For banks, now is a good time to sue your regulator over CRA

Bloomberg News

WASHINGTON — Banking groups made good on murmurs of a lawsuit over recently finalized anti-redlining reforms Monday, a move that represents a combination of election year politics, a judiciary more skeptical of federal regulation and an increasingly pugilistic banking industry.  

The suit, brought by the Independent Community Bankers of America, American Bankers Association and other banking trade groups, challenges the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency over an overhaul of implementing regulations for the 1977 Community Reinvestment Act — reforms that have been in the works for years under two administrations. The suit argues, among other things, that the final rule goes beyond the scope of the statute and violates the Administrative Procedure Act.

Taking such a step historically has been uncommon for the banking industry, and especially rare when it comes to anti-discrimination measures. 

Consumer advocates like Jesse Van Tol, CEO and president of the National Community Reinvestment Coalition — a group that has long advocated for revised CRA rules — said the banking industry's opposition to revitalizing a civil rights law undercuts its own ostensible concern over the impacts proposed capital hikes could have on communities of color. 

"Out of one side of their mouth they say higher capital requirements will hurt people of color and low-income people, but then out of the other they attack the nation's preeminent law requiring them to lend to those same people," Van Tol contended. "Nobody should believe them when they say they care about lending to working-class people and people of color."

The CRA was a law passed in response to discriminatory lending patterns known as redlining. The law establishes that banks have an affirmative obligation to meet the credit needs of all their customers, including low- and moderate-income customers in the communities they serve. In light of this, banks are carefully phrasing their pushback and challenging the procedure rather than the intent of the rule.

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Ian Katz, managing director at Capital Alpha Partners, noted in an email that the trade groups are well aware of the hairy public-relations issues involved with suing to prevent CRA reforms. 

"I'm sure the bank groups took the optics and politics into account before suing — [they] are aware that it's tricky," Katz remarked. "That's probably why they say at the top that they support and appreciate the goals of the CRA."

What is more, in a contentious election year, a lawsuit could delay the rule long enough for a change in administration, according to Jaret Seiberg, a policy analyst at TD Cowen. 

"The banks are smart if they are using litigation to delay implementation beyond the election," Seiberg wrote in an exchange. "It preserves the ability to restart the process if a Republican wins the White House."

Part of the reason banks may be striking now is their perception that the existing regime — which they had notable qualms about — is at least knowable and tolerable, Seiberg said. A new set of regulations that potentially increase costs, he said, could strike banks as unfair given that CRA doesn't apply to nonbanks, which have assumed a growing role in financial services like mortgage origination and small dollar loans. 

"What I think drives the banks to litigation is the unfairness they perceive about having a regime that only applies to their industry while exempting other providers of similar services," he noted.  "The thinking here is that why should the banks accept an even tougher CRA regime while nonbanks manage to avoid any obligations."

Joseph Lynyak, a financial regulatory analyst at the law firm Dorsey & Whitney, argued that at least part of the banks' decision to challenge the rule is due to increasingly favorable conditions in the courts. The Supreme Court is expected to rule on a case in the coming months determining the future of so-called Chevron deference, a legal precedent that requires courts to defer to reasonable interpretations of ambiguous statutes made by administrative agencies. He noted if Chevron is overturned, banks may choose to avail themselves of legal challenges more often.

"With the clear skepticism of the 5th Circuit regarding agency actions, the opportunity has been created to successfully bring challenges under the APA," he argued. "If the Chevron case is overturned by the Supreme Court, the opportunity will be created to challenge virtually any agency determination, particularly non-APA policy decisions."

But Van Tol was more skeptical that the suit against the CRA rules will succeed, or even that a successful challenge is a desirable outcome for banks. The changes to the CRA rules — which include rejiggering CRA criteria to assess banks where they lend rather than solely their physical location — align well with the intent of the original statute, and he's confident the rules will stand. 

"Clearly the drafters of CRA intended for it to cover more than a small portion of a bank's activity," Van Tol argued. "Clearly they are chartered to do business beyond where their branches are physically located, unless they want to turn back the clock to before interstate banking rules took effect and give up their regional and national franchises."

While industry watchers and consumer advocates differ on the merits of the suit, it's clear the industry is emboldened and banking on the idea that the era of judicial deference to agencies is coming to a close. But, Seiberg notes, for a regulatory regime like the CRA, Monday's lawsuit is likely only the first in a number of challenges they'll need to mount in order to get the reforms overturned.

"None of these cases will be dispositive at the trial court or appeals court level," he wrote. "It likely takes one of these cases getting to the Supreme Court."