Senate Democrats urge regulators to rethink CRA reversal

Key Insight: Democratic Lawmakers say the 2023 CRA made important updates to a decades old framework, accounting for online banking and reducing CRA "grade inflation."

Supporting Data: The 2023 rule was backed by bipartisan members of the Federal Reserve Board, including Governor Waller and Chair Powell.

Forward Look: Lawmakers are pressing regulators to defend the 2023 rulemaking in an ongoing lawsuit rather than continuing with their announced rescission. 

Senate democrats on Monday implored bank regulators to rethink their plan to nullify Biden-era Community Reinvestment Act regulations that modernize the process by which banks are graded on their lending to low-and-moderate income Americans. 

The letter to the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Reserve, was signed by Senate Banking Committee ranking member Elizabeth Warren, D-Mass., Sens. Ron Wyden, R-Ore., Tina Smith, D-Minn., Rafael Warnock, D-Ga., Chris Van Hollen, D-Md., and Tammy Baldwin, D-Wisc. 

"The CRA is one of your agencies' most critical tools to combat the effects of decades of discriminatory banking and lending practices," They wrote. "The 2023 CRA final rule made important updates to outdated CRA regulations to ensure that banks are meeting the needs of everyone in the communities where they do business."

Congress passed the CRA in 1977 in response to de facto lending discrimination against underserved Americans, predominantly among communities of color. The law directs agencies to grade banks on how equitably they are lending to low- and moderate-income customers and neighborhoods in their service areas — areas that are determined based on where banks have branches and deposit-taking automated teller machines. Banks seeking to merge or acquire other firms must receive a satisfactory mark in order to receive regulatory approval.

Biden-era regulators finalized the new implementing regulations in 2023, marking the first comprehensive update to the regime since 1995. The Biden-era CRA expanded assessment areas, provided banks with a pre-approved list of eligible community development activities and introduced more rigorous evaluations for large banks.

Backers of the Biden-era rule like Warren say the revamp accounted for the online nature of modern banking, moving appropriately away from branch-based assessments and would more accurately capture banks' adherence to the law. The 1995 standards, the democrats argue, gave most banks passing grades despite what they believe was lackluster performance. 

"[Asessing] a bank's activities near the geographic location of its branch and ATMs, is no longer sufficient to assess whether banks are meeting their lending and community investment obligations," they wrote on Monday. "CRA exams have long displayed rampant grade inflation, demonstrated by the fact that 96% of banks evaluated under the CRA were rated as 'satisfactory' or 'outstanding' from 1990 to 2019 [even as] hundreds of Equal Credit Opportunity Act and Fair Housing Act lawsuits were filed against banks that discriminated against credit applicants of the basis of race and other protected characteristics [during the same time]."

The proposed standards would have required banks to lend to lower-income communities in areas where they have a concentration of mortgage and small-business loans, rather than strictly where they have physical branches — a change that aimed to account for an increasingly mobile banking ecosystem.

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The Senators also pointed to the fact that the 2023 rulemaking received support from all members of the bipartisan Federal Board of Governors, including support from Fed Chair Jerome Powell and Fed Governor Christopher Waller. 

Despite the vote, implementation was delayed after several banking trade groups filed a lawsuit last year attempting to block the final rules. The suit argued the agencies exceeded their statutory authority when they finalized their amendments. The rulemaking was subsequently left in limbo after a district judge enjoined its implementation while the Fifth Circuit granted a stay on the injunction. 

Trump regulators say reverting to the original rules is appropriate given the legal uncertainty tied to the ongoing lawsuit. The Senate Democrats counter that the existence of a lawsuit does not negate the fact that the rule was proposed, revised after public feedback and finalized under the legally required Administrative Procedure Act. They want the agencies to defend the rule in court, rather than react to the impasse by unwinding the 2023 rule. They also call for a staff briefing on the efforts by the end of the month. 

"Rescinding the 2023 final rule and reverting to the 1995 framework is a major step backwards and disregards the years of bipartisan work to modernize the CRA and ensure underserved communities have fair and equal access to economic and lending opportunities," they wrote. "We strongly urge your agencies to withdraw the rescission and defend the 2023 final rule in court."