Several national and Texas banking and business trade groups have filed a lawsuit in the U.S. District Court for the Northern District of Texas challenging the final regulations (Final Rules) implementing the Community Reinvestment Act of 1977 (CRA) that were jointly adopted in October 2023 by the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Federal Reserve Board (Agencies). The national trade groups include the American Bankers Association, Independent Community Bankers of America, and U.S. Chamber of Commerce.

Although the Final Rules are effective April 1, 2024, the compliance date for the majority of the Final Rules’ provisions is January 1, 2026. Despite the delayed compliance date, the trade groups are expected to seek a preliminary injunction that enjoins the Agencies from implementing and enforcing the Final Rules while the lawsuit is pending. In their preliminary injunction motion, the trade groups will likely allege, as they do in the complaint, that given the complexity of the Final Rules and the changes they require, banks cannot wait until 2025 or 2026 to make those changes and must act now. They note that the OCC has acknowledged an estimated industry compliance cost of $90 million for the first twelve months after publication of the Final Rules in the Federal Register (which occurred on February 1, 2024).

In the complaint, the trade groups make the following principal claims:

• The Final Rules violate the Administrative Procedure Act (APA) because they exceed the Agencies’ statutory authority under the CRA which is limited to assessing a bank’s “record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound operation of such institution.” The Final Rules exceed this authority as follows:
  • The Final Rules add “Retail Lending Assessment Areas” and “Outside Retail Lending Areas” that have no connection to a bank’s physical deposit-taking presence. As a result, the Final Rules impermissibly assess banks on their responsiveness to credit needs outside of their geographic deposit-taking footprint. The CRA uses “community” in the ordinary sense, meaning as a delineation of a local geographic area around a bank’s deposit-taking facilities, like a branch or ATM that takes deposits. In the Final Rules, the Agencies interpret “community” to encompass large areas where banks have no deposit-taking footprint.
  • The “Retail Services and Products Test” in the Final Rules assesses banks on products or services such as digital delivery systems and deposit products with certain low-cost or other features. As a result, the Final Rules impermissibly assess banks on products or services that are not “credit.” The CRA instructs the Agencies to assess a bank’s record of meeting the “credit needs” of its entire community. Congress knew the difference between deposit needs and credit needs and its choice to focus on credit needs cabins the Agencies’ authority.
• The Final Rules violate the APA because they are arbitrary and capricious as a result of:
  • Failing to give banks reasonable notice of the areas and products that will be assessed and the market benchmarks against which their performance will be evaluated;Failing to conduct an adequate cost benefit analysis; and
  • Failing to consider the real world consequences of the Final Rules such as the extent to which the cumulative effect of heightened performance measures and the construction of Retail Lending Assessment Areas and Outside Retail Lending Areas could result in the reduction of product and service offerings in certain markets.

In the complaint, the Agencies allege that under the APA, “no deference is owed when an agency acts in contravention of a statute.” They also allege that the CRA “has been politically significant since it was enacted in 1977” and, based on the U.S. Supreme Court’s 2022 decision in West Virginia v. EPA, argue that the Agencies’ assertion of authority in the Final Rules “implicates major questions.” Accordingly, quoting language in West Virginia, they argue the Agencies must show “more than a merely plausible textual basis” for the Final Rules and “must point to clear congressional authorization for the power [they] claim[].’”

The level of deference, if any, to which the Final Rules are entitled is likely to be impacted by the U.S. Supreme Court’s decision in the two cases currently before it regarding Chevron deference. The question presented is whether the Court should overrule its 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. That decision established what became known as “Chevron deference,” which requires courts to accept an agency’s interpretation of federal law when a statute is silent or ambiguous and the agency’s interpretation is found to be reasonable. The Supreme Court heard oral argument in the two cases on January 17, 2024. (On February 15, 2024, we will host a special webinar roundtable featuring Professor Kent Barnett, two other renowned administrative law professors and Carter Phillips, a leading Supreme Court practitioner, who will share their observations and reactions to the oral arguments, insights based on questions posed by the Supreme Court justices during the arguments, and further predictions of the outcome and implications for the future of regulatory regimes and agency authority. For more information and to register for the webinar, click here.)

The new lawsuit has been assigned to Judge Matthew J. Kacsmaryk, who is known to be very conservative. It is not surprising that the trade groups chose a Texas federal district court as the venue for the lawsuit. The Fifth Circuit is widely viewed as a favorable forum for lawsuits challenging federal agency actions, particularly given the recent success that trade groups have had in the Fifth Circuit in challenging regulations issued by the CFPB. Most notably, in CFSA v. CFPB, the U.S. Court of Appeals for the Fifth Circuit ruled that the CFPB’s funding mechanism is unconstitutional and, on that basis, invalidated the CFPB’s payday loan rule. That decision is currently being reviewed by the U.S. Supreme Court which heard oral argument in October 2023. A lawsuit challenging the validity of the CFPB’s final small business lending rule is currently pending in the U.S. District Court for the Southern District of Texas. In October 2023, that court issued an order that preliminarily enjoins the CFPB from implementing and enforcing the Rule on a nationwide basis against all entities covered by the Rule.

Our blog posts discussing the provisions of the Final Rules can be found here, here, and here. To listen to an episode of our Consumer Finance Monitor Podcast in which we discuss the Final Rules, click here.

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