Bank regulators have announced their intention to repeal the 2023 CRA Rule. But it would be a mistake to stop there. For more than a decade there’s been a clamoring to “modernize” the CRA regulations. If the Administration should merely rescind the 2023 rule it would leave a vacuum regarding “modernization” of the legacy rule (1995).
Aristotle is claimed to have said, “Nature abhors a vacuum”. Something similar can be said with respect to bureaucrats (and politicians), “Bureaucracy abhors a vacuum”. This means that the claimed and unaddressed “need” to modernize CRA will remain as an opportunity for future bureaucrats under future administrations to justify and promulgate a “modernized” version of the CRA
We saw a view of what Biden Administration bureaucrats thought was a version of a modernized CRA, an overwhelmingly complicated 1,500-page rule that would require hundreds, and in some cases, thousands of calculations and expand scrutiny of a bank’s lending not just in the local areas where they maintain their deposit-taking branches, but anywhere in the country where a bank has extended a single “ major product line” loan.
As a regulatory compliance consultant since 1994, I’ve never seen a regulation so complicated that it could be described as “convoluted”. The 2023 CRA rule is not only a good example of filling in a perceived regulatory vacuum, but also an example of regulators cramming everything they could into that vacuum.
There may be a temptation to regard the reform of the CRA as a two-step process, with repeal now and reform later. But that would be a mistake too because changing a regulation is essentially a 2-to-3-year process involving development and publication of a “Notice of Proposed Rule Making”, acceptance and review of public comments, publication of a final rule, and implementation of the final rule. Litigation could delay the process even further.
This means any “modernized” version of the CRA will not be effective until the very end of the Trump Administration’s term at the earliest. This is exactly what happened during the Biden Administration; their 2023 CRA rule has an “applicable date” of January 1, 2026, which means the Trump Administration’s repeal of the 2023 rule will take effect before the activation of the 2023 rule has begun! Something similar could happen to anything the Trump Administration may do. So, it would be politically wise for the Administration to simultaneously repeal and replace the 2023 rule with a 2025 or 2026 CRA rule.
The real opportunity is not to “modernize” the regulation. The real opportunity is to improve the regulation. In previous articles I’ve identified and explained those opportunities. Almost all those possibilities would be very simple to implement and would make the CRA more effective and meaningful. In other words, there’s an opportunity to reform and improve the regulation. Now, that’s a vacuum that really should be addressed and should appeal to everyone, making it a winning political opportunity as well. In a future article I shall summarize the improvements that can be made to the CRA and would benefit banks and the communities they serve alike.
