With the Low-Income Housing Tax Credit (Housing Credit) providing roughly 130,000 affordable homes each year, any regulations impacting the Housing Credit can have far-reaching effects on our nation’s ability to produce and preserve affordable housing. The Housing Credit falls under the jurisdiction of the Internal Revenue Service (IRS) and the Treasury Department, though it is also impacted by regulations issued by the Department of Housing and Urban Development (HUD), agencies regulating the Community Reinvestment Act (CRA), the Federal Housing Finance Agency, and other agencies. Learn more about some of the key regulatory issues impacting the Housing Credit below.
Regulatory Issues Resource Center
Basel III Endgame Proposed Rule
On July 27, 2023, the federal banking regulators—the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve (the Fed)— jointly issued a proposed rule that would revise large bank capital requirements, named Basel III Endgame. In response, the AHTCC proposed to the regulators lowering the risk weighting of Housing Credit investments to 50 percent to more accurately reflect the risk associated with such investments, align with the weighting of multifamily mortgages, and support investment in affordable housing production.
Given that banks provide approximately 85 percent of all Housing Credit equity investments, bank capital rules have a material effect on the availability and pricing of Housing Credit investments.
In addition to submitting a comment letter, the AHTCC co-led a broader industry letter alongside the National Association of Affordable Housing Lenders (NAAHL) that echoed the call to reduce the risk weighting for Housing Credit investments in the final rule.
Timeline of AHTCC Engagement in Basel II Endgame Rulemaking
On January 16, 2024, the AHTCC submitted a comment letter to the federal bank regulators on the proposed rule, also known as Basel III Endgame. The AHTCC’s letter recommended reducing the risk weighting for Housing Credit investments from 100% to 50% to better align with other multifamily financing and more accurately reflect the risk associated with such investments.
On July 27, 2023, the federal banking regulators—the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve (Fed)— jointly issued a proposed rule that would revise large bank capital requirements.
IRS Average Income Test Regulations
The IRS released final regulations on the Average Income Test (AIT), also known as ‘income averaging,’ in October 2022 that included changes urged by the AHTCC and our partners for nearly two years. The AHTCC, our partners, and affordable housing champions in Congress initially advocated for the AIT, the third minimum set aside for the Housing Credit, to make more types of affordable housing financially feasible and allow the Housing Credit to serve a broader range of low-income tenants. It was first introduced in the Affordable Housing Credit Improvement Act of 2017 and was enacted through the 2018 omnibus spending package.
However, the IRS proposed regulations in October 2020 regarding the AIT that would have severely limited utilization of the income averaging flexibility, and were already having that effect in their proposed form. The AHTCC and our partners weighed in with the IRS directly to request changes that ensure the AIT remained a viable option. In October 2022, as part of its Housing Supply Action Plan, the Biden Administration released a final regulation on AIT that adopts the majority of AHTCC’s recommended changes to the 2020 proposed rule. The final regulations address our major concerns and will make more affordable housing developments financially feasible.
Read more about the final regulations and other components of the Housing Supply Action Plan in our blog.
Timeline of AHTCC Engagement in IRS Rulemaking Procedure for AIT
On October 7, 2022 the Biden Administration announced several new steps in its Housing Supply Action Plan that reduce barriers to affordable housing construction and preservation, including finalizing the LIHTC income averaging regulation, which addresses concerns over the “cliff effect” created by the October 2020 IRS proposed rule.
On December 2, 2021, the AHTCC and 30 leading affordable housing industry partners sent a letter to the IRS and the Treasury Department urging the agencies to issue a final rule on AIT that sets an appropriate level of risk for utilizing the AIT, allow modifications to unit designations, and allow exceptions and/or flexibilities when noncompliance results from casualty loss.
On March 24, 2021, the IRS held a hearing on proposed AIT regulations, in which Emily Cadik, CEO of the AHTCC, and Michael Gaber, former Chairman of the AHTCC Board of Directors and Executive Vice President at WNC, Inc. testified on behalf of the AHTCC.
Community Reinvestment Act Reform
The Community Reinvestment Act (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 has not been significantly revised since 1995. In recent years, the federal banking regulators – the Federal Reserve Board, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) – have engaged in earnest to modernize CRA.
With an estimated 73 percent of Housing Credit investment stemming from banks motivated by CRA requirements, any changes to CRA could have significant effects on investment in the Housing Credit – and ultimately on our ability to build and preserve affordable housing. The AHTCC has engaged with the bank regulators throughout the modernization process, and will continue to weigh in on the latest proposals to urge that any changes maintain or strengthen the incentive to invest in the Housing Credit.
CRA Modernization Timeline
On August 5, 2022 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.
Our comments emphasized that any changes to CRA should maintain at least as much of an incentive to invest in the Housing Credit as there is today. We provided the agencies with several recommendations, listed below, to accomplish this goal. Our comments were developed in conjunction with our CRA Working Group comprised of representatives from over 60 AHTCC member organizations. See a more detailed summary of our recommendations on our blog.
NPR Proposals that Will Strengthen the Housing Credit
The NPR included two key aspects that we noted in our comments 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 proposed 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 recommended:
- Evenly weight the Retail and Community Development Test
- Require a Low Satisfactory Community Development Test conclusion for a Satisfactory rating:
Key Recommendations to Mitigate the Negative Impact of Removing the Separate Investment Test
If the separate Investment Test is not retained, we recommended 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
- Modify the Community Development Services Subtest to include a responsiveness assessment
- Measure banks’ new equity investments over time
- Include an institution-level Equity Metric and Benchmark, and
- Include the Housing Credit as an impact review factor.
In addition to our recommendations above, we urged 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.
See a more detailed summary of our recommendations on our blog.
On May 5, 2022, the Federal Reserve, OCC, and FDIC released a joint Notice of Proposed Rulemaking (NPR) to modernize CRA. The NPR had been expected after all three regulators announced intentions to develop a joint proposal building on the Federal Reserve’s 2020 Advance Notice of Proposed Rulemaking (ANPR). Learn more about the proposal on our blog.
On May 18, 2021, the OCC first announced that it would not implement its June 2020 CRA rule, and on December 24, 2021, the OCC officially rescinded the rule by issuing a new final rule. Effective January 1, 2022, the new rule returned regulations to those adopted jointly by the OCC, FDIC, and Federal Reserve in 1995, as amended. According to a press release, “this action is intended to facilitate the ongoing interagency work to modernize the CRA regulatory framework and promote consistency for all insured depository institutions.”
On February 12, 2021, the AHTCC submitted comments in response to the Federal Reserve Board of Governor’s CRA reform proposal. Our comments centered on two main points: We urged that any changes to CRA continue to incentivize robust investment in affordable housing through the Housing Credit, and that the new regulations help to address CRA-driven distortions in investment between different regions. Additional details can be found below and on our blog.
Recommendations to Sustain Housing Credit Investment
The Federal Reserve proposed eliminating the separate investment test and instead combining loans and investment under one community development financing subtest. This approach could have the effect of reducing Housing Credit investment unless mitigating strategies are put in place. We urged the Board to retain the separate investment test, and if it is not retained we suggested the following mitigating strategies:
- Strongly encourage community development investment by rewarding large banks that meet a benchmark level of community development investments as a portion of their total community development activities.
- Allow examiners to request an explanation if institution-level community development investment decreases significantly compared to the previous assessment period.
- Expand the proposed Impact Score assessments to a five-point scale, giving Housing Credit investments and other community development investments the highest impact score.
- More fully integrate Impact Scores into the proposed assessment methodology by setting a high-impact community development benchmark at the state or institution level.
In addition to our recommendations above, we strongly suggest that any final CRA regulations are first closely analyzed to ensure they will not have a negative impact on Housing Credit investment.
Recommendations Related to Assessment Areas
The Federal Reserve requested comment on the treatment of community development activities outside of assessment areas and the operationalization of nationwide assessment areas, both of which could significantly impact current Housing Credit pricing distortions between CRA “hot spots” and “desert” areas.
- To adequately incentivize activity outside of assessment areas while providing needed certainty for banks, we believe banks should receive credit at the assessment area level for statewide Housing Credit investments made outside of an assessment area. This treatment would ensure underserved communities that are not within local assessment areas are still able to benefit from the incentive that the CRA provides, helping to limit CRA-driven pricing distortions.
- To the extent the Federal Reserve permits nationwide assessment areas for certain banks, we suggest pairing national assessment areas with incentives for serving traditionally underbanked communities. This would help to ensure banks with national assessment areas are adequately furthering the goals of CRA.
On September 21, 2020, the Federal Reserve released a draft ANPR on CRA reform (see press release and fact sheet), which was unanimously approved by the Board of Governors with the caveat that some technical changes may be made prior to publishing it in the Federal Register. The ANPR was subsequently published in the Federal Registrar on October 19, 2020, and provided 120 days to comment.
The Federal Reserve’s proposal featured several differences from the Office of the Comptroller of the Currency’s (OCC) CRA rule finalized in May of 2020. Learn more about the proposal on our blog.
The OCC released its final rule on CRA reform (see the press release) in late May 2020. While the final rule includes some improvements from the OCC and FDIC 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. Most significantly, the final rule repealed the separate investment test, included a ratio evaluation approach with a very expansive list of CRA-eligible activities, and did not provide benchmarks for the overall CRA evaluation measure or a specific community development minimum, which the rule stated would be released after another Notice of Proposed Rulemaking.
Prior to the final rule, the FDIC joined the OCC in releasing a Notice of Proposed Rulemaking (NPR) on CRA modernization on December 12, 2019, but the FDIC did not join the OCC in issuing the final rule. On the day the OCC released its final rule, FDIC Chairman Jelena McWilliams said in a statement that the agency was “not prepared to finalize the CRA proposal at this time.”
Read more on our blog.
In April 2020, the AHTCC submitted comments in response to the OCC and FDIC’s Notice of Proposed Rulemaking (NPR) on CRA reform. Above all, we urged that any changes to CRA preserve the incentive it provides for investment in the Housing Credit and maintain our current ability to produce homes that are affordable to low-income households. More details about our recommendations can be found below and on our blog.
Support community development through the CRA evaluation methodology:
- Revise the list of activities that qualify under the community development test.
- Require a minimum level of activity in the three activity categories which receive double weighting under the proposal (investments, loans to community development financial institutions [CDFIs], and loans to affordable housing).
- Provide further guidance on the performance context review of community development activities.
Set community development thresholds that meet community needs:
- Utilize bank-provided data and re-publish a proposed rule that outlines the methodology used to determine the community development thresholds.
Evaluate banks’ consistent support of low-income households:
- Consider originations of loans or investments in affordable housing in addition to balance sheet activity or factor decreases in originations into the evaluation methodology
- Provide credit for the full amount of community development investments at the time of commitment.
Incentivize proven community development tools where they are needed most:
- Allow those activities which receive double weighting under the proposal (investments, loans to CDFIs, and loans to affordable housing) across a state be eligible for CRA credit if the bank has an assessment area within the state and received a satisfactory rating in the previous rating period.
On December 12, 2019, the OCC and FDIC released a Notice of Proposed Rulemaking (NPR) on CRA reform, which was officially published in the Federal Register on January 9, 2020. Comments on the proposed rule were initially due on March 9, but the comment period was extended to April 8, 2020. Read more on our blog.
In our comments, we urged that any changes to the CRA continue to support robust investment in the Housing Credit, to ensure that our nation’s primary affordable housing delivery mechanism is at least as efficient and effective as it is today. Specifically, we encouraged the OCC to retain a separate investment test, which is the primary feature of CRA that incentivizes community development investments like the Housing Credit, and to expand CRA assessment areas to encourage investment in underserved areas and help even out Housing Credit pricing differentials. Further, we support efforts to allow for more timely and transparent examinations.
Prior to submitting our comment letter, representatives from the AHTCC participated in a listening session at the OCC during which we also expressed our suggestions.
Read more on our blog.
On August 28, 2018, the Office of the Comptroller of the Currency (OCC) released an Advance Notice of Proposed Rulemaking (ANPR) to significantly alter CRA regulations. Comments were due November 19, 2018.
The OCC’s decision to issue the proposal alone was a notable diversion from previous CRA proposals, which were jointly adopted by all three regulators. 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, meaning the proposal could have significantly impacted Housing Credit investment, even without corresponding changes from the other two regulators.
Read more on our blog.
OECD Pillar II Rules Implementing a Global Minimum Tax
The AHTCC is leading efforts to avoid unintended consequences of global minimum tax rules that, without clarifying guidance, could dramatically reduce incentives for large multinational corporations to invest in affordable housing in the United States.
The OECD’s Pillar 2 model rules would govern the implementation of a 15% global minimum effective corporate tax rate, which aims to discourage nations from engaging in a “race to the bottom” by lowering domestic tax rates to attract foreign investment. The AHTCC is engaging with the Biden Administration to ensure that investors are not disincentivized from participating in the nation’s most powerful affordable housing development program by urging the OECD to issue guidance protecting the Housing Credit in the minimum tax calculation.
Global Minimum Tax Key Updates
The AHTCC, as part of a group of 30 national trade associations representing community development credits and financing tools, sent a letter urging the Treasury Department to protect investment in critical programs like the Housing Credit as the Organization for Economic Cooperation and Development (OECD) progresses on developing rules implementing a 15 percent global corporate minimum tax.
In May 2022, the Treasury commented on their efforts to protect tax credits, like the housing credit, as the OECD moves toward implementing Global Minimum Tax rules.
Assistant Secretary for Tax Policy Lily Batchelder said at the D.C. Bar tax conference May 5, 2022, that the Treasury has been “working with the OECD to clarify the treatment of general business credits under the minimum tax in the commentary to the model rules and in recent OECD public statements” and “are confident that the value of many of our general business credits is preserved under the OECD rules.” She said they “have established a process with the OECD for working towards additional clarifications. So, for example, we have heard concerns about the potential impact of other countries’ UTPRs for some taxpayers that invest in projects that give rise to the low-income housing tax credit, renewable energy credits, and the New Markets Tax Credit. But because of the way those investments are structured and accounted for, the income or loss and the income tax consequences of those investments typically will be excluded from the effective tax rate calculation, so those credits generally should not be impacted by UTPRs.”
The AHTCC continues to urge adoption of final guidance protecting the Housing Credit.
Issues Relating to Amending Tax Returns and Forms 8609
The AHTCC has been pursuing a solution to address issues that have arisen related to when Housing Credits could be claimed relative to the receipt of the Low-Income Housing Credit Allocation and Certification (Form 8609), which could create delays that ultimately impact the amount of tax credit equity available for affordable housing properties.
Though the ‘reasonable cause’ approach outlined in our considerations document from May 2020 has provided an interim option, guidance from the IRS is needed.
AHTCC Resources and Timeline
Prior to 2018, Housing Credits earned in a prior year could be claimed by amending a previously filed return upon receipt of the Forms 8609, even if the receipt of the forms was after the extended due date for the partnership return. Due to the new Bipartisan Budget Act regime, returns must be adjusted through an Administrative Adjustment Request (AAR), and investors claim the Housing Credits included in an AAR on the return for the year in which the AAR is filed rather than the year in which the Housing Credits were generated. The new regime could ultimately impact the amount of tax credit equity available for affordable housing properties, at a time when affordable housing is needed more than ever.
Learn more in the resources below.
On January 22, 2021, the AHTCC provided to the IRS comments in response to a comment request for Forms 8609 and 8609-A. While the request was prompted by Paperwork Reduction Act requirements and does not propose changes to existing regulation, the AHTCC used the opportunity to reiterate the need to address issues relating to amending tax returns and Forms 8609. Our comments include a February 2020 AHTCC letter previously sent to the IRS recommending that instructions for the Forms 8609 and 8609-A be changed to provide that Housing Credits may be reported without having filed the Form 8609 if there is a reasonable cause for the Form 8609 delay.
On June 25, 2020, the AHTCC held a webinar featuring leading industry experts to provide an overview of the above issue and an approach to consider.
- Michael Gaber, Executive Vice President, WNC, Inc., and President of the Board of Directors, Affordable Housing Tax Credit Coalition
- Glenn Graff, Attorney, Applegate & Thorne-Thomsen
- Beth Mullen, Partner, Affordable Housing Industry Leader, CohnReznick
- Michael Novogradac, Managing Partner, Novogradac & Co.
The AHTCC has worked with the IRS and many of our members, including leading affordable housing accounting and law firms, in asking the IRS to allow a partnership to claim Housing Credits prior to the receipt of Forms 8609 based on a “reasonable cause” approach, if the failure to have Forms 8609 is due to reasonable cause and not due to willful neglect consistent with Section 42(l)(1). Learn more about this approach in our memo, AHTCC Considerations for Amending Returns and Forms 8609, published May 12, 2020, and see a summary on our blog.
On April 8, 2020, the IRS released a COVID-19 related revenue procedure that allows once again the amending of Bipartisan Budget Act (BBA) partnership tax returns once Form 8609s are received for 2018 tax returns, as long as the partnership files an amended return by September 30, 2020. The guidance impacted properties that took advantage of the extended filing date for 2018 returns, but did not provide a long-term solution. Learn more on our blog.
Please note that, by providing these materials, the AHTCC is not providing tax advice, and each company will have to consult with its attorneys and accountants to weigh benefits and risks and draw its own conclusions when determining a path forward.
IRS Housing Credit Guidance in Response to the COVID-19 Crisis
The COVID-19 pandemic has brought on barriers and challenges that threaten the development and operation of Housing Credit properties. These barriers include construction labor shortages and delays that increase development costs; the unavailability of gap financing due to the cost of the COVID-19 crisis to state and local governments; financial penalties for missed development deadlines; market instability that can increase costs and decrease Housing Credit equity; increased operating expenses compounded by decreased rent payments; and other unforeseen obstacles. In response, the AHTCC and our partners have advocated for Housing Credit regulatory flexibilities and accommodations to ensure that Housing Credit development and operations can continue to move forward.
IRS guidance which extends Housing Credit deadlines and flexibilities has aligned with AHTCC recommendations on multiple occasions. Most recently, the October 2022 guidance issued as part of the Biden Administration’s Housing Supply Action Plan included extensions of key deadlines emphasized by the AHTCC’s advocacy efforts.
Housing Credit COVID-19 Guidance Timeline
On October 7, 2022, the IRS extended Housing Credit program deadlines and flexibilities. The IRS had already provided extensions of the placed in service and other Housing Credit program deadlines as recently as January 2022. However, the AHTCC, National Council for State Housing Agencies, and other industry leaders had been calling on the IRS to further extend key deadlines in light of the ongoing delays, disruptions and supply chain shortages. In a September letter from the AHTCC to the IRS and Treasury, we noted that “though these deadlines are over a year away, the anticipated continued disruptions are preventing closing on developments in which developers cannot provide a reasonable assurance they will meet the current deadlines. We thus encourage the IRS and Treasury Department to extend these deadlines as soon as possible, to allow critically-needed developments to move forward.” Though the IRS has extended these flexibilities in the past, this is the first time the IRS has done so far in advance of the expiration of the deadlines. The letter called for extensions of the placed in service, casualty loss restoration, and correction period deadlines, all of which were included in the October 2022 guidance.
Read more about the extended Housing Credit deadlines and flexibilities in our blog.
On January 11, 2022, the Internal Revenue Service issued guidance (IRS Notice 2022-05) to extend key Housing Credit program deadlines and provide other flexibilities in light of continued barriers to the construction and operations of Housing Credit properties due to the COVID-19 pandemic. Many of these regulatory accommodations had previously expired, after they were initially provided in July 2020 (IRS Notice 2020-53) and further extended in January 2021 (IRS Notice 2021-12). The AHTCC submitted a letter to the IRS and Treasury Department in September 2021, urging for Housing Credit regulatory relief, and we have continued to push for these extensions along with the National Council of State Housing Agencies (NCSHA) and other partners. See our blog for more information and see a matrix developed by NCSHA comparing the newest guidance to previously enacted guidance and NCSHA’s guidance recommendations.
On January 15, 2021, the Internal Revenue Service (IRS) issued long-awaited guidance (Notice 2021-12) to extend Housing Credit program deadlines and provide other flexibilities in light of the ongoing disruption to affordable housing development, construction and operations brought on by the COVID-19 pandemic. Learn about the guidance on our blog and the full list of guidance requested by NCSHA and in our sign-on letter.
On November 23, 2020, the AHTCC led an effort in which over 140 of our partners signed onto a letter to the IRS and Treasury to request deadline extensions and other accommodations for the Housing Credit related to the COVID-19 pandemic.
On July 1, 2020, the IRS issued IRS Notice 2020-53, which provided important deadline extensions and other accommodations for the Housing Credit, including extensions of the 10 percent test and rehabilitation expenditures deadlines, compliance and review moratoriums, and other flexibilities needed to address COVID-19-related challenges, like social distancing policies. See the details of the original COVID-19-related guidance on our blog.
On the same day, the IRS also proposed regulations to relax previous compliance monitoring regulations that were due to be implemented in 2021. The previous regulations would have increased the number of units state agencies need to monitor, creating additional burden and negatively impacting the provision of affordable housing. For more information on the new regulations, see the NCSHA blog.