Today the AHTCC submitted comments to the Federal Reserve Board of Governors, Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) in response to the agencies’ Notice of Proposed Rulemaking (NPR) on Community Reinvestment Act (CRA) reform.
With nearly 85% of Housing Credit investment stemming from banks motivated by CRA, any changes to CRA could have a significant impact on Housing Credit demand, and ultimately our nation’s ability to produce and preserve affordable housing. Above all, the AHTCC emphasized in our comment letter that any changes to CRA should maintain at least as much of an incentive to invest in the Housing Credit as there is today, and we provided the banking agencies with several recommendations to accomplish this goal. Our recommendations, summarized below, were developed in conjunction with our CRA Working Group comprised of representatives from over 60 AHTCC member organizations.
See below for general information on CRA, a discussion of the AHTCC’s principle concerns with the NPR, and our key recommendations for mitigating the NPR’s anticipated adverse impacts on Housing Credit investment.
CRA Reform Background
CRA was enacted in 1977 to ensure banks meet the credit needs of the communities in which they do business, including low- and moderate-income neighborhoods. Though banking has changed significantly over time, CRA’s implementing regulations have not been significantly revised since 1995, and do not take into account major changes like the advent of online banking. In recent years, the federal banking agencies – the Federal Reserve, OCC, and FDIC – have engaged to modernize CRA, leading up to the NPR issued in May 2022. The banking agencies are now expected to work toward issuing a final CRA rule by the end of the year.
See our alert from May 2022 for a list of recent CRA proposals from the banking agencies and the AHTCC’s past comment letters.
Connection Between the Housing Credit and CRA
Nearly 85% of all Housing Credit investment – $19 billion of Housing Credit investment in 2021 –comes from banks motivated by CRA requirements, meaning that CRA impacts the vast majority of Housing Credit demand. Housing Credit pricing can vary by $0.20 for each $1.00 of Housing Credit between areas where CRA-driven demand is highest – that is, where several major banks must meet CRA requirements – and areas outside of banks’ CRA assessment areas where CRA-driven demand is lowest. As a result, properties with the least CRA demand can receive 20% less equity for the same amount of Housing Credits as properties with the highest demand, rendering many properties financially infeasible.
Expected Impact of Interagency Proposal to Remove the Separate Investment Test
Under the current CRA framework, the CRA examination includes three tests, including an Investment Test weighted at 25% of the overall CRA examination. The Housing Credit is one of main options for meeting the Investment Test, which is the driver of CRA demand for the Housing Credit. The interagency NPR would replace the separate Investment Test with a combined Community Development Financing Test that includes both community development investments and loans, weighted at 30% of the overall CRA examination.
We expect combining investments and loans under one test with only a 30% weight will reduce the incentive to make equity investments because banks will be more incentivized to fulfill their CRA requirements through other eligible activities, such as loans, that are easier and less capital-intensive to administer.
To provide an estimate of the possible impact of removing the separate Investment Test, the AHTCC, Affordable Housing Investors Council, and National Association of Affordable Housing Lenders conducted a survey of 24 large banks. Nearly 42% of respondents – representing $2.4 billion in yearly Housing Credit investment – believed the removal of the separate Investment Test would have a negative impact on their bank’s appetite to invest in the Housing Credit, potentially resulting in decreased Housing Credit investments in favor of eligible community development loans.
While we believe some elements of the NPR will strengthen Housing Credit investment, we are concerned that on balance the NPR will substantially reduce the incentive that CRA currently provides to invest in the Housing Credit. Our recommendations to prevent this negative outcome are summarized below.
NPR Proposals that Will Strengthen the Housing Credit
The NPR includes two key aspects that we believe will benefit Housing Credit investment and help to even pricing disparities:
- Allowing consideration for the full amount of Housing Credit investments, regardless of the share of affordable units.
- Allowing consideration of community development activities outside of assessment areas, which could have the effect of evening pricing differentials between areas with the highest and least CRA demand if there is sufficient motivation for banks to invest in the Housing Credit.
Key Recommendations to Prioritize Community Development
The NPR proposes a disproportionate focus on retail activities over community development activities, which may not provide enough incentive for banks to focus on community development activities. To better motivate community development in general, we recommend:
- Evenly weight the Retail and Community Development Test:
- The NPR proposes weighting the Retail Test at 60% and the Community Development Test at 40%. We urge that the Retail and Community Development Tests instead be weighted evenly to provide banks with more incentive to aim for an Outstanding conclusion on the Community Development Test.
- Require a Low Satisfactory Community Development Test conclusion for a Satisfactory rating:
- Under the NPR, a bank could receive a Satisfactory rating overall with only a Needs to Improve conclusion on the Community Development Test. We urge that banks be required to achieve at least a Low Satisfactory on the Community Development Test to receive a Satisfactory rating overall.
Key Recommendations to Mitigate the Negative Impact of Removing the Separate Investment Test
If the separate Investment Test is not retained (see above for more information), we recommend the following changes to help ensure that CRA modernization does not diminish the incentive to invest in the Housing Credit:
- In addition to weighting the Community Development Test at 50%, modify the community development subtests, for which we propose two alternatives:
- Include an Investment Subtest weighted at 20% of the total score: Instead of combining investments and loans in a single Community Development Financing Test, we propose creating two tests to account for investment and lending separately. An Investment Subtest would ensure that community development equity investments continue to play a distinct and important role in the CRA evaluation. We propose weighting the Investment Subtest at 20% (slightly lower than the current 25% Investment Test because it would not include Mortgage-Backed Securities), the Lending Subtest at 25% and Service Subtest at 5%.
- Modify the Community Development Services Subtest to include a responsiveness assessment: As an alternative, we proposed keeping the general structure of the proposed Community Development Test, but changing the services test to a Community Development Services and Products Subtest, weighting it at 15%, and modifying it to include an evaluation of the responsiveness of all community development products. The responsiveness factors would necessarily include our mitigating factors listed below, which will help to ensure equity investments receive proper attention. We propose that Community Development Financing Subtest be weighted at 35%.
- Measure banks’ new equity investments over time:
- A bank’s annual originations of equity investments should be measured from one CRA examination to the next to identify any sudden drop-offs in new equity investing, particularly in the early years of new CRA regulations. If there is significant reduction in new equity investment volume, examiners should be able to request an explanation.
- Include an institution-level Equity Metric and Benchmark:
- If an Investment Subtest is not created, we believe it will be important to ensure that equity investments are prioritized in another way by instituting an equity-specific metric and benchmark. An Equity Metric would measure a bank’s equity levels compared to deposits, and an Equity Benchmark would be used to compare this metric to peer institutions. We suggest that the Equity Metric and Benchmark are integrated into the institution-level community development test or subtest conclusion, much like the current proposal integrates the Community Development Financing Metric and Benchmark.
- Include the Housing Credit as an impact review factor:
- Under the proposal, a bank’s Community Development Financing Test conclusion would be determined by the Community Development Financing Metric, Benchmarks, and Impact Review, which is meant to encourage activities that are particularly impactful or responsive. The NPR names several broad impact review factors to be included in the review (e.g., activities that serve persistent poverty counties or benefit Native communities). Considering the responsiveness of the Housing Credit in addressing community needs, we strongly urge that the Housing Credit be added as an impact review factor.
In addition to our recommendations above, we urge the Federal Reserve, OCC, and FDIC to evaluate any final CRA regulations to ensure they will not have a negative impact on Housing Credit investment.
As the affordable housing crisis continues to worsen, we cannot risk reducing the incentive to invest in the Housing Credit, which would dramatically impact the nation’s ability to produce and preserve affordable housing. See the AHTCC’s comment letter here.
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