Federal banking regulators are asking the Fifth Circuit Court of Appeals to lift a Texas court injunction barring implementation of new Community Reinvestment Act (CRA) rules.

In asking the court to lift the injunction, the FDIC, OCC and Federal Reserve Board contend that U.S. District Judge Matthew Kacsmaryk erred by finding that only the geographic area around a bank’s physical facilities should be taken into account when assessing the financial institution’s record of meeting community needs under the CRA.

In February, groups including the U.S. Chamber of Commerce, the Independent Community Bankers of America and the American Bankers Association sued, contending that the rules did not follow the statute and that they would impose tremendous costs on financial institutions.

In asking that the injunction be lifted, the regulators said, among other things, that the banking industry has changed tremendously since the last time the CRA rules were rewritten.

“Since the last comprehensive update to the regulations in 1995, a subset of banks, such as primarily online banks, are now conducting substantial shares of their retail lending away from these physical facilities, creating a lack of parity in how institutions with different business models are evaluated,” the regulators argued.

They said that Judge Kacsmaryk had “grafted” an exclusion into the language of the law when he issued his injunction in March. “Such rewriting of the statute is impermissible,” the agencies argued.

Although we believe the retail lending test and retail lending assessment areas were unnecessary additions to the Final Rule, the decision of the District Court was surprising.  The Act states that “[i]n connection with its examination of a financial institution, the appropriate Federal financial supervisory agency shall—(1) assess the 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…” The Act itself does not define a bank’s “entire community” and, given technological changes that have reduced reliance on brick and mortar branch offices, it is not unreasonable for the regulators to consider how an institution’s “entire community” is measured.

We would have preferred to see assessment areas determined not only where banks maintained offices, branches, and deposit-taking remote service facilities, but also, for institutions that source significant deposits from locations where they do not have facilities, where they source those deposits. The rule, as written, allows a bank to take deposits over the internet from a community, but not make loans in that community. We continue to think that is a mistake, but think the Act, as written, permits regulators to reconsider how an institution’s entire community is defined.

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