Two banking trade groups are calling for regulators to hold off on implementing a final rule on the Community Reinvestment Act, arguing the revised proposal should be delayed until the impact of increased capital requirements and a Consumer Financial Protection Bureau court case is known.
The Bank Policy Institute and the American Bankers Association last week said the two recent developments threaten to upend how banks design programs to ensure CRA compliance.
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency in July proposed regulations that would force the biggest U.S. banks to hold 19% more in common equity tier 1 capital, on average.
The trade groups said the new capital requirements would “materially affect key activities underpinning these banks’ CRA programs, leading to reduced credit availability and economic growth.”
“[T]he proposed capital rules would reduce incentives to engage in mortgage lending, which is central to the CRA programs of many banks,” the groups wrote in a letter to the Fed, FDIC and OCC last week.
The trade groups also noted that many community banks sell their mortgage loans to larger banks.
“If the capital rules reduce the risk appetite of larger banks to purchase these loans, mortgage lending by smaller banks could be impacted,” they wrote.
The groups also cited a constitutional challenge to the CFPB’s funding structure as another reason regulators should pause the implementation of the CRA revamp.
Earlier this month, a Texas judge granted a preliminary injunction — filed by the ABA, among others — saying the plaintiffs and their members are exempt from implementing the CFPB’s small-business lending rule until the Supreme Court weighs in on an appeal of a case scrutinizing whether the bureau’s funding is constitutional.
The groups said the injunction could delay many banks’ Section 1071 data collection and reporting — a key component in measuring CRA compliance — by as much as 10 months.
Some observers have called the trade groups’ request a tactic to run out the political clock on CRA reforms.
"I think the trades sending that letter … is just an attempt to continue to delay, which is really just an attempt to kill it," Jesse Van Tol, CEO of the National Community Reinvestment Coalition, told American Banker.
If the goal is to enact the updated CRA before the 2024 election, the Fed, FDIC and OCC would need to finalize it by the middle of next year, Ian Katz, an analyst with Capital Alpha Partners told the publication. Otherwise, a Republican administration and majority in both houses of Congress could nullify a regulation finalized up to 60 legislative days earlier through the Congressional Review Act.
The trade groups said regulators should allow the public to comment on the impact increased bank capital requirements would have on the new CRA rules. They also said the agencies should reevaluate the proposed CRA rules and consider proposing amendments for public comment to account for any such changes.
The trade groups’ request for the delay follows the joint revamp to the CRA that the Fed, FDIC and OCC proposed in May 2022.
The 1977 law, which was enacted to ensure banks are not engaging in discriminatory “redlining,” had come under fire in recent years because it hadn’t undergone a significant overhaul since 1995.
A previous attempt to revamp the law has also sparked debate in regulatory circles.
The OCC in May 2020, under Trump-era Comptroller Joseph Otting, pushed a 372-page revamp of the rule that drew criticism for not securing the support of the Fed or the FDIC. The pace at which the revamp was issued also garnered backlash.
In December 2021, Acting Comptroller Michael Hsu rescinded the CRA’s 2020 update, reverting the rule to its 1995 form.