Regulators’ CRA reform plans need to be made ‘DOGE-proof’

The bank regulatory tables have turned.

Not because of the new administration but because the banking industry was right to challenge the Fed and take them to court to get regulatory justice on a political makeover of the most subjective regulation in banking, the Community Reinvestment Act, or CRA.

Bankers fear regulators in a boardroom informing their directors of an enforcement action against their bank. In a complete turnaround, the industry in a federal district courtroom informed its regulators of an enforcement action, in the form of a federal district court injunction, against them.

Using terms like “misstate and misapply,” “miss the mark,” and “misconstrue,” the preliminary injunction was highly critical of the regulators. Bank regulatory karma?

The regulators appealed the ruling, just as banks appeal their enforcement actions. Because of the industry’s very strong case and the high likelihood the federal appellate court and even the Supreme Court, if necessary, would rule in the industry’s favor, two things happened. The regulators rescinded their final rule and effectively withdrew their appeal.

By way of disclosure, in addition to strongly encouraging industry legal action since 2022 against the politicized CRA final rule, I submitted an amicus brief in support of the industry’s position.

In addition to declaring “no mas” in the legal arena, the regulators agreed to seek public comment on and reinstate the 1995 regs currently in effect and work together to promote a consistent regulatory approach.

Easier said than done.

Unlike the Federal Reserve, the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, under the first Trump administration’s direct control, released their CRA final rule in June 2020, but the Biden administration rescinded it in December 2021. Meanwhile, the Biden-friendly Fed developed their own CRA reform proposal in September 2020 that morphed into the recently rescinded final rule.

CRA was now well immersed in the political swamp.

Any CRA reform effort in the current administration must be effectively “DOGE-proof” in terms of maximizing government efficiency and productivity demanded by the so-called Department of Government Efficiency. Otherwise, it will be another colossal waste of time and money, like the tens of millions the industry spent on trying to understand and prepare for the convoluted and complex 1,500-page rescinded final rule, not to mention litigation expenses.

I had the honor and privilege of knowing and working with Sen. William Proxmire, the “father of CRA,” and former Comptroller Eugene Ludwig and his very capable OCC team that developed the 1995 regs, which included several of my recommendations.

Regardless of what regulators or the industry think CRA reform should look like, I believe it must meet the following three DOGE tests.

First, it must strictly follow the 1977 law, which encourages banks to help meet the credit needs of their entire community, including low- and moderate-income, or LMI, neighborhoods. With the statutory focus on income instead of race or other factors, CRA will be able to withstand future political challenges.

Second, it must fairly consider and balance the costs and benefits to all three corners of The CRA Triangle, namely communities, regulators, and America’s banks and thrifts. Vocal community groups and overzealous regulators cannot overburden the industry as was done with the rescinded final rule. Likewise, the industry, currently holding most of the CRA cards, must not overplay its hand.

Third, it must focus on the goal of modernizing CRA to prevent digital redlining, aka “weblining,” by branchless banks, the only reason the 1995 regs are under study. CRA, primarily established to eliminate traditional redlining, must now be updated to eliminate digital redlining. This means a tune-up of the existing regs as recommended by a 2018 Treasury study on which I consulted, instead of an unnecessary and politicized major overhaul like the rescinded final rule.

This recommended DOGE approach to CRA reform, with these three objectives is simple: Modernize the existing apolitical 1995 regs that bring communities approximately $500 billion annually, benefit community groups with $100 billion agreements with merging banks and pass 98% of banks on their CRA exams.

Banks and regulators, with their downsized staff under DOGE’s Workforce Optimization Initiative, do not need to waste tens of millions more learning and implementing a new untested regime when the existing regs have worked fine for the last forty years.

The modernization solution, which I labeled the “5% Deposit Reinvestment Rule,” was included in the OCC and FDIC’s 2020 final rule under the previous Trump administration following several meetings I had with the OCC.

Following the letter, intent and middle name of CRA, this common-sense “Robin Hood” rule requires banks to proportionally reinvest in the LMI neighborhoods of any market generating at least 5% of deposits. Every bank CEO, especially those at branchless banks, should know their deposit geographic distribution down to the ZIP code; if they don’t, they shouldn’t be CEO.

Politically powerful branchless banks, mainly headquartered in Delaware, South Dakota and Utah, harvest more than $2 trillion of deposits from our biggest cities, with their $40 billion of annual CRA benefits unfairly going back to their headquarters’ cities under the current regs. These well-lobbied credit card, fintech and other internet banks fought the 5% rule during the first Trump administration, but believe the current DOGE mentality in Trump’s second administration will allow it to prevail.

In addition to this 5% modernization fix, CRA can be updated with some of the best ideas from previous reforms, such as a list of and prequalification of community development activities and the online posting of the CRA public file.

Anything more by overzealous regulators encouraged by vocal community groups and over-the-top congressional members will likely land the regulators back in court, with the industry seeking and likely once again getting regulatory justice.

While the industry is enjoying a well-deserved CRA victory lap, it must be guided by common sense not excessive celebration or other unsportsmanlike conduct. This means following the above fair and balanced approach to CRA modernization without piling on unnecessary wish-list items to the current regs and without allowing big, bruising branchless banks to undermine the needed 5% modernization solution.

Depending on how much government waste DOGE wants to eliminate, it may even consider my previous recommendation to consolidate all CRA enforcement in a common-sense CFPB, including coverage of credit unions, to promote needed consistency and eliminate CRA regulatory shopping.