WASHINGTON — Banking groups asked for a longer time frame and significant changes to the rewrite of the Community Reinvestment Act, suggesting that legal challenges could be around the corner if bank regulators plow ahead.
The comment letters from bank trade groups, submitted before the regulatory deadline last Friday, represent a shift in tone for the industry, which was
But after months of reading the nearly 700-page overhaul proposed by the Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency, banks criticized myriad elements, including the potentially tougher CRA exams, adjustments for online-based lending and the regulators' timeline for finalizing and implementing the new rule.
Bank complaints
"A 90-day comment period for a 700-page proposal that makes sweeping changes to the CRA framework, contains 180 questions and poses numerous alternatives, and yet proposes a 12-month implementation period for the final rule, suggests that the agencies are not seeking informed feedback on the rule, and instead are preparing to issue a final rule quickly with the goal of implementing it before a possible administration change in 2025," the American Bankers Association said in its comment letter.
Regulators denied a request by 10 banking organizations to delay the proposal's comment period by 30 days, which would have pushed it to the end of September, the ABA said.
"We do not understand the agencies' rationale in denying this request or why the agencies are proceeding with a comment period that is too short relative to the scope and magnitude of changes being proposed," the trade group said in its letter.
The trade group said that if the rule is finalized as proposed, and absent any additional explanation or "meaningful opportunity to comment," it could be challenged.
"A legal challenge will ultimately sow confusion, further delay modernization, and possibly delay implementation of the provisions all stakeholders agree will advance certainty and consistency for industry and communities alike," the ABA said. "These results serve no one."
Regulators have repeatedly said that CRA exams would become more difficult to score highly on under the new rewrite. In the proposed rulemaking, regulators estimate that 9% of banks with assets of $10 billion to $50 billion would have received "Needs to Improve" ratings from 2017 to 2019 based on the retail lending test conclusions under the proposed rule, while 4% of banks with assets over $50 billion would have had the same.
The Bank Policy Institute hinted that this could be used to nullify the law, arguing that the proposal would have a "significant risk of legal challenge if finalized in its current form."
"According to the agencies' own calculations, the stringency of the Retail Lending Test would lead to widespread downgrades of large banks' performance, a result that the agencies do not rationalize or adequately explain and that could therefore make the Proposal vulnerable to a challenge that it is arbitrary and capricious," the institute said in its comment letter.
The letter notes, in a footnote, that the Administrative Procedure Act, directs the courts to "'set aside agency actions, findings, and conclusions' that exceed the agency's authority, fail to comply with procedural requirements, or are 'arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.' "
Smaller banks also raised concerns about the stricter examinations.
"We are concerned that, relative to the current exam framework, the proposed rule would result in a much higher percentage of the banking industry being assigned low ratings which would portray the good work done by small and medium sized banks in an unfairly negative light," the Independent Community Bankers of America said in its comment letter.
The group suggested that it would help to change the wording of the "Low Satisfactory" score to simply "Satisfactory," but asked that regulators lower either the market or community benchmark levels for "Needs to Improve" on the retail lending test.
Banking groups also took issue with the way the proposal suggests incorporating online lending into CRA exams. Under the proposal, regulators would still use "facility-based assessment areas" as the primary factor for determining if banks are meeting their CRA obligations. Large banks would also consider areas where they have a concentration of retail loans and aggregate activity in low- and moderate-income across the entire country. The agencies also call for large banks to be able to consider community development activity regardless of where it takes place as a separate metric.
BPI asked that retail lending assessment areas and outside retail lending area concepts be optional in the final rule, saying that the changes to inadvertently disincentivize lending in some low- to moderate-income areas.
"It takes time and dedicated resources to build meaningful CRA infrastructure in a given geography," the trade group said. If making retail loans outside a bank's facility-based assessment areas could give rise to a stringent distribution analysis in new separate geographies, banks would have a strong disincentive to offering lending products in many places outside their facility-based assessment areas where they lack these resources. As a result, underserved communities could suffer from a constriction in the availability of credit."
The ABA said that large banks that lend online should be evaluated "at the bank level," rather than each bank being rated in individual geographic areas where they make loans by comparing their digital lending to the lending of other banks, including those with branches in the area.
"That misses the point — virtual lending is not local in its nature, and should be evaluated at the bank level rather than in multiple locales across the country," the ABA said. "In effect, the proposal is the regulatory equivalent of trying to put a square peg into a round hole — it just doesn't work."
Community group qualms
Community groups had their share of concerns, although they demonstrated more support overall for the proposal.
The National Community Reinvestment Coalition asks that the CRA explicitly consider bank activity by race or ethnicity — a request that would be legally tricky. The bank regulators' proposal sidesteps this issue by calling for large banks to disclose the racial and ethnic background of their borrowers, a move that they hope will provide more transparency to the public about what groups are getting access to credit.
"As important as these proposed changes are, they fall far short of the measures needed to remedy the persisting legacy of discrimination in the areas covered by the CRA," the coalition said in its comment letter. "Ongoing disparities and patterns of discrimination continue, against a backdrop of systemic racism that has plagued our nation for centuries."
The reinvestment coalition also requests that regulators crack down on bank-fintech partnerships in their CRA exams: "We ask the agencies to expand upon their proposal to include partnerships with banks and nonbanks for retail lending. When a bank partners with more than one non-bank, the lending of all the non-banks needs to be totaled together for calculating if the threshold is exceeded for purposes of creating assessment areas."
Better Markets also criticized the proposal's attempt to modernize based on online activity, although the group suggests that assessment areas be based on where deposits are taken, not necessarily where lending activity occurs.
"It will possibly if not likely result in banks choosing more affluent areas that are not tied to physical locations for making loans or even pushing for a faster transition to electronic banking to take advantage of being able to receive credit on CRA examination for taking deposits from one location and using them to invest in another," Better Markets said in its letter. "Put differently, this will be easily gamed by banks which will continue to get high CRA scores while still not achieving meaningful results for the intended beneficiaries."
