OCC Kickstarts CRA Regulatory Reform Efforts; Could Impact LIHTC and NMTC Investment
The Office of the Comptroller of the Currency (OCC) released August 28 an advanced notice of proposed rulemaking (ANPR) soliciting public comment on reform of Community Reinvestment Act (CRA) regulations. For some time OCC has planned to modernize its CRA regulations to update them for the modern banking industry and the needs of low- and moderate-income communities. Although federal banking regulatory agencies have periodically issued “Questions and Answers” guidance interpreting CRA regulations in recent years, the last significant reform of the CRA regulations was in 1995, before widespread interstate banking, Internet banking, and the passage of significant banking legislation, such as the Gramm-Leach-Bliley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The ANPR was informed by an April 3 memorandum the U.S. Department of the Treasury sent to federal banking regulating agencies charged with CRA implementation — OCC, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve Board of Governors (Federal Reserve) — recommending CRA regulatory reforms, as well as feedback gathered by federal banking agencies in their review of regulations under the Economic Growth and Regulatory Paperwork Reduction Act. The memorandum was the result of a review Treasury began in July 2017. 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.
The ANPR includes 31 specific questions designed to suggest possible changes to CRA regulations. Those questions soliciting comment are roughly organized into the following categories:
- Increasing lending and services to people and in areas that need it most, including in low- and moderate-income (LMI) areas;
- Clarifying and expanding the types of activities eligible for CRA consideration;
- Revisiting how assessment areas are defined and used;
- Establishing metric-based thresholds for CRA ratings;
- Making bank CRA performance more transparent;
- Improving the timeliness of regulatory decisions related to CRA; and
- Reducing the cost and burden related to evaluating performance under the CRA.
One of the common criticisms of CRA implementation is the arbitrary and outdated nature of a bank’s assessment areas, in which the bank regulators largely focus their examination of a bank’s CRA performance. The OCC notes that most assessment areas are limited to those communities in which the bank has a physical presence, such the headquarters, deposit-taking branches, and automated teller machines, which were the primary means banks delivered financial services in 1995. Since then, many more banks began to operate across state lines, more institutional and money-center banks were established, Internet and mobile banking took off, and mortgage lending changed significantly. The assessment areas no longer fully represent where a bank does business. OCC asks how the definition of assessment area should be updated to accommodate these new developments. Changing the assessment area definition could significantly improve low-income housing tax credit (LIHTC) equity pricing in markets that lack traditional assessment areas.
The OCC also requests feedback on a number of questions on what activities should be eligible for CRA credit, including expanding the types of economic and community development activities that should be eligible, as well as how they should be treated when evaluated for CRA examination purposes. Depending on whether and how the federal banking regulators expand the range of eligible investments for CRA credit could impact LIHTC and new markets tax credit (NMTC) investment demand.
Some affordable housing and community development stakeholders are concerned by the ANPR questions concerning the establishment of metric-based thresholds for CRA rating and performance. While the greater transparency and timeliness of CRA examinations could be improved, it could also have the effect of leading banks to choose the investments that best fit the evaluation metric rather than have the biggest impact on low- and moderate-income communities and populations. Others worry that it could set an unofficial cap on CRA activities.
While the OCC issued the ANPR on its own instead of in conjunction with the FDIC and the Federal Reserve as it has in the past on CRA guidance, media reports suggest that all three agencies are exploring possible CRA regulatory changes and could collaborate on proposing a specific set of reform proposals later. If OCC were to implement regulatory reform on its own, those proposals would apply only to the national and commercial financial institutions the OCC regulates. The OCC currently regulates a little more than 20 percent of the nation's banks, though those banks combined have more total assets than those regulated by either FDIC or the Federal Reserve, and cover the vast majority of LIHTC and NMTC investors.
The deadline to submit responses to the ANPR is 75 days after it was published in the Federal Register. The Novogradac LIHTC, NMTC, and Opportunity Zone Working Groups will draft comment letters in response to the ANPR. For information on how to join these groups, please contact Karen Destorel at [email protected].