Bowman: Regulators likely lacked authority to modernize CRA

Federal Reserve Gov. Michelle Bowman said federal regulators likely exceeded their authority by modernizing Community Reinvestment Act rules late last month without Congressional action.  

“Some of the changes made by the agencies, including those that evaluate banks outside of their deposit-taking footprint, are likely beyond the scope of our authority under the statute,” Bowman said Nov. 9 during an American Bankers Association forum in Palm Beach, Fla.

Michelle Bowman

Bowman’s comments came approximately two weeks after the Federal Reserve, FDIC and Office of the Comptroller of the Currency issued a final rule modernizing CRA for the first time since 1995. The updated rule requires community banks with more than $2 billion in assets to comply with the same CRA evaluation standards as the largest banks, including by undergoing a new retail lending test, facing expanded assessment areas and undertaking more rigorous data and reporting obligations.

To account for the rise in mobile banking, the updated standards also require banks to lend to lower-income communities in areas where they have a concentration of small business and mortgage loans, not just physical branches.  

Bowman, who voted against the final rule, said it failed to properly tailor CRA expectations to a bank’s size and business model. She said community banks should have instead been allowed to opt into the retail lending test and assessment areas. 

Bowman expressed concern that the more stringent rules could incentivize banks to pare back lending in areas where there is already a lack of credit access. “The rule is unnecessarily complex, overly prescriptive and directs outcomes that result in disproportionately greater costs than benefits, adding significantly greater regulatory burden for all banks, but especially community banks,” Bowman added.

The Independent Community Bankers of America expressed similar sentiments following the final rule. In an Oct. 24 statement, President and CEO Rebeca Romero Rainey said the updated CRA standards would “create disproportionate implementation costs for community banks. 

“ICBA has long advocated for a uniform rule that minimizes new data collection and reporting burdens for community banks and increases transparency into how ratings are established,” she added.

RSM Senior Analyst Brandon Koeser said banks must fully understand the modernized rule and properly assess whether their current internal systems are sufficient to comply. Banks that need to update their internal standards might decide to do so by acquiring another bank, he added. 

The final rule will be fully implemented on Jan. 1, 2026. 

During the ABA forum, Bowman also criticized the Federal Reserve’s recent proposal to lower the interchange fee cap for credit card issuers with more than $10 billion in assets and interagency climate change risk guidance issued Oct. 24 for banks with more than $100 billion in assets. 

To Bowman, the interchange fee proposal could force banks to discontinue their lowest-margin products, potentially to the disadvantage of lower-income issuers who might not qualify for alternatives. 

“I expect the fee cap will continue to affect a broader range of issuers, including community banks,” Bowman noted. “Issuers of all sizes use the same payment rails, and smaller issuers will inevitably face some pricing pressure, at least indirectly, from the interchange fee cap.”

The climate change guidance recommends that banks with more than $100 billion in assets monitor and measure climate-related risks and develop strategies, delegate resources and build capacity to account for such risks.  

Bowman cautioned that the proposal could eventually trickle down to smaller banks. She warned that the rule could steer more financial services to nonbanks and distract regulators from their core responsibilities of ensuring that banks account for credit, interest rate and liquidity risks. 

“Regulatory reform can also pose significant financial stability risks,” Bowman added. “The cumulative effects of recent proposed and final rules remain to be seen, but these significant regulatory changes could present ongoing risks to the health of certain institutions and the U.S. banking system.”

Hovde Group Vice President Kirk Hovde advised banks to proactively address the changes by speaking with their advisers, lawyers and state associations. The burden of new regulations disproportionately falls on community banks, he noted, as they generally lack the resources to effectively tackle new requirements. 

Though Hovde doesn’t view regulatory compliance as usually being the sole driver behind an M&A, he does see it as a contributing factor when the bank already has credit or capitalization issues. Increased regulatory oversight can also require banks to dedicate more staffing for compliance, which is especially burdensome in the current economic environment as profit margins are squeezed due to rising funding costs and interest expenses.