Banking agencies are alleged to have exceeded their congressional authorization, with potentially adverse consequences on banks and consumers.

On February 5, 2024, several banking trade groups[1] (the Plaintiffs) sued the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the Agencies) in the US District Court for the Northern District of Texas. The Plaintiffs allege that the Agencies overstepped their regulatory mandates when overhauling their regulation (the Regulation) under the Community Reinvestment Act (CRA) of 1977. The updates, intended to promote bank lending in underserved communities, were finalized on October 24, 2023, and published in the Federal Register on February 1, 2024.  

The Regulation, the Plaintiffs asserted, flouts the plain text of the CRA. In addition, the Plaintiffs claimed that the Regulation is unnecessarily byzantine (spanning 649 pages and 60,000 words in the Federal Register), burdensome, and arbitrary and capricious.

Bank Evaluations Under the CRA

The CRA was originally enacted to encourage lending in low- and moderate-income neighborhoods across the US by reducing “redlining” (i.e., the practice of refusing to extend credit in certain neighborhoods deemed by lenders to be too risky). Therefore, Congress determined that the Agencies must, as part of their supervisory duties, assess a covered insured depository institution’s “record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution.” Under the CRA, the Agencies must issue a written public report and rating for each financial institution that describes CRA compliance in each “assessment area”[2] (i.e., geographic area where the covered insured depository institution has a main office, branch office, or other facility that accepts deposits). CRA evaluations are taken into account by the relevant Agency when determining whether to approve merger and acquisition transactions.

Plaintiffs’ Claims

The Plaintiffs seek review of the Regulation under the Administrative Procedure Act (APA), and make various arguments as to why the Regulation should be vacated.

The Regulation Exceeds the Agencies’ Statutory Authority

According to the complaint, the Regulation exceeds the Agencies’ statutory authority because (i) the expanded CRA assessment rubric “abandon[s] the statute’s geographic, deposit-taking touchstone”; and (ii) runs “contrary to the [CRA’s] explicit direction to focus on the ‘credit needs’ of the community.”[3]

First, the Plaintiffs argued that the Agencies unjustifiably expanded the scope of the CRA assessment rubric to include “Retail Lending Assessment Areas” and “Outside Retail Lending Areas” where an institution may not have a physical presence. They further contended that the Regulation eschews the CRA’s focus on geographic nexus and deposit-taking while adding complex tests that apply only to financial institutions with a certain level of total assets.

Second, the Plaintiffs took issue with the fact that the Agencies will assess banks’ deposit products in addition to the credit products that they claim were Congress’s CRA focus. Specifically, the Regulation implements a “Retail Services and Products Test,” which for certain large banks, will consider banking activities outside of the credit space.[4] In issuing the Regulation, the Agencies claimed that for various reasons, “there is a sufficient nexus between deposit products and the provision of credit.” Plaintiffs took issue with these claims and maintained that even if the Agencies’ claims of sufficient nexus were true, it would not permit them to act beyond their congressionally mandated remit to focus on credit needs under the plain terms of the CRA.

The Regulation Is Arbitrary and Capricious

According to the complaint, the Regulation is arbitrary and capricious because it “deprive[s] banks of notice concerning the areas and products that will be assessed and the market benchmarks against which their performance will be evaluated.”

Plaintiffs also asserted that the compliance costs that banks will shoulder are enormous, and yet the Agencies failed to provide a reasoned cost/benefit analysis or adequate evidence that the Regulation will have a positive effect on the type of lending the CRA was intended to promote.

Alleged Ramifications

Contrary to the Agencies’ assertion that the Regulation will promote CRA lending, the Plaintiffs alleged that it will actually cause banks to limit lending across sectors and geographies. According to the complaint, certain banks will “curtail[] lending” or “scuttle plans to expand” to avoid becoming subject to the new CRA assessment areas.

According to the ABA’s president and CEO, the Regulation “risk[s] undermining the very goals of CRA by creating disincentives for banks to offer certain products or lend in geographies outside of their branch network.” The ICBA’s president and CEO also noted that the Regulation was “likely to have unintended consequences and fail[ed] to consider the long-term impact on the very communities they seek to protect.”[5]

Challenging Agency Overreach

The president and CEO of the TBA, representing more than 400 member banks, decried the Regulation as “regulatory overreach far beyond Congressional authorization,” which undermines “the Constitution’s separation of powers and politicizes banking.” Furthermore, according to an ABA analysis of member banks cited in the complaint, the cost for banks to comply with the “extraordinarily and unnecessarily complex” Regulation may exceed $600 million in the first year alone. This figure is more than six times the OCC’s estimate of $91.8 million.

Plaintiffs’ APA challenge comes when the current judicial climate is less deferential to administrative agency actions. The Supreme Court of the United States has recently demonstrated its willingness to review and curtail federal agency authority, first in the seminal 2023 case of Sackett v. Environmental Protection Agency (in which the Supreme Court rejected the EPA’s interpretation of “waters of the United States” as used in the Clean Water Act, implying regulatory overreach by the EPA), and second in the current Supreme Court term with the pending decision in Relentless Inc. v. U.S. Dep’t of Commerce and Loper Bright Enterprises v. Raimondo (in which the Supreme Court is considering whether to alter or overrule the longstanding Chevron doctrine, which compels courts to defer to agencies’ interpretations of ambiguous statutory language).

Conclusion

The Regulation is scheduled to become effective on April 1, 2024. The Plaintiffs are asking for the District Court to issue an order and judgment vacating the Regulation to mitigate the harms alleged in the complaint.

Compliance with a majority of the Regulation, however, is scheduled for January 1, 2026,[6] allowing the Plaintiffs ample time to litigate their claims if the Regulation is not vacated. In the interim, Plaintiffs are expected to seek a preliminary injunction to prevent the Agencies from implementing and enforcing the Regulation while the Court decides the merits of the case.

Endnotes

[1] The Texas Bankers Association (TBA), Amarillo Chamber of Commerce, American Bankers Association (ABA), Chamber of Commerce of the United States of America, Longview Chamber of Commerce, Independent Community Bankers of America (ICBA), and Independent Bankers Association of Texas.

[2] Or as updated under the Regulation, “facility-based assessment areas.”

[3] Plaintiffs conceded that Congress did not define the word “community” in the statute, but argue that “the statutory indicia confirm that [Congress] used this term in the ordinary sense as referring to a geographic subunit along the lines of a county or town.”

[4] The Retail Services and Products Test will assess whether certain banks offer deposit products with “low-cost features, including but not limited to, deposit products with no overdraft or insufficient funds fees, no or low minimum opening balance, no or low monthly maintenance fees, or free or low-cost check-cashing and bill-pay services.”

[5] Plaintiffs’ statements available at https://www.texasbankers.com/TBA/News_Releases/2024-02-05-Trade-associations-sue-regulators-for-exceeding-statutory-authority-in-new-CRA-rules.aspx.

[6] January 1, 2026 for those provisions related to new tests, definitions, and data collection and maintenance requirements; January 1, 2027, for reporting requirements.