A revised proposal to substantially reform the Community Reinvestment Act (CRA) regulations, released last month, represents the first major change to CRA rules in more than 25 years. While the May 5 proposal is a substantial improvement over previous changes issued between 2018 and 2020, as currently proposed, the regulations do raise some issues of concern for community tax credit stakeholders. To avoid unintended negative effects from the rule changes, the development tax credit community is encouraged to participate in the comment period that closes Aug. 5.

CRA Background and Regulatory History

Since it was enacted in 1977 and with the last significant interagency revision to its regulations in 1995, the CRA is one of the most important federal policies for affordable housing and community development financing, generating hundreds of billions of dollars in loans and equity investments annually. The CRA is responsible for 75% to 85% of annual investor demand for the federal Low-Income Housing Tax Credit (LIHTC) incentive, virtually all of the annual investor demand for the new markets tax credit (NMTC), and to a lesser extent investor demand for the historic tax credit (HTC) and renewable energy tax credits (RETCs), especially if there are located in economically distressed communities.

The three main federal banking regulatory agencies–Federal Reserve Board of Governors (Federal Reserve), the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC)–on May 5 jointly issued a Notice of Proposed Rulemaking (NPR) to reform CRA regulations. Along with the official notice, the agencies provided a one-page fact sheet, summary of key CRA objectives, as well as a Federal Reserve Board memo discussing the CRA regulatory reform proposal.

This latest CRA regulatory reform proposal follows years of efforts by the agencies. In 2009-10, the agencies held several public hearings in Washington, D.C., and nationwide on how to reform the 1995 CRA regulations. However, because there was not enough consensus among the regulators, such hearings did not result in a robust proposal to reform the regulations, but rather interagency Questions and Answers guidance on the existing CRA regulations, released in 2016.

Starting in 2017, the U.S. Department of the Treasury (Treasury) consulted with many affordable housing and community development stakeholders, including Novogradac, to assess how CRA regulations could be modernized to reflect developments in the banking industry and improve CRA implementation. These consultations resulted in a Treasury memorandum issued on April 3, 2018, and sent to federal banking regulating recommending CRA regulatory reforms. The Treasury CRA memo resulted in an advance notice of proposed rulemaking (ANPR) issued by OCC in August 2018, an NPR issued by OCC and FDIC, but not the Federal Reserve issued in December 2019, and a final rule reforming the CRA regulations issued by the OCC in May 2020. However, that rule lacked widespread support in the banking community as well as community development industry, and was rescinded and replaced with the original 1995 regulations by OCC under new leadership in December 2021.

After it failed to get the OCC to act on a joint CRA regulatory proposal, the Federal Reserve kickstarted its own CRA reform efforts when it issued its ANPR in October 2020 based on an alternate approach, and the joint NPR issued borrows heavily from the approach outlined in the Federal Reserve ANPR as well as some noncontroversial elements of 2020 OCC final rule.

Highlights of the May 2022 Proposed CRA Regulations

In the accompanying one-page fact sheet, the agencies note that the joint CRA reform proposal has five key elements:

1. Expand access to credit, investment and basic banking services in low- and moderate-income communities;
2. Adapt to changes in the banking industry, including internet and mobile banking;
3. Provide greater clarity, consistency and transparency;
4. Tailor CRA evaluations and data collection to bank size and type; and
5. Maintain a unified approach.

These objectives guided a variety of changes throughout the CRA regulations. Highlights of these changes follow.

Change in CRA Examinations

In contrast with the current law large bank test, where a bank’s CRA examination score determined a lending test (50%), an investment test (25%) and a services test (25%), the joint proposal for large banks would change to:

• Retail lending test (45%),
• Retail products and services test (15%),
• Community development financing (investments and lending) test (30%), and
• Community development services test (10%).

The examination process would initially be based on qualitative factors, but eventually transition once the agencies had sufficient data to incorporate specific benchmarks that could be adjusted based on peer performance and place in the economic cycle. Originations as well as investment and loans in portfolio would be eligible for positive CRA consideration.

Furthermore, the agencies propose to change the standards for banks to receive an outstanding rating as opposed to a satisfactory rating. Banks would be required to meet newly established higher benchmarks under the retail lending test to be eligible for an outstanding rating. While the agencies may believe such higher benchmarks would provide an incentive for a “race to the top,” if such benchmarks are so high that banks conclude they are not worth pursuing, then not only would retail lending not improve, but such banks may also not be incentivized to excel on the community development financing test, as its performance on that test could not compensate for a satisfactory rating on the lending test.

Assessment Areas

Under the proposal, regulators would still use “facility-based assessment areas,” which are delineated by a bank’s deposit-taking networks, as the primary factor for determining if banks are meeting their CRA obligations. Large banks would also consider areas where they have a concentration of retail loans and aggregate CRA-related activity in low- and moderate-income areas (which are generally defined as census tracts with median incomes at or below 80% of the area) across the entire country. The agencies also allow large banks to be able to consider community development activity regardless of where it takes place, inside facility-based assessment areas, in states where a bank has facility-based assessment areas but outside those boundaries, multi-state areas, or nationwide.

Changes in Qualified Activities

The notice of proposed rulemaking also amends the type of activities that qualifies as community development, revising what constitutes affordable housing and economic development as well as adding new categories. Banks would be credited for activities in:

• Affordable housing (with important clarifications for unsubsidized and mixed-income housing);
• Economic development that supports small businesses and small farms (mostly evaluated under the retail lending test);
• Community supportive services;
• Revitalization activities (with significant changes from current regulations);
• 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 Treasury-certified community development financial institutions;
• Financial literacy; and  
• Qualifying activities in Native land areas.

In addition to quantifying the activities listed above, the agencies propose to evaluate the impact and responsiveness to community need of the qualifying activities for purposes of the community development financing and services test. Such an impact review could privilege certain community development activities over others.

Affordable Housing Changes

The agencies are proposing a definition for affordable housing that includes four components:

1. affordable rental housing developed in conjunction with federal, state and local government programs,
2. multifamily rental housing with affordable rents,
3. activities supporting affordable low- or moderate-income homeownership, and
4. purchases of mortgage-backed securities that finance affordable housing.

The agencies propose that affordable housing that is developed in conjunction with federal, state, local, or tribal government programs that have a stated purpose or bona fide intent to promote affordable housing would be considered even if fewer than the majority of the beneficiaries of the housing are low- or moderate-income (LMI) individuals (those earning at or below 80% of AMI). Such housing activities would receive pro-rata credit.

The agencies propose a different approach for an activity that involves LIHTCs. Specifically, a bank would receive consideration for the full amount of the loan or investment for a LIHTC-financed development, regardless of the share of units that are considered affordable.

Lastly, the proposal would help facilitate positive CRA consideration for activities focused on unsubsidized housing, often referred to as “naturally occurring affordable housing” or NOAH, as long as the CRA financing targets rental affordability at 30% of 60% of AMI, a more targeted standard than LMI. The agencies considered using the standard of 30%of 80%t of AMI but they believed it would be preferable to use a more targeted definition to ensure that rents are affordable to low-income households and to increase the likelihood that LMI households will occupy the units.

Revitalization, Stabilization and Place-Based Activity Changes

The six proposed place-based definitions share four common elements. First, each definition has a geographic focus (e.g., low- or moderate-income census tracts) where the activities must occur. Second, each definition has standardized eligibility criteria that require the activity to benefit local residents, including low- or moderate-income residents, of the targeted geographies. Third, each definition has the eligibility requirement that the activity must not displace or exclude low- or moderate-income residents in the targeted geography. Finally, each definition provides that the activity must be conducted in conjunction with a government plan, program, or initiative that includes an explicit focus on benefitting the targeted geography.

Racial and Ethnic Data Reporting and Incentives

For the first time, the agencies also call for large banks to disclose the racial and ethnic background of their borrowers, a move that they hope will provide more transparency to the public about what groups are getting access to credit. To lower the regulatory burden, the proposal largely would require banks to report the same characteristics as under the Home Mortgage Disclosure Act for the CRA activities.

The proposal also adds incentives to invest in special purpose credit programs (SPCPs) and alternative underwriting models. SPCPs are an important tool to address racial equity within the limits of the Fair Housing Act and the Equal Credit Opportunity Act.

Implications of the May 2022 Proposed CRA Rules for LIHTC, NMTC and Proposed NHTC

For the LIHTC, the changes on assessment area geography, especially allowing for positive CRA consideration for community development investments outside facility-based areas, should help equity pricing in rural and other areas with less CRA-motivated demand under the current regulations. However, Salt Lake City and Wilmington, Delaware, which benefit under the current CRA regulations as certain banks decide to book an unusually large portion of their deposits into those metropolitan areas under the current CRA regulations, may experience less CRA-motivated demand as a result.

NMTC equity pricing does not have the same geographic disparity as LIHTC, but still would benefit for the greater clarity on assessment areas. Both the LIHTC and the NMTC would benefit from the ability to get positive consideration for community development activities held in portfolio, as opposed to just getting credit for originations, as they are often held on bank balance sheets for many years.

While it is not enacted, it is unclear how the proposed neighborhood home tax credit (NHTC) would be affected by the proposal, given the changes in how community development activities for revitalization and stabilization in distressed communities are treated for CRA purposes. The focus on requiring activities benefit LMI households and preventing displacement and exclusion of LMI households for community development might pose an obstacle for the NHTC to get positive CRA consideration, because it might serve households earning up to 140% of the AMI. The NHTC proposal has several other design components to avoid gentrification, such as limits on home values, limits on how much assistance could be provided to any subsidized home, among others. Nevertheless, if the CRA regulations make it difficult for banks to receive positive consideration if the NHTC assists households earning more than 80% of AMI, the CRA-motivated interest in NHTC (if enacted) would likely be limited to activities targeting LMI households.

All three incentives may be affected by the change from evaluating lending and investments separately. Given that several large banks are required to reserve less capital for community development loans as compared to equity investments could be a deterrent for such banks, especially smaller banks. How the regulators decide to evaluate the impact of the community development financing could have implications on whether a bank would favor community development lending over investments.

Implications of the May 2022 Proposed CRA Rules for Opportunity Zones, Historic Tax Credits and Renewable Energy Tax Credits

Unlike the 2020 OCC final rule, the May 2022 joint proposal does not explicitly note how opportunity zones (OZ) investments may be considered for positive CRA consideration. Like the NHTC, OZs, HTCs and RETCs may be affected by the changes to the definition of community development activities for revitalization and stabilization, given the focus on requiring benefits for LMI and concerns about displacement and exclusion. The National Park Service (NPS) has reported more than 50% of HTC properties are located in LMI census tracts, and 75% are located in economically distressed communities, but it may be difficult to document benefit of these HTC properties for LMI households.

Next steps for the May 2022 Proposed CRA Rules

The agencies’ May 2022 NPR contains important improvements to the current CRA regulations, and overall represent an improvement from the 2020 OCC CRA regulations. However, there are several concerns about the proposal for community development tax credit practitioners.  Public comments on the proposal are due by Aug. 5. The Novogradac LIHTC, NMTC, NHTC and OZ working groups will submit comments. Please contact Karen Destorel if you are interested in joining one or more of the working groups.