WASHINGTON — Dissenting members of the Federal Reserve and Federal Deposit Insurance Corp. gave voice to a number of potential legal challenges to a newly-finalized revamp of the Community Reinvestment Act, but it remains unclear whether banks will want to challenge the anti-redlining regulations in court.

Columbia Law Professor Todd Baker said there are a number of legal theories that banks could include in a legal challenge. One, which was outlined by FDIC vice chair Travis Hill, is that regulated banks were given insufficient time to consider such a long and complicated rulemaking. That kind of argument would likely gain a favorable reception at the Supreme Court, he said. 

"If the regulators go ahead without more industry discussion and negotiation, there are likely to be legal challenges under the Administrative Procedures Act alleging that the CRA rule failed to comply with procedural requirements — in this case a longer notice and comment period given the new mandates in the proposed rule — or is 'arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,'" Baker said. "A filing with a conservative District Court in the Fifth Circuit could lead to an injunction, appeals and an ultimate decision by a Supreme Court that increasingly eschews Chevron deference to agency interpretation and has a hostile view of regulation in general."

Ian Katz, managing director at Capital Alpha Partners, wouldn't speculate on whether banks will challenge the rule, but acknowledged that if they try, there are venues out there where they could successfully make their case.  

"The banks have a sympathetic judiciary, especially in the Fifth District, so they might feel they have a strong enough case to win there," he said. "That makes a suit a real possibility."

Katz added the CRA rule may be a difficult one to argue as hastily crafted, given how long it has been in the works and how many different iterations of it have been presented.

"On the other hand, this rulemaking has been in the works a long time, with a couple of iterations of proposals, he noted. "It might be harder to make the case that it wasn't studied or analyzed sufficiently. But you only need one interested party to sue, so of course it's possible."

APA compliance isn't the only legal grounds that dissenting regulators raised over the CRA rule. FDIC board member Jonathan McKernan said Tuesday that he was concerned that certain aspects of the agencies' final rule might be exceeding the statute's original Congressional intent.

"I have yet to be convinced that the regulators have statutory authority to prescribe important aspects of the rule," he said at the board meeting. "The CRA requires each agency to assess a bank's record of 'meeting the credit needs of its entire community,' [and] I have not seen a convincing argument that we have the authority to consider lending activities outside a bank's facility-based assessment areas."

Federal Reserve Board Governor Michelle Bowman seized on a similar argument Tuesday, saying legislators, not regulators, would be more appropriate arbiters of change to the CRA. 

"Congress, not the banking agencies, is responsible for modernizing the statute," she said. "In my view, some of the changes being made by the agencies in this rule, including those that evaluate banks outside of their deposit-taking footprint, are likely beyond the scope of our authority under the statute."

Ken Thomas, President of the Miami-based Community Development Fund Advisors LLC, said there is considerable potential for legal action on the CRA Final Rule considering the dissents echoed by Bowman and Hill. 

"It is very unusual to have so many very strong dissents from [members of] two of the three regulators on such an important topic," he wrote in an email. "They toned down the over-the-top [notice of proposed rulemaking] a bit … but not enough to prevent a legal challenge. The Final Rule is riddled with numerous unintended consequences for both banks — and even many communities — that can easily be translated into economic damages."

Banks have already raised the possibility of litigation before. The Bank Policy Institute previously hinted at a legal challenge to the CRA rewrite after the regulators denied their request to extend the rule's comment period. BPI also indicated they believed interested industry parties should be afforded the opportunity to further comment on the CRA proposal given the coinciding revised capital framework earlier this year. 

"The agencies should reevaluate the proposed CRA rules and consider proposing changes for public comment," BPI's Senior Vice President Paige Paridon said in August. "If the agencies finalize the CRA rules before the outcome of these recent developments is clear, the public will not have had a meaningful opportunity to respond to the full range of regulatory effects."

But just because banks can sue the regulators doesn't necessarily mean that they will, and a big part of that decision rests on how costly the rule would be to comply with and how long they have to comply. Jaret Seiberg, an analyst with TD Cowen, said while the final rule will moderately increase costs for publicly-traded banks, evidence from the the last CRA overhaul in the 1990s suggests banks will take the revised reinvestment rules in stride.

"Banks likely will need to invest in new systems, but our experience is that banks are adept at these challenges [so] it should not be a long-term drag on banks," he wrote in a note. "The big changes are not until Jan. 1, 2026 [a]nd the current interest rate environment makes bank M&A less attractive. It is why we believe banks have runway before this could be a problem."