as I understand the arguments and the supporting facts.
First, the statute itself mandates that banks have an affirmative obligation to meet the credit needs of the communities they serve. The statute does not authorize federal bureaucrats to evaluate depository services, nor has it ever been interpreted by regulators to apply to depository services. Now, after 47 years of regulatory enforcement, regulators have determined in the 2023 CRA that depository services are a part of a bank’s CRA responsibilities. Have regulators been negligent by omitting depository services as a CRA responsibility for 47 years?
Second, the statute and subsequent regulations and revised regulations always have considered a bank’s CRA “Assessment Area” to be limited by where a bank maintains depository facilities. In fact, 12 U.S.C. §2906(b)(1)(B) states that the agencies shall develop assessments that “shall be presented separately for each metropolitan area in which a regulated depository institution maintains one or more domestic branch offices”. The prudential regulators understood this because in the CRA regulations they developed they explicitly allowed only one exception to the deposit-taking facilities requirement for a CRA assessment area, and that sole exception has been for banks that predominately serve military personnel who are not located within a defined geographic area (12 C.F.R. § 228.41(f)). Why would an exception be needed if an assessment area were not restricted to facility-based markets?
As someone who has advised banks about CRA matters for 30 years I can say that the regulators’ insistence that every CRA assessment area must include at least one deposit-taking facility created serious problems for banks that developed market strategies that relied on LPO’s and other delivery systems. Frequently, that strategy, when successful created problems with the standards (the so-called “Assessment Area Ratio”) used to measure the adequacy of a bank’s lending within its CRA defined communities, specifically the mandate that at least the majority of a bank’s CRA-related lending activity must be within its CRA Assessment Areas. Nevertheless, regulators insisted that a bank could not delineate a CRA assessment area outside the market served by a bank’s deposit-taking branches, even when a bank operated facilities like loan production offices in another market. This is a problem not precipitated by the Internet nor by modern technology, but by the advent of secondary markets for conforming mortgages and SBA-guaranteed loans that have been around for 40 years.
The simple answer to this problem is not to contradict decades of enforcement predicated on branch-based markets, but to recognized that lending is no longer a zero-sum game wherein lending outside a bank’s community reduced its ability to lend inside its assessment areas if a bank were to rely on the secondary markets for funding those loans. A “retail lending volume screen” as contained in the new CRA regulations could address that flaw in the “Assessment Area Ratio” test without mandating “Retail Lending Areas” and “Outside Retail Lending Areas” as required in the new regulations.
In fact, one of the most radical provisions of the new regulations is the mandate to evaluate a bank’s lending anywhere it originates “major product line” loans, be it in Facility-based assessment areas, Retail Lending Areas or Outside Retail Lending Areas. Essentially, the new “local” communities in the 2023 CRA can include communities thousands of miles away from any deposit-taking branch operated by a bank. It’s common for a bank to extend credit to a customer for the purchase of a second home, outside of a bank’s CRA assessment area. These loans will have drastic implications for banks that may cause them to rethink loans of this type.
The justification for the new version of the regulations is “modernization”. But that term is only superficially mentioned in the proposed rulemaking and in the preamble of the revised 2023 CRA regulation. It’s assumed, without any documented evidence, that the new “digital” economy requires the radical changes to the CRA regulations that are incorporated into the new rule, even if it means enforcement that contradicts the 47-year history of CRA regulations. Perhaps virtual banks require amendments to the CRA regulations, but those changes should be limited to phenomenon such as Internet banks. In a depositor distribution study conducted by our company three years ago community banks continue to derive most of their deposits from the communities local to their bricks and mortar depository facilities. The advent of a new niche in the financial services industry does not necessarily justify jettisoning the 47-year history of regulatory enforcement for the entire industry.
If CRA needs to be modernized it’s the lawmakers who should initiate the change, not bureaucrats who have appropriated power to adopt regulations that are radically different from, and even a contradiction of, long-established regulatory enforcement history. The override of “judicial deference” to federal bureaucrats embedded in the Chevron framework points in the direction of judicial override of the new CRA (and Section 1071 regulations too). Time will tell.
