For bankers facing the new CRA rule, it's time to 'Fight the Fed'

Vitalii Vodolazskyi - stock.adob

"Don't fight the Fed!"

Good advice for investors, but bad advice for bankers facing the most complicated and convoluted regulation in the history of American banking.

Banking trade groups and Texas bankers took the courageous but necessary step of legally challenging the Federal Reserve's politically motivated Community Reinvestment Act final rule.

Good public policy means fair lending and fair banking, but neither is possible with unfair and  politically tainted regulations preventing banks from meeting the needs of their communities and shareholders.

It is fitting this litigation is during a deeply divided election year. For the first time, CRA has become a political football. The major overhauls first in the Trump CRA and then the Biden CRA, while wildly different, were totally unnecessary. CRA only needs to be modernized for digital banking to prevent weblining, modern day redlining by branchless banks.

CRA was working fine since its last major 1995 reform, which Senator Bill Proxmire, the "Father of CRA," supported. That 1995 "Proxmire CRA" stood the test of time and results in about $500 billion of annual community benefits, $100 billion of community benefit agreements with merging banks and a 98% CRA exam passing rate.

While working fine for communities and most banks, it was not working fine for two ex-bankers who former President Trump tapped to run the Treasury Department and its Office of the Comptroller of the Currency. They came to Washington with a CRA chip on their shoulder as a result of tremendous community group difficulties involving the purchase and sale of their former bank, IndyMac/One West.

They obediently followed Trump's deregulation agenda but attacked the wrong reg. According to a Fed study at that time, the Bank Secrecy Act was, by far, the No. 1 most burdensome regulation. CRA was far down the Fed's regulatory burden list at No. 6.

Trump's get-CRA regulators used the "modernization" excuse to reform CRA by issuing an Advanced Notice of Proposed Rulemaking, or ANPR, in August 2018; an NPR with the FDIC in December 2019; and the final "Trump CRA" rule (without the FDIC) in May 2020.

Unlike the 1995 reform where all regulators eventually worked together, the Fed was noticeably absent and came out with its own ANPR in September 2020. The Fed's CRA architect, a "liberalish" Democrat and supporter of President Biden, reportedly desired to run Treasury and the Fed.

Biden didn't give her either job but instead made her Fed vice chair and later head of his National Economic Council in the White House. He then appointed a politically savvy academic, who served in two previous Democratic administrations, as the Fed's new CRA czar.

Biden cemented his Fed ties by reappointing the current Fed chair and appointing the former Fed chair to head Treasury who, in turn, appointed a former Fed official to run the OCC. It is no secret that for every Republican economist at the Fed, there are more than ten Democrats.

The Biden-influenced, re-regulating and some would say "woke" Fed became the new alpha regulator, and Trump's CRA was rescinded in December 2021. The Fed issued a joint NPR in May 2022 based on the previous ANPR, and the final "Biden CRA" rule was released in October 2023, with the OCC and FDIC compliantly tagging along.

Not surprising, the only former banker on the Fed and two FDIC directors, all Republicans, strongly opposed the Biden CRA's cost/benefit and other unintended consequences.

CRA had become just another brick in the polarizing political wall.

Regulation and compliance

Regulators reaffirm commitment to embattled CRA reforms in personal terms

Top banking regulators reaffirmed their commitment to bolstering the Community Reinvestment Act despite a court challenge, emphasizing their personal dedication to seeing the rule implemented.

By Ebrima Santos Sanneh

March 5

The only bright spot in the competing CRAs was the 5% Deposit Reinvestment Rule in Trump's CRA. It required banks to reinvest in communities sourcing at least 5% of deposits. This deposit focus not only followed the intent, letter and middle name of CRA but also prevented weblining.

Biden's anti-Trump CRA took the opposite approach of focusing on where banks make loans, including the Fed's Frankenstein creation of a "national" community. By effectively allowing regulators to monitor every loan everywhere, Biden's CRA has become the "Credit Reallocation Act."

Community groups that legally challenged the Trump CRA got almost everything they wanted in Biden's CRA, short of making it a new fair lending law.

The recent bank litigation emphasized the national community concept and final rule's failure to focus on credit. It also listed arbitrary and capricious violations of the Administrative Procedures Act as well as exposing the final rule's true regulatory burden, fully six times that claimed by the OCC.

This litigation, however, only exposed the tip of this unfair regulation's iceberg. For example, it ignored the final rule's encouragement of weblining, thereby depriving $40 billion of CRA benefits annually from our big cities, $4 billion from New York alone.

The litigation also failed to mention the adverse community impact of and lack of justification for exempting nearly 800 banks with a community development requirement; removing more than 200 banks from a more strenuous large bank exam; creating a new category of very large banks over $10 billion bearing the brunt of the new regulatory burden; and increasing the percentage of failing banks fivefold, from 2% to 10%, thereby preventing them from branching or merging.

The CRA curve-setting Fed kept outstanding banks at 10% for a textbook 10-80-10 "normal" distribution, but made it nearly impossible for large banks to maintain an outstanding rating. The Fed disingenuously removed the NPR's revealing Tables 9 and 10 from its final rule documenting this shocking shift.

For example, while over 50% of banks over $50 billion received an outstanding rating, none would get it under the final rule's critical 40%-weighted retail lending test driving the overall rating. The comparable percentages for banks over $10 billion falls from 40% to just 4%. So, why wouldn't those big banks, caring about their outstanding rating, fight the Fed?

Jerome Powell, the chair of what is supposed to be an apolitical Fed during an election year, can end this unprecedented bank regulatory revolution and litigation now by simply rescinding Biden's CRA in the same way Trump's CRA was rescinded.

This means keeping the existing 1995 Proxmire CRA but tuning it up with some of the best ideas from both final rules (e.g., the list of allowable CRA activities) plus adding the 5% Deposit Reinvestment Rule to eliminate weblining.

By removing the political stake placed in CRA's heart, the Fed can refocus on avoiding a recession and banks can get back to serving their communities and shareholders in an uncertain economic and political environment.