Bank Regulatory Agencies Issue Joint Proposal to Modernize Community Reinvestment Act Regulations
The three major bank regulatory agencies include the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Fed), and the Federal Deposit Insurance Corporation (FDIC). Recently, these three agencies jointly issued a notice of proposed rulemaking that would strengthen and update regulations concerning the Community Reinvestment Act (CRA). For instance, the CRA would contain modernized definitions to reflect the current community’s reliance on internet-based and mobile banking.
The purpose of the CRA is to encourage covered banks to help meet the credit needs of their local communities, including low-income and moderate-income neighborhoods. The proposed revisions would be the first significant changes to the CRA in over 25 years; the last substantial revision to the CRA occurred in 1995. The OCC issued its notice of proposed rulemaking to update the CRA in June 2020, but the agency rescinded that rule in December 2021 in favor of issuing a joint rule.
The CRA and Community Development Activities
The rule will clarify eligible CRA activities focused on low and moderate-income, rural, and underserved communities, including affordable housing. The agencies propose using a “primary purpose” standard in determining the eligibility of these activities. Measuring “primary purpose” involves consideration of:
- Whether a majority of the dollars, applicable beneficiaries, or housing units of the activity are identifiable to one or more of the defined community development activities, or
- Where the measurable portion of any benefit bestowed or dollars applied to the community development purpose is less than most of the entire activity’s benefits or dollar value, the activity may still have a valid primary purpose if:
- the express, bona fide intent of the activity, as stated, for example, in a prospectus, loan proposal, or community action plan, is primarily one or more of the enumerated community development purposes;
- the activity is specifically structured to achieve the expressed community development purpose; and
- the activity accomplishes, or is reasonably certain to accomplish, the community development purpose involved
The rule also would give “pro-rata” consideration for certain affordable housing activities. More specifically, if the affordable housing is developed in conjunction with Federal, state, local, or tribal government programs that have a stated purpose or bona fide intent to promote affordable housing, it would get some CRA credit, even if fewer than most of the beneficiaries of the housing were low or moderate-income individuals. In this situation, the activity would have a primary purpose of affordable housing only for the percentage of total housing units in the development that is affordable. However, in the case of low-income housing tax credits (LIHTCs), a bank would receive CRA credit for the entire amount of the loan or investment in the LIHTC-financed project, no matter the number of units that are affordable.
The revised CRA also would revise the existing four categories of community development activities to include eleven categories that establish specific eligibility standards for a broad range of community development activities. These revised definitions focus specifically on activities responsive to community needs, especially those of low and moderate-income individuals and communities, as well as small businesses and farms. The new categories include:
- Affordable housing, including:
- Affordable rental housing developed in conjunction with federal, state, and local government programs,
- Multifamily rental housing with affordable rents,
- Activities supporting affordable low- or moderate-income homeownership, and
- Purchases of mortgage-backed securities that finance affordable housing.
- Economic development that supports small businesses and small farms (mostly evaluated under the retail lending test);
- Community supportive services;
- Revitalization activities (with significant changes from current regulations);
- Essential community facilities;
- Essential community infrastructure;
- Recovery activities in designated disaster areas;
- Disaster preparedness and climate resiliency activities;
- Activities with minority depository institutions, women’s depository institutions, low-income credit unions, and Treasury-certified community development financial institutions;
- Financial literacy; and
- Qualifying activities in Native land areas
Review of Community Development Activities
If the rule is finalized, the revised CRA regulations will provide a metrics-based approach to CRA evaluation of retail lending and community development financing, including public benchmarks. The proposal also better delineates facility-based assessment areas for banks. As a result, banks would receive CRA credit for any qualified community development activities, regardless of location, but with an emphasis on activities within the facility-based assessment areas.
The agencies proposed an evaluation framework that would consider bank size and business model differences. Even within the bank size categories, banks would have the opportunity to further tailor their evaluation frameworks.
For example, a large bank’s current CRA examination score is based on a lending test (50%), an investment test (25%), and a services test (25%). Under the new joint proposed rule, that score would be based on the following criteria:
- Retail lending test (45%)
- Retail products and services test (15%)
- Community development financing (investments and lending) test (30%)
- Community development services test (10%)
Impact on LIHTC and NMTC Programs
The proposed assessment area changes would benefit the LIHTC program, especially for community development activities outside facility-based areas. These changes could lead to more widespread LIHTC use in terms of improved equity pricing in rural and other areas with less CRA demand. Although the NMTC program does not have the same geographic disparities as the LIHTC program, it would still benefit from the assessment area changes.
Separating the lending and investment considerations in the CRA evaluation process could affect the LIHTC and NMTC programs. For example, many large banks must reserve less capital for community development loans than for equity investment, which arguably could deter the banks from participating in these programs.
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If you want more information about NMTCS and similar opportunities available to you, call our offices at 215.880.9441 in Philadelphia or 202.817.3941 in Washington D.C. and schedule a time to speak with us today. You also can find Savage & Associates online 24 hours a day, seven days a week, to learn more about our extensive range of services. Dionne Savage is here to help you access the benefits of economic development tools such as New Markets Tax Credits, Low-Income Housing Tax Credits, C-PACE, and Historic Tax Credits. These programs can give you the resources to revitalize and build up communities across the United States. With our legal advice and your ideas, we can work to achieve your dreams for your community.