In August 2018 the Office of the Comptroller of the Currency (OCC) released an advanced notice of proposed rulemaking (ANPR) soliciting public comment on reform of Community Reinvestment Act (CRA) regulations.  Nearly 1,500 national, state and local organizations and businesses submitted comments to OCC in response to the ANPR, a sample, comprised of key affordable housing and community development associations and stakeholders, of which can be found here. Since then, there have been countless discussions around CRA requirements and what regulatory reform would mean for the banking industry and the low- and moderate-income (LMI) communities they serve. 

CRA requirements ensure banks invest in LMI communities so understandably affordable housing and community development stakeholders are closely watching. The tax credit community is particularly interested in CRA regulations and guidance because approximately 85 percent of the annual low income housing tax credit (LIHTC) equity investment is CRA-driven according to the Affordable Housing Investors Council (AHIC). An equally large, if not greater, proportion of new market tax credit (NMTC) investment demand is driven by CRA-motivated banks. To help put this demand in context, this post examines banking activities in relation to CRA and tax credits.

Background

While there are three regulating agencies charged with CRA implementation — OCC, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board of Governors (Federal Reserve or FRB) – it was OCC that released this recent ANPR on CRA regulatory reform. If the Federal Reserve or FDIC does not join with the OCC on regulatory reform, any changes in CRA requirements that result from the ANPR would only apply to OCC regulated banks.  However, it is likely the ANPR could be the impetus for a larger conversation among the three CRA regulators and result in more far-reaching regulatory reform.  It’s been more than 20 years since there has been significant reform to CRA regulations and the banking industry has undergone massive change since then – banks have begun to operate increasingly across state lines, Internet and mobile banking has taken off, mortgage lending has changed significantly, and more institutional and money-center banks were established. Any new requirements should take into account how these changes could affect the way banks serve LMI communities.

Current Investment Trends

Some of the largest banks invest in the LIHTC, NMTC and historic tax credit (HTC) programs. Novogradac research shows that nearly all of the largest 10 banks, as ranked by assets, invest in one or more tax credits. The financial institutions presented in the table below represent U.S. holdings, though some have foreign parent companies. Foreign parentage should be noted because the base erosion and anti-abuse tax (BEAT), a new tax created as part of the tax reform, would apply to certain bank and securities corporate taxpayers with significant foreign operations. Tax credits may lose some or all of their effectiveness as a result of the BEAT.

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The OCC regulates the majority of the largest banks found to invest in the various tax credits. Overall, while the OCC currently regulates a little more than 20 percent of the nation's banks, these banks combined have more total assets than those regulated by either FDIC or the Federal Reserve, accounting for about 70 percent of all covered financial institution assets.  Known tax credit investors (the table above is not an all-inclusive listing) are not limited to banks – the housing government sponsored entities (GSEs) Fannie Mae and Freddie Mac are significant LIHTC investors, as are insurance companies, other financial institutions, some large corporations and other nonfinancial institutions such as Microsoft and Google. In 2017, the GSEs’ regulator, the Federal Housing Finance Agency (FHFA), permitted the GSEs to resume their LIHTC equity investing, after a 10-year absence. Since then, numerous multi-million dollar GSE-led LIHTC investment funds have been closed, ensuring the creation and preservation of affordable housing throughout the country, notably in areas outside of the traditional assessment areas of large banks, and putting them on par with many banks in terms of LIHTC investing.  The GSEs had been dominant LIHTC investors prior to 2008, consisting of 35-40 percent of the annual LIHTC investment market.

What effect could banking trends have on investments in tax credits?

In the 10 years that followed the financial crises of 2008, there was little talk of bank mergers as banking regulations were revised in light of the Dodd-Frank Act and policymakers were afraid of letting banks get too large. Earlier this year, however, talk of mergers started to resurface as BB&T and SunTrust announced merger plans in February 2019. A merger of this size – BB&T and SunTrust would have a combined $442 billion in assets, making it the sixth largest bank – has raised concerns and the U.S. Federal Reserve has scheduled public hearings for April 25 and May 3.  As Forbes data and a recent Urban Institute report show, the larger banks, JPMorgan Chase in particular, far outpace the reach and assets of other large banks and mid-size/regional banks. The Urban Institute research highlighted mortgage lending trends, important in the context of equity investing as investors are likely to invest more equity for tax credits in properties in which they are also lending, and found that lending activity is concentrated among the largest lenders, with JPMorgan Chase far surpassing its closest competitors. Other large banks dominating the market include Citigroup, the largest affordable rental housing lender nationally according to Affordable Housing Finance magazine’s annual survey of affordable housing lenders. Taking all of this into account, as small and midsize banks look for ways to remain relevant in the increasingly competitive banking market, there is an added impetus to merge with larger financial institutions.

If we start to see a resurgence in bank mergers, what could this mean for CRA requirements, and housing and community development efforts in LMI communities? As larger banks acquire more mid-level institutions to remain competitive, and smaller banks continue to focus on their local communities, we could see a hollowing out of the middle, creating a barbell effect. There is concern that this could leave a dearth of regional and midsize banks, possibly affecting the services provided to consumers in these areas. Another likely outcome of mergers could be fewer bank branches, which could mean less access to banking products and services for the communities served by these banks.  As part of the Bank Merger Act of the Federal Deposit Insurance Act, proposed mergers are examined to determine if the transaction would threaten the ability of the merged institutions’ to meet their CRA obligations like meeting the credit needs of the LMI communities they serve. Fewer branches does not necessarily mean less access but would place a higher burden on banks to develop alternative service methods as a means of meeting the needs of their communities and CRA requirements.  

Fewer bricks and mortar locations would also affect the banks’ assessment areas. OCC’s ANPR included questions designed to garner input on how assessment areas are defined and used.  Service areas are currently limited to those communities in which the bank has a physical presence, such as the headquarters, deposit-taking branches, and automated teller machines. These may have been adequate measurements in the early 1990s but are less suitable in current times, as rising criticism of current CRA standards includes the way assessment areas are used to gauge a bank’s CRA performance. Previous analysis noted the current CRA assessment areas no longer fully represent where a bank does business, with the rise of alternative service methods, like internet and mobile banking. The OCC ANPR does ask how the definition of assessment areas should be updated to accommodate these new developments. Changing the assessment area definition could significantly improve LIHTC equity pricing in markets that lack traditional assessment areas.

Conclusion

The LIHTC, NMTC and HTC rely on bank investments and without the incentive provided by CRA, it is unlikely banks would invest in LMI communities as much as they do. That the OCC wants to reevaluate its CRA requirements is newsworthy and has many following these discussions closely. Banking trends and investing patterns will also need to be monitored to see how shifts in this industry will affect community development financing of LMI communities in general and meeting CRA requirements in particular.  All three regulating agencies would have to agree on a course of action because it is unlikely the OCC would move ahead alone. As such it may be some time before any CRA changes would take place. At the time of this writing, a joint release of a proposed rule on CRA regulations from the OCC, the Federal Reserve and the FDIC is expected sometime from mid-2019 to mid-2020. A comment period of at least 60 days would likely follow, putting the possible release of final regulations anywhere from late 2020 to early 2021, barring any setbacks.  

Advocacy of the LIHTC, NMTC, and HTC communities is crucial as the OCC, Federal Reserve, and FDIC considers CRA regulatory reform.  Stay tuned.