The Federal Reserve Board of Governors (Federal Reserve) today released a draft Advance Notice of Proposed Rulemaking (ANPR) on Community Reinvestment Act (CRA) reform. The ANPR was unanimously approved by the Board of Governors this morning with the caveat that some technical changes may be made prior to publishing it in the Federal Register, after which stakeholders will have 120 days to comment. The AHTCC will submit comments and provide resources to assist our members in developing their own comments ahead of the deadline.
The AHTCC maintains that any changes to CRA should preserve the incentive it provides for investment in the Low-Income Housing Tax Credit (Housing Credit), and maintain our current ability to produce homes that are affordable to low-income households. While we continue to analyze the ANPR, below we have provided a brief overview of the ANPR and recent CRA reform developments.
Regulators Propose Differing Approaches to CRA Reform Process
The Federal Reserve ANPR differs in many ways from the Office of the Comptroller of the Currency’s (OCC) final rule on CRA reform published in May, just six weeks after the agency received more than 7,000 comments in response to its joint proposed rule with the Federal Deposit Insurance Corporation (FDIC).
While the OCC’s final rule included some improvements from the proposed rule that the AHTCC and our partners recommended – including new specifications about the use of multipliers, the treatment of Housing Credit investments, and the expansion of deposit-based assessment areas – several of the overarching concerns we noted in our comments on the proposal remained. Notably, the FDIC did not join the OCC in issuing the final rule, and the Federal Reserve did not sign on to either the proposed or final rule.
In remarks at an Urban Institute event today, Federal Reserve Board Governor Lael Brainard echoed previous statements that “it is much more important to get reform right than to do it quickly.” Today she explained that the ANPR “incorporates ideas from public comments on past rulemaking notices, research, and our discussions with the other banking agencies. Our proposal also reflects extensive outreach through the 29 CRA roundtables we held across the country with community and industry leaders and community members.” She also noted the “extended 120-day comment period to allow ample time for thoughtful feedback from a broad set of stakeholders.”
Key Themes of the Federal Reserve’s Approach
According to remarks from Governor Lael Brainard, the Federal Reserve’s proposal seeks to:
Advance the CRA’s core purpose of addressing inequities in credit access and ensuring an inclusive financial services industry,
Provide more certainty and consistency,
Tailor expectations to local conditions and bank business models, and
Minimize reporting burden.
Importantly for the Housing Credit, the proposal does not use the OCC’s “single ratio” approach, and maintains a separate community development financing test, which was eliminated in the OCC’s final rule. Under the Federal Reserve’s proposed rule, the CRA evaluation will be performed through four separate subtests: the Retail Lending Subtest, Retail Services Subtest, Community Development Financing Subtest, and Community Development Services Subtest (see figure below). Small banks are not subject to the Community Development Test.
Housing Credit investment falls under the “Community Development Financing Subtest,” along with other bank loans and investments that “create and maintain affordable housing, promote economic development, and revitalize and stabilize [low- and middle-income] communities.” For large retail banks subject to this subtest, community development loans and investments will be measured relative to deposits in each assessment area, and thresholds will be “calibrated using local and national data” that would account for regional differences and “adjust automatically to changes over time.” The thresholds would be provided in regularly updated dashboards like the example below.
However, as the draft ANPR states on page 98, “some stakeholders worry that combining loans and investments could reduce direct incentives to make Low-Income Housing Tax Credit (LIHTC) investments,” and requests feedback on the structure of the subtest. The AHTCC will analyze the proposed rule in full and provide feedback in our comments.
Also of note, the draft ANPR proposes an expansion of assessment areas to help address “credit deserts” and “proposes to designate certain areas, based on persistent inequities, where banks could receive credit for community development activities that often lie beyond the boundaries of a bank’s branches.” Additionally, and similar to the OCC final rule, the ANPR “proposes to publish and regularly update an illustrative, but not necessarily exhaustive, list of qualifying activities,” and requests feedback on a pre-approval process to provide greater certainty.
After the Federal Reserve publishes the final ANPR and the comment period concludes, likely at the end of January 2021, the Federal Reserve will need time to analyze and incorporate feedback into a final rule. However, today Governor Brainard remarked that she does believe there will be enough time for the OCC, FDIC, and Federal Reserve to converge on a single plan, as stakeholders have requested throughout the CRA reform process.
Compliance with the OCC final rule will be required in 2023 for larger banks and 2024 for smaller banks. However there are still key details, like the evaluation thresholds, which will require further rulemaking before the rule can be implemented, and are expected to be released in the coming weeks. It is also important to note that a new Administration would also influence the path forward, potentially undoing the OCC’s final rule.
The AHTCC will reconvene the CRA Working Group, led by Matt Josephs, First Vice President of the AHTCC and Senior Vice President of the Local Initiatives Support Corporation, to develop our response to the Federal Reserve ANPR. If you are a member of the AHTCC and would like to join the working group, please contact Megan John.