In light of ongoing litigation and the Trump administration’s new policy approach, federal banking agencies intend to rescind the 2023 CRA final rule and revert to pre-2023 standards.
By Betty M. Huber, Arthur S. Long, Pia Naib, and Deric Behar
On March 28, 2025, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the Agencies) announced that they intend to issue a proposal to rescind the Community Reinvestment Act (CRA) rule (the Final Rule).
The rule was finalized on October 24, 2023 and came to force on April 1, 2024, but compliance with a majority of the Final Rule was not scheduled until January 1, 2026.
The decision to rescind the Final Rule was made “in light of pending litigation,” according to the Agencies.
Background of the CRA
The CRA was enacted in 1977 to encourage bank lending in low- and moderate-income neighborhoods across the US by reducing “redlining,” the practice of refusing to extend credit in certain neighborhoods that lenders deem too risky. 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” (i.e., geographic area where the covered insured depository institution has a main office, branch office, or other facility that accepts deposits). The relevant Agency takes CRA evaluations into account when determining whether to approve merger and acquisition transactions.
Legal Challenge to the Final Rule
On February 5, 2024, prior to the effective date of the Final Rule, several banking trade groups (the Plaintiffs) sued the Agencies in the US District Court for the Northern District of Texas, alleging that (1) the Agencies overstepped their regulatory mandates in issuing the Final Rule; and (2) the Final Rule is arbitrary and capricious (for more information, see this Latham blog post).
- The Final Rule Exceeds the Agencies’ Statutory Authority: 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 Final Rule 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.
- The Final Rule Is Arbitrary and Capricious: According to the complaint, the Final Rule 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.” The 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.
The court issued a preliminary injunction against the Final Rule on March 29, 2024.
Practical Implications
As noted above, under the CRA, insured depository institutions are required to help meet the credit needs of their entire communities, including low- and moderate-income neighborhoods. The Final Rule encouraged subject banks to invest in these communities, including through activities related to disaster preparedness and climate resilience as a new category of community development eligible for CRA credit. Banks may wish to consider whether business, economic, and pecuniary reasons exist — such as community demand or long-term profit expectation — to continue to invest in these areas separate and apart from the Final Rule. The Final Rule also expanded assessment areas to include activities associated with online and mobile banking. Firms that have made plans to comply with the Final Rule may wish to reassess these aspects as well.
Conclusion
As expected, the Plaintiffs and bank industry groups applauded the Agencies’ decision (e.g., here, here, here, and here), while consumer advocate groups criticized it (e.g., here and here).
The Agencies stated that they intend to reinstate the CRA framework that existed prior to the Final Rule. They noted that they “will continue to work together to promote a consistent regulatory approach on their implementation of the CRA,” perhaps to proactively allay concerns that the Agencies often lacked consistency in how they applied the CRA to different banks under the CRA framework that existed prior to the Final Rule.
In any event, the plan to rescind the Final Rule is yet another step by the federal financial market regulators to nullify Biden-era rules, proposals, guidance, investigations, and enforcement actions that are viewed as contrary to the policy objectives of the current administration.