Final CRA Rule Implementation on Pause  

Judge Matthew Kacsmaryk of the U.S. District Court for the Northern District of Texas recently granted an injunction to extend the Community Reinvestment Act (CRA) final rule’s effective date, April 1, along with all other implementation dates. Here’s what you need to know about the case (Texas Bankers Association et al v. Office of the Comptroller of the Currency et al.) and how it will impact Low Income Housing Tax Credit investment.

First let’s set the stage. LIHTC finances virtually all new affordable housing, and CRA motivates most of these investments. As reported in the March Housing Tax Credit Monitor, total LIHTC investment reached $26.2 billion in 2023, of which an estimated 85.5 percent—or $22.4 billion—came from banks motivated by CRA requirements. How and when the CRA final rule is implemented will impact most LIHTC investors.

The CRA final rule came out in October 2023 and most LIHTC participants were cautiously optimistic. Earlier drafts of the rule would have incentivized lending over investment, but the final rule took a more balanced approach. Depending on the size of the institution, banks had until 2026 or later to comply with most of the provisions in the final rule. But many were already beginning to implement internal systems to prepare for the new regulatory regime.

In February, a group of bankers (Texas Bankers Association, Amarillo Chamber of Commerce, American Bankers Association, U.S. Chamber of Commerce, Longview Chamber of Commerce, Independent Community Bankers of America and Independent Bankers Association of Texas) sued the federal banking regulators (the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Federal Reserve Board of Governors). The plaintiffs asked the court to vacate the final CRA rule arguing the regulators violated the Administrative Procedure Act by acting beyond their statutory authority and to grant a preliminary injunction while the court decides the merits of the case.

In late March, the first major action in the case came down as an injunction against the regulators, temporarily preventing the agencies from enforcing the final rules and extending the effective dates for each day the injunction remains in place, pending the resolution of the lawsuit.

Judge Kacsmaryk agreed with the plaintiff’s assertion that the regulators ran afoul of their statutory authority by analyzing banks 1) outside the geographies where they operate physical facilities and accept deposits and 2) on deposit products.

The first argument hinges on the definition of “entire community,” which regulators argue gives them the authority to analyze banks based on where they serve customers. The argument continues that in an increasingly digital banking system, the actual branches and the community around them becomes less meaningful, hence the need for a broader scope. While not a final ruling, Judge Kacsmaryk granted the injunction because he believes the plaintiff’s argument will likely prevail. In their view, the entire community is geographically based on branch locations, with the legislative text bolstering their argument using the words “local communities.”

The second argument centers on meeting the deposit vs. credit needs of a community. Again, regulators took a more expansive view, arguing that the CRA does not bar them from considering deposit products as a factor when evaluating if a bank is meeting the credit needs of its entire community and that there is a sufficient nexus between deposit products and the provision of credit that requires them to consider deposit products when evaluating a bank. The plaintiffs argue, “Congress knew the difference between ‘credit’ and ‘deposit’ activities” – and nevertheless instructed the Federal Banking Agencies only to “assess the institution’s record of meeting the credit needs of its entire community.”

Implementation of the final regulations will remain on hold until the case is officially decided. Given the injunction order by Judge Kacsmaryk, it seems probable that the defendants will prevail at the District Court, at which point the regulators will likely appeal to the U.S. Court of Appeals for the Fifth Circuit. Expect a drawn-out legal process as the case winds its way through the courts. Given all of this, banks will be operating under the old CRA regulations for some time with little impact on tax credit pricing, at least from a CRA perspective.