The Office of the Comptroller of the Currency (OCC) has released its final rule on Community Reinvestment Act (CRA) reform, just six weeks after more than 7,000 comments were submitted to the OCC and Federal Deposit Insurance Corporation (FDIC) on their proposed rule. See the OCC’s press release here. The AHTCC’s comments urged that any changes to CRA – which drives an estimated 73 percent of Housing Credit investment – preserve the incentive it provides to invest in the Housing Credit and maintain our current ability to produce homes that are affordable to low-income households.
Compliance with the 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. It is also possible that changes in the Administration or Congress could prompt further revisions, or even postponing or repealing the law before it is implemented. Comptroller of the Currency Joseph Otting is expected to step down soon now that the rule has been finalized, so the forthcoming Notice of Proposed Rulemaking on thresholds and any other changes will be made under new leadership.
While the OCC only oversees roughly 20 percent of banks, those banks represent 70 percent of financial institution assets and the vast majority of institutions that invest in the Housing Credit (see analysis from Novogradac and Co.). However, it is notable that the FDIC did not join the OCC in issuing a final rule. Though the OCC and FDIC issued the proposed rule earlier this year jointly, FDIC Chairman Jelena McWilliams said in a statement today that the agency “is not prepared to finalize the CRA proposal at this time.” The Federal Reserve, the third of the CRA regulators, has not issued a proposed rule, but has indicated a separate vision for CRA modernization.
Overview of the Final Rule
Below we have provided an initial summary of key provisions impacting the Housing Credit in the final rule. The AHTCC will continue to analyze the OCC’s final rule and provide more information as we further assess its potential impact on affordable housing.
Several of our chief concerns regarding the proposed rule are still intact in the final rule:
- Elimination of Investment Test: The rule repeals the separate investment test, which has been a strong motivator for affordable housing investment.
- New Ratio Evaluation Approach: The final rule retains from the proposed rule the general framework to evaluate banks based on a ratio evaluation approach in which many more types of activities qualify for CRA credit, with an expansive list of activities that qualify for CRA credit in the community development category.
- Unsupported Benchmarks and Minimum Thresholds: In our comments, the AHTCC expressed concerns that the proposed thresholds for minimum levels of activity may not be robust enough, and urged the OCC to utilize bank-provided data and republish a proposed rule that outlines the methodology used to determine the thresholds. The final rule does not contain benchmarks for the overall CRA evaluation measure, a specific community development minimum, or thresholds for the retail lending distribution tests. Rather, the rule states that the OCC will gather more data, conduct further analysis, and issue another Notice of Proposed Rulemaking before calibrating the benchmarks, thresholds, and minimums (see pages 153-154 of the final rule). As a result, we cannot yet determine the potential impact.
Ultimately, we remain concerned that Housing Credit investments may be seen as a less appealing way to meet CRA obligations relative to other potentially easier or less impactful options, which could affect Housing Credit demand and ultimately affordable housing production.
Improvements from Proposed Rule
The OCC does acknowledge several issues that the AHTCC and others in the Housing Credit community had raised in our response to the proposed rule, and made some positive changes in the final rule. However, we still do not know whether these changes will be sufficient to robustly incentivize affordable housing given the other changes to CRA regulations:
- Multipliers: The proposed rule introduced multipliers in which certain activities, including investment in affordable housing, would receive double weighting. While we generally agreed with the choice of activities that would receive the multipliers, we suggested that banks be required to provide a minimum level of applicable activity to ensure that the multipliers do not effectively reduce community development. In the final rule, a bank would now not be eligible for the multipliers until the quantified dollar values of its current period community development activities are approximately equal to the quantified dollar values of community development activities considered in its prior evaluation period. (See page 85 of the final rule for more information.)
- Treatment of Housing Credit Investments: The proposed rule included an examination of only balance sheets in quantifying a bank’s qualifying activities. In our comments, we expressed concern that banks could then meet targets based on current balance sheet assessment and limit or halt new investment activity, and the OCC noted in its final rule that several groups commented that the proposal specifically undervalued Housing Credit activities. The final rule has now been updated from the proposed rule to assure that banks will receive credit for the total dollar value of the Housing Credit fund in the year it was originated and additional credit for the Housing Credit investment after the transaction is complete. If a bank holds a portion of the syndication on its balance sheet, it will be quantified in the same manner as other community development investments. (See pages 79-80 of the final rule for more information.)
- Assessment Areas: The proposed rule would have created new deposit-based assessment areas where banks receive at least five percent of their retail domestic deposits, with the assessment area constrained to the smallest geographical area. We suggested that Housing Credit investments receive CRA credit if they take place within a state in which a bank has at least one assessment area, and noted that the change would help to balance Housing Credit investment geographically. The final rule broadens banks’ deposit-based assessment areas at any geographic level up to the state level, provided the deposit-based assessment areas do not overlap facility-based assessment areas. The final rule also allows for double weighting of qualifying activities in CRA deserts, which have a major impact on Housing Credit pricing. (See pages 92 and 85, respectively, of the final rule for more information.)
Especially now as affordable housing is needed more than ever due to the impact of the COVID-19 crisis, and with so many new challenges to developing and financing affordable housing, we will continue to work with the Administration and Congress to advocate for robust investment in the Housing Credit, our nation’s primary tool to finance affordable homes.