Community Reinvestment Act Litigation
Texas Bankers Association v. OCC
Date: Feb. 5, 2024
Issue: Whether the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency’s (agencies) final rules implementing the Community Reinvestment Act (CRA) exceed their statutory authority and violate the Administrative Procedure Act (APA).
Case Summary: The American Bankers Association, Texas Bankers Association, U.S. Chamber of Commerce, Independent Community Bankers of America, Independent Bankers Association of Texas, Longview Chamber of Commerce, and Amarillo Chamber of Commerce (collectively ABA) sued the Agencies in the Northern District of Texas, challenging their final rule implementing the CRA (final rules).
In 1977, Congress enacted the CRA to reverse years of government policies and private market actions that deprived lower-income areas of credit due to redlining. The law encourages banks to lend to low-and moderate-income borrowers in local communities where they have a physical presence and accept deposits and not simply to borrowers in affluent communities. To achieve this, Congress required the agencies to assess the institution’s record of meeting the credit needs of its entire community. The agencies examine each bank periodically and issue written public reports. These reports include a rating that evaluates the bank’s CRA performance in each geographic area where the bank has its main office, branch office, or facility that accepts deposits. The geographic areas are known as “assessment areas” under the CRA and “facility-based assessment areas” (FBAAs) under the final rules.
On Oct. 24, 2023, the agencies issued the nearly 1,500-page final rules. Aside from several technical modifications, the final rules introduce major changes to the CRA regulations in four key areas: the delineation of assessment areas; the overall evaluation framework and performance standards and metrics; the definition of community development activities; and data collection and reporting. The final rules require large banks (banks with over $2 billion in assets) to designate a new type of assessment area called a retail lending assessment area (RLAA), where the agencies will evaluate a bank’s lending outside of its physical branch network. RLAAs are triggered when a bank originates more than 150 closed-end mortgages or 400 small-business loans. Banks that conduct more than 80% of their retail lending within their FBAAs are exempt from the RLAA requirements. The final rules also add an outside retail lending area (ORLA) where regulators will evaluate all retail lending that is not in an FBAA or an RLAA. The final rule provides four new tests under which large banks may be evaluated and a new framework for assigning conclusions and ratings of banks’ performance: retail lending test, retail services and products test, community development financing test, and community development services test.
In its complaint, ABA argued the final rules violate the APA because they exceed the agencies’ statutory authority under the CRA, which is limited to assessing a bank’s “record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operation of such institution.” ABA claimed the agencies ignored the geographic limits of the CRA because the RLAAs and OLRAs have no connection to a bank’s physical deposit-taking presence. The CRA uses “community” in the ordinary sense, meaning as a delineation of a local geographic area around a bank’s deposit-taking facilities, like a branch or ATM that takes deposits. In the final rules, the agencies interpret “community” to encompass large areas where banks have no deposit-taking footprint.
ABA also argued the retail services and products test in the final rules assesses banks on digital delivery systems and deposit products with certain low-cost or other features. As a result, the final rules impermissibly assess banks on products or services that are not “credit.” The CRA instructs the agencies to assess a bank’s record of meeting the “credit needs” of its entire community. Congress knew the difference between deposit needs and credit needs and its choice to focus on credit needs cabins the agencies’ authority. Above all, ABA emphasized the agencies have no authority to assess an institution’s deposit products under the CRA.
In addition, ABA argued the final rules violate the APA because they are arbitrary and capricious. The APA requires an agency to examine relevant data and articulate a satisfactory explanation for agency action, including articulating a rational connection between the facts found and the choice made. ABA emphasized the final rules fail to give banks reasonable notice of the areas and products to be assessed and the market benchmarks against which their performance will be evaluated. ABA also argued the agencies did not adequately consider the real-world consequences of the final rules. For instance, the final rules did not consider the extent to which the cumulative effect of heightened performance measures and the construction of RLAAs and ORLAs could reduce product and service offerings in certain markets. Moreover, ABA argued the agencies failed to conduct a reasoned cost-benefit analysis, emphasizing the final rules subject many banks, particularly intermediate and large banks, to significant compliance burdens.
On Feb. 9, 2024, ABA moved the court for a preliminary injunction. In its motion ABA argued that: There is a substantial likelihood of success on the merits because the final rules exceed the agencies’ statutory authority; there is a substantial threat of irreparable harm absent injunctive relief; and the balance of equities and the public interest weigh in ABA’s favor. ABA asked the court to stay (pause) the final rules while the case is ongoing.
Bottom Line: The agencies must respond to ABA’s motion for a preliminary injunction by March 8, 2024.
Documents: Complaint
