In an all too familiar scenario, some of the largest players in the banking industry are using the federal courts as a means to delay or completely kill a federal rule intended to benefit consumers and ensure safe, sound and non-discriminatory lending. On February 5, 2024, a group of the largest bank lobbying trade associations filed a complaint in Texas district federal court challenging a newly issued regulatory rule intended to update the standards for examining banks’ compliance with the Community Reinvestment Act (CRA). The trade associations, which include the American Bankers Association (ABA), the Independent Community Bankers of America (ICBA), the Chamber of Commerce of the United States (Chamber) and three Texas-based banking lobbying groups argue in their complaint that three agencies charged by Congress to oversee the CRA violated the Administrative Procedures Act (APA) by exceeding the authority that Congress had provided and acted “arbitrarily and capriciously” in issuing the rule. The complaint seeks to stop the CRA rule from ever being implemented.
The CRA rule challenged by the bank lobbyists was intended to bring the process of examining banks for CRA compliance into the 21st Century. The CRA regulators — the Federal Reserve Bank, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation — issued the CRA rule on October 24, 2023 after a lengthy notice and comment period during which the bank lobbyists and any other person who wanted to could give feedback and recommendations. As the CRA regulators noted in the introduction to the new rule, they have the responsibility to examine a “bank’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the bank’s safe and sound operation.” (emphasis added).
This is not the bank lobbyists’ first rodeo in challenging constructive federal efforts to combat discrimination. Indeed, they seem to be making a habit of it. They recently filed a complaint, also in Texas federal district court, which challenged a “sunshine” rule issued by the Consumer Financial Protection Bureau (CFPB) that required small business lenders to provide data on who they were lending to, where they were lending and the financial costs of the loans they made. That suit also pinned its arguments to the APA and to the arbitrary-and-capricious accusations that undergird their new CRA complaint. They were not successful in their efforts against the CFPB. Although a Texas district court enjoined the small business data collection rule, that decision did not endorse the arbitrary-and-capricious piece of the lobbyists’ arguments, instead grounding itself in the Fifth Circuit’s finding in Community Financial Services Assoc. of America v. CFPB that the CFPB’s funding mechanisms are unconstitutional. The district court ruling explicitly noted that if the Supreme Court later found the CFPB is constitutionally funded – which appears likely based on the oral arguments last October – then the injunction would dissolve.
The Texas district court could have included the other APA-related grounds asserted by the bank lobbyists in their complaint if it had found they were well grounded in law. It did not do so – a correct choice which may provide a preview of how the new CRA lawsuit could play out.
There are several reasons it is clear the bank lobbyists’ lawsuit is a legally unsupportable effort primarily engineered to delay implementation of the CRA Rule.
First, as noted above, the bank lobbyists’ similar APA arguments in their complaint were not adopted by the Texas federal district court in the case challenging the CFPB’s small business data collection rule. So one of the most conservative federal district courts in the country, the Southern District of Texas, did not choose to include the bank lobbyists’ APA arguments.
Second, under legal precedent in the Fifth Circuit, the bank lobbyists have not met the very high standard required to demonstrate the CRA regulators violated the APA. As noted above, although the Fifth Circuit in Community Financial Services Assoc. of America, Ltd. a case filed by a payday lending trade association, agreed with the bank lobbyists that the CFPB was unconstitutionally funded, it rejected the argument that the CFPB had violated the APA. Instead, the Fifth Circuit found that the CFPB had addressed concerns raised by payday lenders as part of the notice and comment process in rulemaking, had fully fleshed out its explanation for the rule and had provided a record as a part of the rulemaking that demonstrated that it was fulfilling the Congressional intent of the underlying statute. The Fifth Circuit found that the CFPB demonstrated that Congress had provided authority through the Dodd-Frank Act for the agency to pass a rule to address payday lending fees that were unfair and could not be avoided by consumers. The Fifth Circuit also rejected the argument that CFPB’s payday lending rule was arbitrary and capricious, finding that a plaintiff needs to demonstrate that the federal agency considered impermissible factors, failed to consider important aspects of the issue, offered an explanation that is contrary to the evidence in the rulemaking record or is “so irrational that it could not be attributed to differences in opinion or the result of agency expertise.”
The new CRA complaint similarly fails to meet the Fifth Circuit’s high standard for proving an APA violation. The bank lobbyists first argue that the CRA regulators exceeded their Congressional authority because they are considering deposit products and also lending activity by banks outside the communities where those banks take deposits. However, in their comments on the earlier proposed rule and 20 pages later in the complaint, they both want credit for banking activities outside their assessment area and do not even dispute the CRA regulators’ finding that there is a “sufficient nexus” between deposit products and provision of credit.
None of these arguments supports a finding that the CRA rule exceeds Congressional authority or is arbitrary and capricious. The fact that the CRA rule is long and includes a robust administrative record shows that agencies in fact take pains to comply with the judicial scrutiny standards the banks accuse them of treating capriciously. Nor does the fact that CRA regulators will consider the “entire credit needs of the community” including digital and online lending, as well as deposit products, rise to the level of an irrational or contrary-to-facts determination as defined by the Fifth Circuit. Banking has changed significantly since the CRA rule was last updated 29 years ago. The CRA regulators reasonably took into consideration modern banking in updating the rule using their “agency expertise.”
The lawsuit is further undercut here by the bank lobbyists’ own comment letters to regulators while the rule was being revised. Some of the same trade associations challenging the CRA Rule asserted in their comments that the updated rule should take into consideration how the banking market has evolved, particularly with the provision of digital and internet financial services (ICBA Comment at p2, ABA Comment at p9). They even argued that they should receive community development credit for financial services offered outside their assessment areas (ICBA Comment at pp2-3, ABA Comment at p2). The regulators did exactly that – using their own expertise to define how the modernization and credit-expansion the bank lobbyists requested should be shaped. It is troubling that these same groups are suing the CRA regulators when the federal agencies took their comments into consideration and issued a final rule that reflected a more realistic and complete set of community investment activities that is consistent with modern banking practices.
In a particularly noteworthy complaint from the bank lobbyists, they argue that it will be hard for some of the same staff at their member banks to implement both the Small Business Data Collection Rule and the new CRA rule. It is ironic that these are both rules designed to combat discrimination that the bank lobbyists have sought to enjoin.
At the end of the day, one must wonder why the bank lobbyists who describe the CRA as a “landmark” law designed to prevent redlining and foster community development filed a lawsuit seeking to undermine the law’s effectiveness. Many of their individual members do care about fair lending and are working hard to comply with both the CRA Rule and the Small Business Data Collection Rule. The CRA regulators have spent a significant amount of time addressing concerns raised in the rulemaking process. Although the CRA Rule is not perfect — there are several areas where the advocacy community’s suggestions were not included — it is a workable compromise accompanied with a detailed rationale, and soon will be in effect (April 1, 2024) unless enjoined. Instead of working to stop implementation, the bank lobbyists and their member banks should be working with the CRA regulators and the advocacy community to make sure the new rule fulfills its stated purpose of ensuring banks serve their entire communities and preventing discrimination.
Brad Blower is the founder of Inclusive-Partners LLC and former General Counsel at NCRC.
Photo via bloomsberries on Flickr.
