The Trump Administration officially has announced it intends to emphasize “deregulation” with a focus of eliminating 10 regulations for every new regulation. Eliminating regulations is one thing, but enforcement is another matter. Roy Cohn, who advised Trump early in his business career, once said, “Don’t tell me what the law says, tell me who the judge is”. With respect to regulations it might said, “Don’t tell me what the regulation says, tell me who the regulator is”.
During President Biden’s first term his Attorney General, Merick Garland, announced the “Combatting Redlining Initiative” which relied heavily upon the concept of “disparate impact” as measured by statistical analysis. When the initiative was implemented, in many cases it depended on reversing the history of how a “Reasonably Expected Market Area” or “REMA” was defined. REMAs were critical to the prosecution of many redlining allegations because the definition of the markets in which the alleged redlining was happening was unrealistically large or had geographically dispersed subcommunities that should have been evaluated separately instead of being merged into one mega REMA. Insisting on an unreasonably large REMA set up some community banks for redlining allegations. Nothing in the regulations changed. What was changed was how the regulations were interpreted and enforced.
From my practice as a bank regulatory compliance consultant, I’ve seen indications that, “deregulation” notwithstanding, including the termination of the application of the concept of “disparate impact” in particular, regulators are continuing aggressive enforcement of the Community Reinvestment Act regulations and fair lending laws, sometimes in a way that contradicts the emphasis on deregulation by the Trump Administration.
During the last 3 months I have had one bank client tell me their bank regulator is dropping an allegation of redlining based on “disparate impact” analysis and will now be pursuing that allegation as a matter of “disparate treatment”. I am very familiar with the situation and the detailed facts, and I consider the redlining allegation to be completely bogus. So, the Trump Administration wants to reduce or eliminate the application of the “disparate impact” theory, and the regulator is substituting allegations of “disparate treatment” for its original allegations of disparate impact. If the bank were guilty of disparate treatment, why wasn’t disparate treatment alleged right from the beginning?
That’s not the only example of a regulator contradicting the Administration’s deregulation agenda that I’ve seen in recent months. Today I spoke to another community bank that was coerced by examiners into agreeing to expand its CRA assessment area by annexing communities where the bank has no branch presence nor any branches nearby. The Community Reinvestment Act explicitly states in 12 CFR §345.41(d) that “A bank may adjust the boundaries of its assessment area(s) to include only the portion of a political subdivision that it reasonably can be expected to serve. An adjustment is particularly appropriate in the case of an assessment area that otherwise would be extremely large, of unusual configuration, or divided by significant geographic barriers”. Moreover the “Q&As” published by the regulators with respect to the CRA also clearly indicate a bank may make such adjustments to its assessment area.
The bank, in this instance, had maintained its assessment area for years without criticism by regulators, but now examiners insist that the bank annex an unrealistic expanded “assessment area” where they have no presence. The bank was threatened with a downgrade of their CRA rating and a referral for violating the regulation (i.e., “redlining”) if they did not comply with the directive from examiners. This means the bank will be evaluated on unrealistic market performance benchmarks in future exams. Again, there’s been no change in the regulation, but this instance suggests there’s been a change in enforcement contrary to the Administration’s directive.
So, any promised relief for banks from the regulatory burden by the President may be contradicted by more aggressive enforcement by the bureaucrats.
This may be another version of Cohn’s advice:
Don’t tell me what the regulation says, tell me what the regulator does!
