Federal Court Blocks Enforcement of Revised CRA Rules

A federal district judge in Texas has enjoined federal bank regulators from enforcing the recently overhauled Community Reinvestment Act (“CRA”) rules.  The injunction was issued on the eve of the first effective date under the new regulations, April 1, 2024, however, the injunction effectively puts the entire CRA revamp on hold pending further litigation on the merits.  The new rules for regulatory review of CRA compliance were issued in October 2023 to near universal dismay from the banks of every size.  A coalition of bank trade groups sought to block the new rules, arguing that the new framework for analysis of CRA compliance exceeded the regulators’ mandate under the CRA.

The CRA was enacted in 1977 as a response to concerns that some banks were engaging in redlining to deny credit to customers in poorer, often minority, areas.  Under the CRA, federal bank regulators are required to assess an institution’s record of meeting the credit needs of the entire community with separate evaluations required for each area in which the bank maintains a branch office.  The revised CRA rules, which cover 649 pages in the Federal Register, represent a significant departure from the prior rules for assessment of CRA compliance by introducing a series of new tests that, among other things, (i) significantly expand the scope of the assessment to consider lending activity in areas where a bank does not maintain a physical presence but engages in lending activity and (ii) consider whether banks are meeting the deposit needs of the community as part of the CRA assessment.  The new rules, which were scheduled to be fully effective by 2026, also impose a significant administrative burden on banks of nearly every size.  The American Bankers Association has estimated that the cost of compliance industry wide will exceed $600 million.

In granting the injunction, U.S. District Judge Matthew Kacsmaryk, sitting in the Northern District of Texas, agreed with the trade groups’ claim that new rules went beyond the intent of the statute .  The court found that the expanded lending test violated the statute by requiring consideration of lending activity in geographies outside of the areas where a bank maintains a physical facility.  In addition, the court found that the regulations exceeded statutory authority by allowing federal banking agencies to assess customer access to deposit products as part of the CRA exam.  The court noted that the statute is expressly focused on whether institutions are meeting the “credit needs” of the community, rejecting the agencies’ contention that “credit needs” could be construed more broadly to include deposit products as a necessary adjunct to a bank’s lending activity.

It is interesting to note that the court expressly enjoined the regulatory agencies from enforcing the new CRA rules against the plaintiff industry trade groups but not specifically to the banks that are members of the plaintiff groups or to banks that are not members of the groups.  Whether the court will resolve this uncertainty with a modification of the injunction is unclear.  In any event, the decision will force a significant delay in the implementation of the CRA regulations as the litigation continues.


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