WASHINGTON — After years of proposals, counterproposals, interagency disagreement and political intrigue, the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency appear poised to finish their modernization of the Community Reinvestment Act's implementing rules.
FDIC Chairman Martin Gruenberg said last fall that he expected
"You had a mini banking crisis in the spring that certainly pulled people away from this. You had a leadership transition at the Fed as well with [former Vice Chair Lael] Brainard's departure, [and] you've gotten new Fed governors who came on board." he said. "The light at the end of the tunnel is here, and I think we will see the final rule in October."
Congress passed the CRA in 1977 as a way to address de facto lending discrimination faced by communities of color. The act requires that banks be graded on how equitably they are lending to low- and moderate-income customers and neighborhoods in their service areas, typically determined by where they have branches and deposit-taking automated teller machines. Banks need to receive a satisfactory mark in order to merge with or acquire other banks.
Given the advent of mobile banking, both banks and community groups have
Former Comptroller of the Currency Joseph Otting previously attempted to reform CRA implementation during the Trump administration, but community organizations argued the proposal effectively allowed banks to ignore underinvested communities and they
The banking agencies
Banking groups on Tuesday
But the regulators appear unfazed by that criticism. Ian Katz, a Washington analyst with Capital Alpha Partners, said that may be due in part to the closing window of opportunity that regulators have to finalize the rule and avoid a congressional repeal after the 2024 election. The Congressional Review Act allows Congress to nullify a regulation within 60 legislative days of its finalization with a majority vote in both chambers and approval of the president. Katz said that a real threat of an override exists if Republicans win the House, Senate and White House.
"If the administration wants to make sure that the rule can't be nullified by a Republican administration and Congress, it probably needs to finalize it by roughly mid-2024 to avoid the other CRA, the Congressional Review Act," Katz said. "I think they'll put it out before then."
But in addition to racing against the clock, experts say regulators also have to take their time to ensure that the final rule is not vulnerable to a legal challenge.
"CRA is complicated, and the proposal gives the banks a lot of different pieces they can attack. The banks are also asserting that the regulators are going beyond their statutory authority and that the proposal, if unchanged, would be vulnerable to a legal challenge," Katz said. "I imagine the regulators have been taking a look at that and will try to make sure they put out something that won't be easy to strike down in court."
Van Tol said the agencies are highly sensitive to industry concerns and have spent a lot of time making certain the law complies with statutory authority. To craft a durable rule, the agencies — particularly the Fed, which is leading the rewrite — are likely to take all the time they have. Van Tol said this puts pressure on regulators to ensure the rule withstands the test of time.
"Because the banking trades have threatened to sue them, I think they are trying to make sure that they've dotted the i's and crossed their t's in such a way that the rules are best protected," said Van Tol.
Ye the delay in finalization can't all be attributed entirely to industry pressure, Van Tol said. CRA-related rules have historically been very difficult to get done, in part because the details are very complex and also because they require interagency collaboration.
"It's an interagency ruling, it's much more complicated to coordinate amongst three agencies — two of whom have boards — who have to vote on the proposal," he said. "The Fed [officials] are perfectionists. If you give them time, they'll take it. They'll take as much time as they need to get to something they're satisfied with."
Dennis Kelleher, CEO of the public advocacy organization Better Markets, said part of the problem is that industry turmoil and agency turnover made an already tedious process more difficult.
"I think anyone thinking it was going to be finalized earlier this year was overly optimistic," Kelleher said. "It would have been record-breaking for them to do all that and finalize by earlier this year. While we always prefer rules to be finalized sooner than later, we're more interested in rules being finalized that are effective, workable, durable and achieve the intended goal. If that takes more time than less, better to get it right than be quick about it."
When reached for comment, officials at the OCC indicated they are working on the rule and incorporating public feedback.
"The OCC has been working with the Federal Reserve and FDIC to modernize and strengthen the Community Reinvestment Act to expand financial inclusion and opportunity for all Americans, especially the underserved," they noted in an email. "The agencies received hundreds of detailed and thoughtful comments on the notice of proposed rulemaking, and we are working together to consider the suggestions."
The FDIC and the Fed did not comment for this story.
Van Tol said that for all the bluster about a possible legal challenge, he is skeptical that banks would actually follow through on their threat to sue their prudential regulators over the rule.
"I think the trades sending that letter [on Tuesday] is just an attempt to continue to delay, which is really just an attempt to kill it," Van Tol said. "It will be interesting to see if they do. I think it's one thing to sue the CFPB; I think it's another thing entirely to sue your prudential regulator. I wouldn't want to be in that position."
He added that banks also must toe a fine line in opposing the CRA, given how such a stance could contradict
"Some banks will think twice — many of them having made statements about their commitment to racial equity, their commitment to the community in the wake of George Floyd — about suing over a rule that fundamentally is about lifting up underserved communities," he said. "I think obviously that's the reason why they work through their trades, to shield themselves from criticism."
