Banking groups were bullish about an update to the Office of the Comptroller of the Currency's Community Reinvestment Act rule, but the upheaval could prove confusing for banks as they try to comply with CRA.

On May 18, the OCC announced it was reconsidering the rule and that it would not object if banks suspended developing systems or taking other measures to comply with the rule change prior to its anticipated start date.

"At this time, the OCC also does not plan to finalize the Dec. 4, 2020, proposed rule that requested comment on an approach to determine the CRA evaluation measure benchmarks, retail lending distribution test thresholds, and community development minimums under the June 2020 rule," the OCC wrote in its bulletin.

Community groups reacted positively to the news.

"Today's action lays out a course for reversing the OCC's 2020 final rule," wrote Jesse Van Tol, CEO of the National Community Reinvestment Coalition, in a statement. "Although more needs to be done, this is a necessary first step to creating an updated CRA that increases, rather than decreases, financial services, lending and investment in low- and moderate-income communities."

Banking trade associations, including the Consumer Bankers Association, had previously asked the OCC to be more clear about formally withdrawing the CRA rule to ensure banks are not implementing costly changes, including expensive and time-consuming data collection.

"Today's action is a positive step, and we continue to urge the OCC to formally withdraw the rule or delay the compliance date," the American Bankers Association wrote in a statement about the OCC's announcement.

Formally withdrawing the rule is important so that bankers can avoid confusion.

"Banks are already allocating significant resources to comply with the current rule, and these expenditures will be wasted if it is modified as part of a future interagency rulemaking," wrote Richard Hunt, president and CEO of the Consumer Bankers Association, in an email.

Acting Comptroller Michael Hsu said during a May 19 congressional hearing that the rule may be revised or rescinded.

"All options are on the table," Hsu said.

The OCC issued its final rule on CRA in May 2020 under former Comptroller Joseph Otting and without support from the other two CRA regulators, the Federal Reserve and the FDIC. The Federal Reserve proposed its own changes to CRA regulation in September 2020.

Otting stepped down as comptroller May 29, 2020, just days after the final rule was announced. Brian Brooks served as acting comptroller from Otting's resignation through Jan. 14, and was succeeded by Blake Paulson. Most recently, Michael Hsu was announced as acting director on May 10.

The upheaval at the OCC, differing proposals between the regulators and abrupt changes in final rules can be confusing and costly for banks as they try to ensure they are following the rules, said Craig Miller, partner and leader of the Financial Services Group at Manatt Phelps & Phillips LLP.

"Banks are some of the more traditional corporations that we have, they like to know what the rules are and how they can follow them," Miller said. "There is a real sense, certainly among community and regional banks, to fulfill the needs of low- and moderate-income communities, having a baseline where everyone's on the same page is really important."

But some remain skeptical that the three agencies will be able to agree to a single rule change.

"There's a reason that this hasn't been updated comprehensively since the mid-90s," said Isaac Boltansky, director of policy research at Compass Point Research & Trading LLC, in an interview.

The large number of stakeholders, technological innovations and questions regarding how to handle nonbanks prevent streamlined rulemaking, Boltansky added.

"This should've never been done on a unilateral basis," Boltansky said. "It's incredibly unhelpful to have a divergent standard like this. It's bad policy, it's bad for business, and most importantly, it's unhelpful for the consumers that it is intended to help."

For now, the CRA only applies to banks, but Federal Reserve Chair Jerome Powell said during the NCRC's 2021 Just Economy Conference that "like activities should have like regulation," but only Congress can bring nonbanks under CRA regulations.

But both Boltansky and Miller said it may be hard to bring mortgage lenders into the CRA fold, since they do not collect deposits and have different funding sources.

"Conceptually, we can all get behind a level playing field for everyone in the marketplace," Boltansky said. "I just have yet to see a viable proposal that can implement CRA-like regulation on nonbank mortgage lenders, for example."