The bank regulatory revolutionary war is at a critical inflection point.
Bankers in America's most heavily regulated industry drew a line in the sand when theCommunity Reinvestment Act, which has been working fine since 1995, waspoisoned with politics and denigrated to a national credit allocation scheme.
Like everything, CRAhas become a very divisive Trump vs. Biden/Harris issue, so much so that it pitted red vs. blue states and bankers vs. regulators in federal court.
Banks have always complained about the regulatory burden of safety and soundness and compliance requirements like capital rules and the Bank Secrecy Act, or BSA, but they were devoid of politics. Bankers comply with capital rules regardless of their political persuasion, and we go after money launderers whether they are conservatives or liberals.
The 1977 CRA has always been an apolitical law, even when reformed in1995. I had the honor then to work with Senator Proxmire, the "father" of CRA, and the Office of the Comptroller of the Currency on what we now refer to as the "Proxmire CRA," because he was involved with and endorsed it.
The 1995 Proxmire CRA, in effect today, has worked fine. Communities receive approximately$500 billion annually, community groups obtain$100 billion agreements with merging banks and98% of banks pass their CRA exams.
Everything changed with the 2016 election of President Trump, who brought in bankers to run the Treasury Department and the Office of the Comptroller of the Currency. Instead of addressing BSA, thecostliest compliance regulation, they decided to overhaul CRA, far down the list, because their previous bank had serious community groupCRA problems.
They justified their regulatory overreach by using the modernization argument as a Trojan horse. Everyone agreed CRA should be updated to addressbranchless banks, since they were engaging in modern-day redlining or "weblining" of our big cities to the tune of about $40 billion annually.
The "Trump CRA," a 372-pagefinal rule produced in 2020, wascriticized by the increasinglypoliticized Federal Reserve and its community group friends, whochallenged it in a San Francisco federal district court.
President Bidenrescinded the Trump CRA and replaced it with the "Biden CRA," a 1,494-page final rule, the most complicated and convoluted regulation in the history of American banking.
It was the handiwork of Fed Ph.D. economists, the vast majority of whom are registeredDemocrats, based on areform proposal created by a Biden-appointed Fed vice chair who is now heading the White House'sNational Economic Council.
The Trump CRA included a variant of the5% deposit reinvestment rule to prevent weblining, but the Biden CRA ignores it. That "Robin Hood" rule requires banks to reinvest in the low- and moderate-income neighborhoods of any market generating at least 5% of deposits.
The Biden CRA backwardly focuses on where banks make loans rather than where they get deposits, thus ignoring CRA's reinvestment purpose … and middle name.
Banks usually pass theirCRA exam with at least a 50% loan-to-deposit ratio, assuming the majority of loans benefit their entire local community, including its LMI segment. Where and how a bank lends the remaining deposits outside its community is the bank's business … until the Frankenstein final rule evaluating and rating nationwide lending kicks in.
This credit allocation scheme takes these lending decisions out of a bank's board room and puts it in the hands of Washington bureaucrats. A colossal shift from private to public decision making, pushing our capitalist banking system closer to a socialist one.
Citadel Federal Credit Union's $6.5 million deal with the Justice Department settles allegations of discriminatory lending around Philadelphia. It was the DOJ's first-ever redlining order against a credit union.
The Biden CRA punitively increases the current 2% CRA exam failure rate fivefold to 10%, with the Fed'sretail lending test projections driving the overall rating. Banks over $10 billion, many of which lend nationwide, will see their outstanding ratings shrink from 40% to just 10% based on these sameFed projections. Outstanding ratings at the largest banks over $50 billion will plummet from nearly 60% to 0%.
There's no need for such a radical change to the Proxmire CRA, when all that is needed is the simple weblining fix. Regulators proselytize aboutfairness to bank customers, but a just economy also requiresfairness to bankers.
The Biden CRA's politically charged and unfairfinal rule left bankers no choice but to take their prudential regulators tocourt, the first time ever on such a large scale. Using terms like "misstate and misapply," "miss the mark" and "misconstrue," a federal district court'sinjunction was highly critical of regulators.
The regulatorsappealed, and supporting amicus briefs were filed by a "blue state" coalition, various community groups and a San Francisco area activist bank owned by anonprofit. The industrycountered with supporting amicus briefs filed by a "red state" coalition, an industry trade group and this author.
Misinformed members of Congress predictablysupported the regulators' appeal. In a blatant intimidation effort, theydemanded names of banks supporting the legal challenge and amounts pledged.
'Tis the season for fake CRA news.
The Fed, which cannot comment on litigation, is cleverly using its community group and other friends to bash banks for supporting the litigation atrecent andupcoming CRA conferences. This author's requests to present an opposing view at these events have been denied. If you can't convince a judge, then why not use your friends to convince bankers?
The circuit court's decision can be appealed to the Supreme Court. A reelected President Trump, meanwhile, could rescind the Biden CRA, the same way President Biden rescinded the Trump CRA.
The best public policy solution, however, is a nonpartisan one keeping the current successful and apolitical Proxmire CRA but modernizing it with the 5% deposit reinvestment rule to eliminate weblining. This would allow bankers to get out of the courtroom and get back in their boardroom serving their communities and shareholders.
Affirm partners with Sixth Street to sell its buy now/pay later loans to the investment firm; Associated Banc-Corp promotes Steven Zandpour to deputy head of consumer and business banking; Visa Direct speeds up its money transfers; and more in this week's banking news roundup.
Banks will feel the fallout from a court's decision to strike down a Nasdaq rule that would have mandated more disclosure about the racial and gender composition of corporate boards.
The bank said it redeployed proceeds from the sale into high-yielding investments. It also said it would end an employee pension plan to curb expenses.
A close result was complicated by an hour-long adjournment of the New York-based company's annual meeting that angered dissident investors and left them mulling legal action.