Federal Banking Regulators Propose CRA Overhaul

Last week, the three major federal banking regulators — the Federal Deposit Insurance Corporation, the Federal Reserve, and the Office of the Comptroller of the Currency — released a proposed rule that would substantially amend their Community Reinvestment Act (CRA) regulations. The stated purpose of the proposed rule is to update the CRA rules to reflect market developments since the regulations were last overhauled in 1995 and to encourage more critical investment and lending to benefit low- and moderate-income households and communities.

NCSHA is analyzing the proposal to determine how it will impact the Housing Credit, Housing Bonds, and other HFA programs, as well as affordable housing generally. The regulators will accept comments until August 5. NCSHA will submit comments on behalf of all HFAs. If you have any input for NCSHA to consider in its comments, please contact Greg Zagorski by COB on July 11.

Some of the rule’s major provisions are summarized below.

New Evaluation Framework for Large Banks

Under current CRA regulations, large banks must meet three tests to comply with CRA guidelines: the lending test, service test, and investment test. The proposed rule would replace this system with four new tests: the retail lending test, which would account for 45 percent of a bank’s evaluation; the retail services test, which would account for 15 percent; the community development financing test, which would account for 30 percent; and the community development services test, which would account for 10 percent.

The community development financing test includes all activities, including lending and investments, that support activities whose primary purpose is one or more of the following community development activities:

  • affordable housing
  • economic development that supports small businesses and small farms
  • community supportive services
  • revitalization activities
  • essential community facilities
  • essential community infrastructure
  • recovery activities in designated disaster areas
  • disaster preparedness and climate resiliency activities
  • activities with minority depository institutions, women’s depository institutions, low-income credit unions, and Community Development Financial Institutions
  • financial literacy
  • qualifying activities in Native Land Areas

Included within affordable housing is participation in federal, state, and local government programs, with the Housing Credit and HOME Investment Partnerships program explicitly cited as examples. For most affordable housing activities, banks will get CRA credit for the proportion of the project that is affordable. For example, if a bank finances a $100 million loan for a multifamily housing building in which 50 percent of the units are affordable, the bank would get CRA credit for $50 million. The proposed rule includes an exception for Housing Credit investments, allowing banks to get CRA credit for the entire investment regardless of the share of affordable units.

Other eligible activities under affordable housing are support for naturally occurring affordable housing, support for affordable single-family housing (except for individual mortgage loans, which would count under the retail lending test), and purchases of mortgage-backed securities that contain loans for affordable housing.

Under the proposed rule, all bank assistance for affordable housing and other community development financing activities, whether in the form of loans or equity investments, will count equally toward a bank’s CRA score. In addition, the proposed rule will allow banks to receive CRA credit for the outstanding balance of community development loans originated in previous evaluation periods if they remain on the balance sheet. Currently, banks receive credit only for previous periods’ equity investments, not loans.

Assessment Areas

The proposed rule maintains much of the current regulations’ approach of evaluating bank CRA activity predominately in geographically defined assessment areas surrounding a bank’s headquarters, branches, and deposit-taking ATMs. To address the rise in online banking and ensure banks support those areas in which they do business, the proposed rule would require large banks to delineate retail lending assessment areas where they have concentrations of home mortgage lending (at least 100 or more mortgages per year) and/or small business lending (at least 250 small business loans per year) outside of their facility-based assessment areas.

The regulators also propose to allow banks to receive credit under the community development financing and services tests for activities conducted in areas outside their assessment areas. Specifically, banks could receive consideration for qualifying activities anywhere in a state or multistate metropolitan area in which they maintain a facility-based assessment area, regardless of whether the activities occur specifically in the assessment area. In addition, banks could receive CRA credit for any qualifying activities conducted nationwide.

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