Factionalization in the financial sector heightened on Monday as some of the largest U.S. banking and business groups, including the American Bankers Association (ABA), Chamber of Commerce, and Independent Community Bankers of America, joined forces to file a lawsuit against three banking regulators in response to recently updated fair lending rules. The lawsuit forms part of Wall Street's increasing pushback against what they perceive as unreasonably comprehensive new regulations.
Contention Around Updated Regulations
Initiated in the Northern District of Texas, the lawsuit aims to quash the new rules that enforce the Community Reinvestment Act (CRA). According to its opposers, the updates expand beyond the regulatory authorities' legal capacity, are excessively entangled, and could demotivate lending. In the interim, as the legal system deliberates, the groups are requesting a preliminary injunction to stop the enforcement of these regulations.
Last year, the Federal Deposit Insurance Corporation, Federal Reserve, and Office of the Comptroller of the Currency updated their enforcement regulations of the CRA, a legislative action taken in 1977 to ensure banks lend funds within their local communities. The decision to take legal action did not come lightly. As explained by ABA CEO Rob Nichols, given the federal regulators' lack of response to public comments and considerable flaws in this rulemaking, they felt compelled to file the lawsuit reluctantly.
Review of New CRA Regulations
Traditionally, the CRA was designed to prevent redlining, a biased practice where banks restrict or refuse lending to specific communities or populations. The regulations under the CRA are methodical in their appraisal of how efficiently banks service the areas in which they cater. These revised rules, however, necessitate that lending is widened and more services are provided to those in low-income brackets across a more extensive geography.
When contacted, the regulators chose not to provide an immediate public comment. Still, they previously stated that the review represented an essential modernization in light of the growth of online banking and diminishing local branches.
Legal Challenges Surfacing
The current litigious objection by the banking industry forms the newest in a string of legal face-offs against a backdrop of a myriad of novel regulations, encouraged by an empathetic judiciary and the opportunity to tackle regulators under President Joe Biden's Democratic administration.
Over the last year and a half, over 30 corporations and trade associations, including banks, funds, and varying firms, have filed around 15 lawsuits against financial regulators concerning major regulations, policies, and supervision issues. This information, as reported by Reuters in November, highlights a rising trend of legal opposition.
However, while litigation against the consumer watchdog and securities regulator is commonplace, banks seldom confront their prudential supervisors, more so the Federal Reserve. As researched by Wharton School professor David Zaring, over the past decade, neither industry groups nor individual banking enterprises have taken more than one case to court challenging the Fed's policymaking.
Significantly, it was in 2013 when a parallel case arose, whereby the ABA filed a lawsuit against the Federal Reserve over proprietary trading rules, as supported by an analysis of the Federal Reserve's annual reports.
