WASHINGTON (Reuters) -U.S. bank regulators announced Friday they intended to rescind a 2023 update to fair lending rules for banks and reinstate the prior requirements, citing a legal challenge from the banking industry over the new framework.

In a joint statement, the Federal Reserve, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency said they intend to issue a proposal reinstating prior rules enforcing the Community Reinvestment Act, a 1977 law that requires banks to service local communities.

The updated rules were intended to modernize CRA requirements and acknowledge the rise of online banking. The new, tougher requirements would have forced banks to provide services to lower-income Americans in areas beyond their physical bank branches to include large populations of online users.

U.S. banking and business groups sued the regulators last year over the new rules, arguing they exceeded regulatory authority and could hinder lending. A Texas judge blocked enforcement of the new rules a year ago.

Conceived to prevent red lining - a discriminatory practice where banks refuse or offer only limited lending to certain areas or populations, primarily minorities - CRA regulations are central to banks' overall supervisory performance. Poor CRA grades put lenders in a so-called penalty box, meaning they are barred from doing mergers and other deals.

(Reporting by Pete Schroeder; Editing by Chizu Nomiyama)