This week, the Texas Bankers Association, the Amarillo Chamber of Commerce, the American Bankers Association, the Chamber of Commerce of the United States of America, the Longview Chamber of Commerce, the Independent Community Bankers of America, and the Independent Bankers Association of Texas Revenue Based Finance Coalition (collectively, the plaintiffs) filed a complaint in the U.S. District Court for the Northern District of Texas challenging the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency’s (collectively, the agencies) Final Rule modernizing how they assess lenders’ compliance under the Community Reinvestment Act (CRA). In their complaint, the plaintiffs asked the court to vacate the Final Rule and provide a preliminary injunction that would pause implementation of the Final Rule while the court decides the case.

As discussed here, last week the Final Rule was published in the Federal Register with the stated goals to encourage banks to expand access to credit, investment and banking services in low- and moderate-income (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.

In their complaint, the plaintiffs argue that the Final Rule violates the Administrative Procedure Act (APA) because the agencies acted in excess of their authority: (i) by assessing banks’ activities outside of the locations where they maintain a physical presence and accept deposits; and (ii) by assessing banks’ deposit products rather than the credit products targeted in the statute. They further argue the Final Rule is arbitrary and capricious.

To support their first argument, the plaintiffs point to the new Retail Lending Test, which accounts for 40% of large banks’ and 50% of intermediate banks’ CRA ratings and adds “Retail Lending Assessment Areas” for any large bank that does not conduct more than 80% of its retail lending inside of its Facility-Based Assessment Areas. The agencies will also consider retail lending performance for every large bank and some intermediate banks in an “Outside Retail Lending Area,” i.e., the area outside the banks’ Facility Based Assessment Areas and Retail Lending Assessment Areas. According to the plaintiffs, Congress intended the CRA to focus on assessment areas with geographic limits where banks have a physical presence and accept deposits.

As to their second argument, the plaintiffs point to the Retail Services Test, which assesses branch availability, branch services, remote service availability, and digital delivery systems in LMI census tracts. Likewise, the Products Test evaluates credit products and, in the case of certain large banks, “a bank’s deposit products” to assess whether such banks offer deposit products with low-cost features. But according to the plaintiffs, Congress’s delegation of authority to the agencies was only to “assess the institution’s record of meeting the credit needs of its entire community.” By conflating digital delivery systems and deposit products with credit needs, the agencies’ Final Rule exceeds the statutory authority granted by Congress under the CRA.

Third, the plaintiffs argue that the Final Rule is arbitrary and capricious because it fails to: give banks reasonable notice of the areas and products that will be assessed and the benchmarks their performance will be evaluated against; conduct an adequate cost benefit analysis; and consider the real-world consequences of the Final Rule. As one example, the plaintiffs asserted that the agencies’ failure to consider the cumulative effect of heightened performance measures and the construction of Retail Lending Assessment Areas and Outside Retail Lending Areas could, paradoxically, result in the reduction of product and service offerings in certain markets — the very thing that Congress intended to avoid when it passed the CRA. We will continue to monitor this litigation and provide updates.