Bankers must challenge the overly complex, Fed-driven CRA overhaul

When the comment period for the proposed overhaul of the Community Reinvestment Act closed in August, the vast majority of the 650 submissions expressed some concerns about it. But the 102 comments from the banking industry generally questioned or outright opposed it.

Having been involved with CRA since 1977 and especially the last major revision in 1995, I was surprised by the small number of comments. 

Ting Shen/Bloomberg

The 1995 reforms, spearheaded by the Office of the Comptroller of the Currency, took three years, because of continuing challenges by the Federal Reserve. It was the result of seven public hearings and 13,900 comments, approximately one per bank at that time.

The 239-page December 2019 joint OCC-Federal Deposit Insurance Corp. notice of proposed rulemaking (NPR) generated 7,500 comments (1.4 per bank), more than 10 times the 650 comments from the 679-page May 5, 2022, NPR (0.14 per bank).

Smaller number of comments on the current NPR is likely the result of a relatively short 90-day comment period provided for a very complex and lengthy document. It may, however, also be a reflection of CRA reform burnout.

The OCC's final rule under the Trump administration was rescinded, so perhaps the same fate awaits the Biden administration's current NPR with a repopulated Congress after the November midterm elections. Why bother commenting on a reform that may again be rescinded?

Billed as a "joint" effort, the current NPR was really the handiwork of the Fed, guided by Vice Chair Lael Brainard. With former Fed officials running Treasury and the OCC, the seemingly rudderless FDIC had no choice but to go along for the ride.

Full of equations and complex rules, the Fed-driven proposal reads more like a Ph.D. dissertation than something for CRA practitioners. Making matters worse, industry requests to extend the 90-day comment period were refused.

Just 16% of the 650 comments were from the industry, because bankers were understandably nervous about criticizing their regulators. Using the safety in numbers approach, one-third of the industry comments came from trade groups or took the form of joint comments.

The comments from the Bank Policy Institute and American Bankers Association stood out because they suggested a possible legal challenge. This would be similar to the legal challenge against the OCC's final rule filed by two community groups.

While the community groups' challenge had several legal arguments, an industry challenge to the current NPR would have a much stronger legal basis.

The Bank Policy Institute details three different legal arguments, starting with the fact that certain provisions of the NPR exceed the "bounds of the agencies' statutory authority." The NPR totally overhauls a successful law rather than simply modernizing it to account for branchless banks, the real purpose of reform.  The institute's example of a "radical departure from Congress's clear intent" is the NPR's focusing on where branchless banks make loans rather than garner deposits, the intent (and middle name) of CRA.

Second, the BPI documents how the NPR violates the Administrative Procedure Act. For example, it argues that "it would be arbitrary and capricious for the agencies to downgrade the ratings of a broad portion of the industry." The NPR does not demonstrate that it is "necessary or appropriate" to greatly expand the small- and large-bank asset thresholds to $600 million and $2 billion, respectively, to effectively safe harbor roughly 1,000 banks, not to mention the adverse community development consequences on their communities.  The procedure act requires consideration of "reasonable, less-onerous alternatives," the most obvious being maintaining the status quo and fixing the branchless- bank issue with the simple 5% deposit reinvestment rule.

Third, the institute describes how the NPR violates the Constitution's due process principle by failing to give banks "fair notice of the standards to which they will be held," by setting critical performance benchmarks "after the fact."

The legally required documentation of damages by community groups was weak compared to what banks can easily prove in terms of unnecessary regulatory burden, significantly lowered ratings, and reduced profitability using the Fed's own forecasts.

Exhibit A is the great concern raised by a Fed governor, a former banker. She not only properly questioned the NPR's cost-benefit trade-off but also the "significant costs and burdens" on banks over $10 billion in assets. Those 135 banks control 88% of all assets compared to the 32 banks over $100 billion controlling 75% of assets. Why unfairly burden the 103 banks with $10 billion to $100 billion of assets for the benefit of covering just 13% more of the industry?

Regulation and compliance

Blow up the CRA and start from scratch

June 22, 2022 9:47 AM

The two community groups certainly had the willingness to challenge anything related to the Trump administration and, thanks to the more than $500 billion of community benefit agreements they arranged, they easily had the ability.

The Bank Policy Institute and the banking industry certainly have the ability, but do they have the willingness to sue their regulators with the lurking possibility of regulatory retribution?

JPMorgan Chase Chief Executive Jamie Dimon, the institute's chair, knows this better than anyone based on his recent comment to a senator about the Fed: "Speaking for myself, they are my judge, my jury and my hangman. They can do whatever they want unless constrained by you."

I am hopeful that Dimon, as today's "banker's banker," like his predecessor J.P. Morgan, will spearhead the NPR's legal challenge in the same way the American Bankers Association and the Consumer Bankers Association recently sued the Consumer Financial Protection Bureau.