Community Reinvestment Act – What Changes Are Coming?

Published by Michael Novogradac on Monday, May 16, 2011 - 12:00am

As many know, the Community Reinvestment Act of 1977 (CRA) is undergoing regulatory review, and the results of that review will affect the investment appetite of CRA motivated investors. There has been no comprehensive review of CRA since 1995.

So what is likely to happen?

First, a proposed rule will likely be available later this year. Further, here is my analysis of some items likely to be part of the proposed rule; items that are of particular relevance to the affordable housing and community development field:

  1. The current CRA test is a three part test, double weighted to lending:
    1. 50% lending (home mortgages and small business loans)
    2. 25% investment test
    3. 25% services test (90% based on bank distribution)

      The investment test is likely to be replaced with a community development (CD) test, and the weighting of the CD test raised to more than 25%. 
  2. Look for more flexibility with regard to geography. Options include:
    1. % of deposits not tied to branch (i.e., internet deposits) eligible to engage in CRA activities anywhere in U.S.
    2. % of deposits within an MSA eligible for CRA activities outside MSA if within state
    3. % of deposits eligible for CRA activities within larger census tract region (of which there are four in the nation)
  3. Expect to see public reporting of CRA activities.
  4. A new emphasis on qualitative aspects of CRA assessments is probable, including guidance on definition of “innovative”.
  5. An update of the product suite for qualifying activities is coming.  For instance, letters of credit would receive full credit. In essence, anything with a risk capital allocation would qualify. For services, the amount of the capital outlay would qualify.