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On October 24th, three federal bank regulatory agencies jointly adopted a final rule to implement the Community Reinvestment Act (CRA). Because CRA is the primary motivating factor behind 82 percent of investment in producing and preserving affordable homes through the Low-Income Housing Tax Credit (“Housing Credit”), this final rule has the potential to affect the supply of affordable rental homes for low-income renters significantly.
Our overall take on the final CRA rule changes is that they are a mixed bag of modest improvements and missed opportunities on the prior CRA rule and that it is too soon to tell what the net impact on bank activities and low-income renters will be. Nonetheless, we are able to make a few observations.
We join our allies at Rise Economy and Greenlining in deep disappointment that the final rule failed to incorporate race in any meaningful way into the CRA framework despite it being the consensus recommendation of community group commenters in California and nationally. Regulators also missed an important opportunity to promote community participation and impact by requiring Community Benefits Agreements between community groups and banks.
The greatest disappointment for affordable housing providers is that the regulators rejected our request to keep separate bank lending and investing tests as there had been previously. Instead, the regulators proceeded with the proposal we criticized of combining both tests under a single community development test. Our concern is that by making lending and investing interchangeable, regulators may have inadvertently weakened the incentive for banks to invest in Housing Credits because banks generally find lending easier and more convenient than investment.
Regulators offered a partial response to our request to keep the investment test separate by creating a separate assessment of Housing Credit and New Market Tax Credit (NMTC) investments for large banks with assets of more than $10 billion, which includes all banks operating in California that have dedicated community development staff. The flaw is that a bank’s performance on this test can only improve, not reduce, its score, meaning banks with otherwise acceptable scores can simply ignore this test. Banks below the $10 billion asset threshold, which currently invest roughly $150 million in the Housing Credit in aggregate in California, may end up shifting resources more towards lending over time.
On a brighter note, the regulations responded favorably to our request to give community development test credit for all affordable housing lending and LIHTC investments, regardless of location. This addresses our concern that certain parts of the state outside of core CRA lending areas had become so-called CRA deserts where it is difficult to attract Housing Credit investors or obtain favorable loan terms. Thanks to this change, banks should now be more interested in lending and investing to affordable housing providers on favorable terms in more rural areas of California.
Regulators made another significant change advocates requested to base CRA scores henceforth on specific benchmarks, namely the average activity of all large banks within a relevant geography. This will increase transparency and consistency in bank ratings. In addition, as advocates requested, the final rule establishes a process and role for public input on community credit needs and opportunities in connection with a bank’s next scheduled CRA examination.
From an affordable housing perspective, the most relevant elements of the final rule are:
- The thresholds to be an intermediate and large bank are increased and indexed to inflation such that only banks with more than $2 billion in assets will now be considered large banks. Intermediate banks between $600 million and $2 billion in assets may now choose to be evaluated under the old or new community development test.
- Among the various tests that banks are subject to, the community development test score is weighted at 40% for large banks and 50% for intermediate banks when determining a bank’s overall rating. These percentages are increased from the draft rule as we requested.
- Banks will receive consideration for any qualified community development loans, investments, or services, regardless of location.
- In general (see below with respect to the Housing Credit and NMTC), the community development test is assessed in each CRA assessment area, each state or multistate metropolitan statistical area, and for the institution as a whole. The bank’s ultimate score on the community development test is a weighted average of the performance in CRA areas and non-CRA areas at each level, with weighting based on the percentage of a bank’s retail lending and deposits inside its CRA assessment areas.
- The community development test includes the following elements: (1) a Community Development Financing Metric used to evaluate the dollar volume of a bank’s community development loans and investments relative to the bank’s deposit base; (2) standardized benchmarks to aid in evaluating performance, which are the average activity of large depository institutions in the respective geography; and (3) an impact and responsiveness review that gives positive consideration for community development loans and investments that are particularly impactful or responsive.
- For banks with more than $10 billion in assets, there is an additional metric for investments in the Housing Credit and NMTC. This metric is applied at the institution level only, and a strong performance contribute only positively to a bank’s community development test conclusion, i.e., there is no downside or penalty for poor investment levels. While still of concern as noted above, this partially responds to our comments and is a significant improvement over the draft rule which had no stand-alone assessment of Housing Credit and NMTC investment for any banks.
- Impact factors can help a bank’s score. There are impact factors for Housing Credit/NMTC investments as well as for loans/investments that directly facilitate the acquisition, construction, development, preservation, or improvement of affordable housing in High Opportunity Areas. The addition of Housing Credit/NMTC investments as a factor also is in response to, and partially mitigates, our concerns about a single combined lending and investment test.
- The community development test counts five types of affordable housing: (1) rental housing in conjunction with a government affordable housing plan, program, initiative, tax credit, or subsidy; (2) multifamily rental housing with affordable rents, upon completion of any rehabilitation, at 80% or less of the area median income (AMI); (3) one-to-four family rental housing with affordable rents in a nonmetropolitan area; (4) affordable owner-occupied housing for households with incomes of 80% AMI or less; and (5) mortgage-backed securities for which a majority of the loans are for government-financed affordable housing or mortgages to homeowners with incomes of 80% AMI or less.
- The community development test counts lending and investment in support of the revitalization or stabilization, as well as disaster preparedness and weather resiliency, of targeted census tracts in conjunction with a public or non-profit entity and plan.
- There is a community development test for Wholesale and Limited Purpose Banks, which includes a qualitative review of a bank’s community development lending and investments in each CRA assessment area and an institution level-metric measuring a bank’s volume of activities relative to its capacity.
- Banks may elect to be evaluated under a strategic plan. Such banks have the same assessment area requirements as other banks and submit plans that include the same performance tests and standards that would otherwise apply unless the bank is substantially engaged in activities outside the scope of these performance tests.
- Banks have 24 months from the date of publication of the final rule to comply with the new regulations.
The Partnership will continue to monitor the impact of the final rule on the Housing Credit market over time and, if necessary, advocate for further CRA changes. We also will continue to support our partners in seeking race-based CRA analysis and metrics to address on-going systemic racial inequity. CRA remains a bedrock law to bring investment to low-income families and communities, including affordable housing, and we remain committed to making it as effective as possible.
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