On March 28, the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (together, the federal banking agencies) announced their intent to rescind the 2023 Community Reinvestment Act (CRA) final rule and reinstate the previous CRA framework. This decision comes in light of pending litigation in the Fifth Circuit by various banking trade associations contesting the rules by alleging regulatory overreach. The agencies stated they will continue to work together to promote a consistent regulatory approach to implementation of the CRA.

Background: The 2023 CRA Final Rule

The CRA, enacted in 1977, was designed to address systemic inequities in access to credit by encouraging banks to meet the credit needs of their entire communities from which they draw deposits, including low- and moderate-income (LMI) areas, while adhering to safety and soundness principles. The regulations implementing the CRA have not been substantively updated since 2005 with the last meaningful, comprehensive revision to the CRA regulations occurring in 1995. The OCC issued its own CRA modernization rules in 2018, which were then tabled under the Biden administration.

As discussed here, on October 24, 2023, the federal banking agencies issued the long-awaited final rule modernizing how they would assess lenders’ compliance under the CRA. This rule aimed to:

• Encourage banks to expand access to credit, investment, and banking services in LMI communities;
• Adapt to changes in the banking industry, including mobile and online banking;
• Provide greater clarity and consistency in the application of the CRA regulations; and
• Tailor CRA evaluations and data collection to bank size and type.

Key provisions included flexibility in retail lending evaluations for smaller banks, new data collection and reporting requirements for larger banks, and the requirement for banks to lend to LMI communities in areas where they have a concentration of mortgage and small business loans, not just where they have physical branches. The final rule was set to become effective on April 1, 2024, with a transition period for compliance with the new regulations.

Despite its comprehensive nature, the 2023 final rule faced criticism by the banking industry for not applying to nonbank lenders or credit unions, which have become significant sources of residential mortgage loan originations, changing the CRA performance evaluation process in ways that did not align with the underlying law, and discouraging community development lending. Moreover, the federal banking agencies were sued by the American Bankers Association, Independent Community Bankers of America, U.S. Chamber of Commerce, and four other trade associations who argued that regulators exceeded their statutory authority in issuing the final rule. Last year, the plaintiffs won a preliminary injunction enjoining the federal agencies from enforcing the rule. Those trade groups welcomed the federal banking agencies’ plans to reverse course, stating in a press release “[g]iven the strength of our case and the court’s rulings to date, rescinding the rule is the right decision.”

Our Take:

The federal banking agencies’ intent to rescind the 2023 CRA final rule is indicative of a broader effort to revisit rules issued under the Biden administration — not only because some rules are subject to legal challenge, but also in light of recent U.S. Supreme Court decisions on administrative law, such as the Loper Bright case. With respect to the 2023 CRA final rule, we would expect formal withdrawal to occur once nominated agency heads are confirmed and installed at the FDIC and OCC, respectively.

We will continue to monitor this situation and provide updates as new developments occur.