Warren, Waters Slam ‘Outrageous’ Suit on Anti-Redlining Rule (2)

Two top Democrats called the banking industry’s lawsuit over a rewrite of decades-old anti-redlining rules “outrageous” and demanded to know which banks or other companies are funding it.

The US Chamber of Commerce and the American Bankers Association successfully got the revamped Community Reinvestment Act regulations put on hold after filing a lawsuit along with other local industry groups in the US District Court for the Northern District of Texas. Judge Matthew J. Kacsmaryk slapped a preliminary injunction on the final rule in March blocking its effective date. Portions of the rule were set to take effect in April.

The Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency have appealed that ruling to the US Court of Appeals for the Fifth Circuit.

The industry lawsuit will block what regulators call a necessary update to the rules governing the 1977 law, Sen. Elizabeth Warren (D-Mass.) and Rep. Maxine Waters (D-Calif.), ranking member of the House Financial Services Committee, said in a Sunday letter to the Chamber and the ABA. The law measures banks’ lending and investments into low- to moderate-income communities based on branch locations.

The shift to online banking has made a reliance on branch networks for CRA evaluations outdated, Warren and Waters said.

“These rules must be updated, and your efforts to stop regulators from doing so is unjustified and harmful,” the two lawmakers said in their letter, obtained by Bloomberg Law.

The industry plaintiffs have argued the CRA rule could decrease lending into targeted neighborhoods and that the implementation period is too short.

A spokesperson for the Chamber said the business lobbying group still supports the CRA’s goals, but said the new rules worked against boosting communities.

“The rules ignored that community focus and would have caused banks to limit lending across sectors, significantly impacting small, Main Street businesses,” the Chamber spokesperson said.

An ABA spokesperson said the banking trade group looks forward to the future of the rule being decided on the merits.

“We reluctantly filed this lawsuit because the new rules exceed what Congress authorized and create disincentives for banks to offer products and lend in some of the very communities that need access to credit the most,” the spokesperson said.

Grading Curve

The industry groups’ lawsuit came even as banks hit with redlining fines still managed to receive top CRA compliance marks, Warren and Waters noted.

City National Bank, the Los Angeles-based “bank to the stars” owned by Royal Bank of Canada, agreed to a $31 million settlement with the Justice Department in January 2023 over its redlining practices—described at the time as the largest redlining settlement in DOJ history—even while carrying an “outstanding” rating for its CRA compliance, according to the letter.

Regulators give banks CRA ratings ranging from “outstanding” to “substantial noncompliance.” A poor grade can restrict a bank’s opportunities for branch expansions and merger activity.

Warren and Waters said there were at least nine cases over the last three years in which banks receiving “outstanding” or “satisfactory” CRA ratings faced charges from their regulators or the Justice Department over redlining in violation of the Equal Credit Opportunity Act.

Question Time

The two Democratic lawmakers asked the Chamber and the ABA if there was a vote among their members over whether to file the lawsuit and what percentage of members voted to do so. They also requested the names of banks and any other companies funding the lawsuit and how much they pledged.

Warren and Waters are also asking the two trade groups how many of their members have been sued for redlining in violation of the ECOA, as well as how many of those financial institutions received a CRA rating of “outstanding” or “satisfactory” during the period covered by such suits.

The lawmakers also asked for the percentage of banks affected by the updated CRA rule that are located in the Northern District of Texas, which includes Dallas, Fort Worth, and Amarillo.

The Chamber has partnered with trade groups including the ABA to file several rule challenges in the Northern District of Texas. Critics say the strategy is intended to get regulatory challenges before friendly, Trump-appointed judges and a conservative Fifth Circuit that’s often skeptical of federal regulations.

Updated Rule

The CRA rewrite that the Fed, FDIC, and OCC released last October is intended to better measure banks’ lending and investments into covered communities through mobile and online banking options along with their branch networks.

The rule also stiffened the grading process to cut down on inflated ratings, while providing a list of activities that would qualify for CRA credit.

Parts of the rule were set to take effect on April 1, while others wouldn’t fully come into effect until April 2027.

Both the Chamber and the ABA said they supported the CRA’s goals in comment letters to the agencies, Warren and Waters noted.

“But filing a meritless lawsuit against the rule that would modernize how we evaluate a bank’s ability to serve the entire community in markets where your members are already doing business indicates the insincerity of the Chamber’s and the ABA’s purported commitments to the CRA’s goals,” the lawmakers said.

The case on appeal is Tex. Bankers Ass’n v. Board of Govs. of Fed. Reserve Sys., 5th Cir., No. 24-10367.