Regulatory Compliance has been an ever-evolving process for decades. But at least the changes have been mostly steady and slow. But during the last 15 years the pace of regulatory change has not only accelerated, but it’s also become a ping pong game among the last 4 presidential administrations. From Obama to Trump, from Trump to Biden, and now, from Biden back to Trump, the regulations and their enforcement has been a back-and-forth match. Nowhere has the change been more radical and more rapid than in the so-called fair lending laws: the Community Reinvestment Act, the Fair Housing Act, and the Equal Credit Opportunity Act. The change has been manifested in the regulations and in their enforcement. Regulatory Compliance officers at financial institutions face a challenging situation under such a volatile regulatory environment.
A prime example of change in the form of the regulations can be seen in the Community Reinvestment Act (”CRA”). During the first Trump Administration the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation could not agree on how to “modernize” the CRA. Ultimately, in an unprecedented move among bank regulators, the OCC went alone and approved its 2020 CRA rule. However, no sooner was President Biden sworn in to office than the OCC announced its intention to repeal the Agency’s just approved new 2020 CRA rule. Before the end of 2021 the OCC 2020 CRA rule was rescinded and reverted to the legacy 1995 rule.
That was not the end of ping ponging the CRA regulations, however. During 2023 the banking regulators approved a new prodigious (more than 1,500 pages) CRA rule which radically changed the 1995 rule making it more expansive than ever and more complex than any previous regulation (CRA or otherwise). The new rule immediately was challenged in the courts and stayed by court injunctions.
Lo and behold, before the litigation proceedings could be completed, the second Trump Administration announced its intention to repeal the 2023 CRA rule and revert to the legacy 1995 rule. The Trump Administration has not announced any new proposed regulations to modernize CRA, but you can be certain that it’s only a matter of time before another change to the regulation will be proposed in light of the clamor to modernize the regulation.
But it’s not only in the matters of the Community Reinvestment Act that the regulatory ping pong match has been played. The regulatory prohibition against “redlining” has been another area where regulatory enforcement has seen dramatic volleys. In October 2021, the Department of Justice announced its “Combatting Redlining Initiative” when the Attorney General announced that redlining was not only a practice in the past but was still widespread today. To enforce its aggressive enforcement against redlining the prudential banking regulators relied extensively on the concept of “disparate impact” which in turn, relies on “statistical significance” to demonstrate discriminatory effects of a lender’s mortgage practices.
The aggressive application of statistically significant disparate impact theory depended heavily on the delineation of the market in which the alleged redlining was occurring. Historically, regulators applied a concept of a “REMA” or Reasonably Expected Market Area based on certain facts such as where a lender was marketing its mortgage products and where the lender’s mortgage applications originated. But following the Combatting Redlining Initiative announcement regulators informed banks of a radical change in how the concept of a REMA was defined. No longer were the theretofore facts relevant, rather a REMA was to be defined as any area no smaller than a Metropolitan Statistical Area or Metropolitan Division (or non-MSA area). This itself would result in unrealistic markets difficult, if not impossible, for community banks to serve. Nevertheless, it was an important factor to produce statistically significant findings against smaller lenders who didn’t have the capacity to serve such large markets. So, within the Biden Administration’s duration, new aggressive anti-redlining regulatory enforcement was announced that relied heavily on the concept of disparate impact and a changed concept of one constituted a REMA.
Within 3 months of replacing the Biden Administration, Trump Administration 2.0 announced its intention to minimize (if not abolish) the concept of disparate impact legal theory as much as possible. This can only mean that the Combatting Redlining Initiative is history.
With the never-ending ping pong regulatory compliance ball furiously bouncing back and forth between successive presidential administrations, regulatory compliance officers find it ever more difficult to follow the compliance ball. It was already a challenge to stay on top of compliance regulations, now it’s almost impossible. Whose serve is next?
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