COMMUNITY REINVESTMENT ACT LITIGATION
Texas Bankers Association v. OCC
Date: March 22, 2024
Issue: Whether the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency’s final rules implementing the Community Reinvestment Act (CRA) exceed their statutory authority to warrant a preliminary injunction.
Case Summary: A Texas district court granted a preliminary injunction filed by the American Bankers Association and its co-plaintiffs challenging the agencies’ CRA final rules.
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. The final rules also add an Outside Retail Lending Area (ORLA) where regulators will evaluate all retail lending that is not in a facility-based assessment area 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.” As an example, the “Retail Services and Products Test” assesses banks on digital delivery systems and deposit products with certain low-cost or other features. But the CRA statute focuses on credit, not deposits. ABA also argued the final rules violate the APA because they are arbitrary and capricious. ABA explained that the CRA requires periodic evaluation of a bank’s CRA performance, but the final rules leave banks guessing about what areas will be assessed, which products will qualify for CRA evaluation and what benchmarks they must meet.
On Feb. 9, 2024, ABA moved the court for a preliminary injunction, arguing: It has a likelihood of success on the merits; 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 the final rules while the case is ongoing. In their opposition brief, the agencies contended: The CRA requires them to assess a bank in its “entire community,” which includes all geographic areas where the bank serves its customers; they have not exceeded their statutory authority by evaluating deposit products and services; and the CRA does not mandate only certain factors be considered in evaluating whether a bank is “meeting the credit needs of its entire community.” The agencies also claimed that ABA has not established associational standing.
In its reply brief, ABA reiterated it demonstrated a substantial likelihood of success on the merits. ABA claimed: The CRA does not authorize assessment of banks wherever they conduct lending; the agencies cannot rewrite the CRA in the name of modernization; and the agencies lack clear congressional authorization to evaluate banks’ performance anywhere they lend. ABA also contended the agencies’ argument that ABA lacks standing is unpersuasive, and ABA averred it demonstrated irreparable harm.
Judge Matthew Kacsmaryk of the Northern District of Texas granted the preliminary injunction. The injunction temporarily prevents the agencies from enforcing the final rules until the court reaches its decision on the merits. Additionally, the implementation dates for the final rules are extended for each day the injunction remains in effect.
At the outset, the court concluded ABA adequately pled associational standing. The agencies argued ABA lacked standing because it did not identify by name at least one member with standing, citing the Supreme Court’s decision in Summers v. Earth Island Institute. But the court explained Summers does not hinge on the anonymity of a declarant, emphasizing the Supreme Court has not adopted a “naming requirement” proposed by the agencies. The court also rejected the agencies’ argument that ABA could not challenge the provisions in the final rules pertaining to banks with over $10 billion in assets. The court referenced the Texas Bankers Association’s declaration explaining it has 20 members with over $10B in assets, concluding that was sufficient for all the co-plaintiffs to challenge these provisions.
Next, the court concluded ABA demonstrated substantial likelihood of success on the merits. The court agreed with ABA’s argument that the agencies’ reading of “entire community” clashes with the text of the CRA. In the court’s view, the CRA imposes obligations on banks to meet the credit needs of their communities where they have a physical presence and accept deposits. Further, the agencies tried to modify what a “community” is by using the word “entire. According to the court, “if a statutory community is created around every individual customer with whom a bank does business—regardless of whether a customer is within the geography of the bank’s physical presence—the term becomes meaningless and the statute ineffectual.”
The court also determined the CRA does not authorize the agencies to assess deposit products. The agencies argued the CRA “does not state that only certain factors may be considered in evaluating whether a bank is meeting the credit needs of its entire community.” The agencies also argued that they have reasonably explained why evaluating deposit activities is appropriate. However, the court explained that under the CRA, the agencies can only “assess the institution’s record of meeting the credit needs of its entire community,” and the CRA does not explicitly mention deposit products. What is more, the agencies argued they “articulated a rational relationship between deposit products and the ability to access credit.” But according to the court, the question is not whether “a sufficient nexus” exists, or whether the agencies evaluation of deposit products is a “good idea.” Rather, the question is whether Congress authorized the agencies to evaluate deposit products, and in the court’s view, “the totality of the statutory text weighs in the opposite direction.”
The court also reasoned the major questions doctrine weighs in favor of ABA. Following the Supreme Court’s decision in West Virginia v. EPA, the major question doctrine bars agencies from resolving questions of “vast economic and political significance” without clear statutory authorization. Applying West Virginia, the court underscored that “never before have the agencies claimed authority to assess banks wherever they conduct retail lending.” What is more, Congress has rejected the Community Reinvestment Modernization Act four times, which would have shifted assessment areas from surrounding deposit-taking facilities to areas where banks make loans. The court concluded these reasons “provide a powerful basis for applying the major question doctrine in favor of plaintiffs.”
Finally, the court determined ABA demonstrated a substantial threat of irreparable injury. ABA highlighted the substantial, unrecoverable compliance costs if the final rules are struck down. In its declaration, ABA detailed the complicated, time-consuming system overhauls and database updates required for its members to comply with the final rules. The agencies argued the compliance costs are de minimis. However, the court explained nonrecoverable costs of complying with an invalid regulation typically constitutes irreparable harm.
Bottom Line: The agencies response to ABA’s complaint is due April 12, 2024.
Documents: Opinion
