NAAHL's Roberts Gives Conditional 'Outstanding' Rating to Updated CRA Regulations

Published by Brad Stanhope on Monday, March 4, 2024

Journal Cover March 2024   Download PDF

For Buzz Roberts, the result of Community Reinvestment Act (CRA) regulations updated in October 2023 is simple: If large banks seek "outstanding" ratings, the new regulations will be good news for properties financed by community development tax incentives.

"The question is whether this rule will provoke a race to the top or a race to the bottom," said Roberts, longtime president and CEO of the National Association of Affordable Housing Lenders (NAAHL). "It depends on whether banks will continue to strive for an outstanding rating and really stretch to achieve that. If they do, then community development will thrive. But if banks don't see the motivation to get to outstanding, if they just want to get by with the minimum satisfactory effort, that could bring down the performance level industrywide."

Under the CRA regulations, banks get a rating of outstanding, satisfactory, needs to improve or substantial noncompliance. Roberts expects many banks–more specifically, banks with assets of more than $10 billion–to desire outstanding ratings, which means an emphasis on low-income housing tax credit (LIHTC) and new markets tax credit (NMTC) equity investments.

CRA regulations outline how bank regulators rate banks' efforts to address the needs of the communities they serve, particularly low- and moderate-income (LMI) households and neighborhoods. The Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation released final regulations Oct. 24, 2023, updating rules adopted in 1995.

After a few months of review, Roberts–who officially retired from his NAAHL post Feb. 15–delivered his conditional verdict.

"It's a very long and very complex rule," said Roberts. "It's 1,500 pages and the first 1,000 are single-spaced. It's complex not just because [the new regulations are] long, but there are a lot of interacting parts, so unless you understand how they fit together in a particular bank's context, it's hard to understand what the overall impact will be."

Roberts has a unique view of CRA regulations. During his 45-year career (which was originally scheduled to end in December 2023, but was extended to allow him to work with his NAAHL successor, Sarah Brundage), Roberts was involved in the enactment of the LIHTC, NMTC, HOME housing partnership program and the Capital Magnet Fund. Over the past decade-plus, Roberts was a key figure in efforts to update CRA regulations.

Roberts said 98% of national banks' LIHTC investment comes from institutions with assets of $50 billion or more, with similar numbers for NMTC investment. He said most of those banks currently pursue outstanding ratings and under the new regime, he hopes for the same–which will help properties financed with equity from community development tax incentives.

Road to Outstanding

Roberts said there is a clear strategy for a bank to achieve an outstanding rating under the new regulations: Achieve a "high satisfactory" rating for retail activity and an "outstanding" rating in community development–a category that is weighted toward equity investment and lending to NMTC and LIHTC-financed properties.

"And to get an outstanding rating [in community development], a bank should do two things," Roberts said. "First is you have to do well in terms of sheer numbers, compared with other banks. Second, you want to enhance that with qualitative elements, such as the impact factors and the new national community development investment metric for banks with assets of at least $10 billion. That's the path to an outstanding rating, and it is achievable."

The regulations created the nationwide community investment metric for large banks, in which total community development equity investments are divided by deposits (nationally) and compared to a national metric of peer banks. The regulations also feature a community development investment impact and responsiveness review that encourages LIHTC and NMTC-related investments and loans.

A Better Community Development Test

Under the previous rule, CRA exams included three tests: lending, investment and services. The new regulations have four tests to measure overall CRA compliance: Retail lending, retail services and products, community development financing (both investment and lending) and community development services. The community development portion and retail portion each comprise 50% of the CRA exam score.

The new rule has a more flexible test for community development finance that combines investment activity and lending while preserving strong incentive for investments, particularly in LIHTC and NMTC. Roberts sees that change as a benefit.

"Combining the investments and lending will increase the responsiveness of the CRA to local needs," Roberts said. "Some areas need community development loans more than investments and vice versa. Focusing on that overall effect rather than the form of financing will lead to more responsiveness and more flexibility."

Geography Improves

Roberts referred to historical geographic disparities for LIHTC investments, with extremely competitive "CRA hot spots" and other "CRA deserts." He said that should smooth out with the new regulations.

The 1995 regulations focused on matching investments with the branch locations, which became problematic over the years. Competition to provide community development financing overheated in markets served by multiple very large banks, but markets with few or no very large banks were overlooked. Mobile and online banking compounded the problem, as more banks entered markets without opening branches (and so without CRA obligations) there.

The new rule includes greater certainty of CRA credit for community development activities outside a bank's branch network, which should help rural and smaller cities that have fewer very large banks and smaller deposit bases.

"That's not to say that bank activities in their branch footprint are devalued, but it will now be much easier for banks to get credit for community development activities anywhere in the country," Roberts said.

Roberts also said that all long-term community development financing will now be recognized for CRA credit, a contrast with the previous rule which provided long-term credit only for investments. The old rule has favored short-term loans over long-term loans. The change should encourage banks to compete to provide longer-term loans for affordable multifamily properties and CDFIs, with the possibility that construction lending could be discouraged because that's a shorter-term loan.

Measuring Impact

Impact now matters, although implementing the principle may take time. 

"Relatively small loans or investments can make a disproportionate difference for a community, depending on how it's structured, where it is and what needs it responds to," said Roberts.

The new rule included a list of 10 specific factors that will contribute to measuring impact, but precisely how the impact factors will affect a bank's rating won't be finalized for a few years, when the regulatory agencies will have enough data to determine a formula. With banks required to collect data in 2026 and begin submitting it in 2027, it could be four or five years for an impact test.

Still, LIHTC and NMTC investments automatically meet some of the factors and will benefit from their impact.

Rural Communities, NOAH and Mixed-Income Get Boost

The move from a bank's branch footprint to encourage investment nationwide should benefit rural communities.

"I think rural communities will do significantly better here for a couple of reasons," Roberts said. "One is that banks will get credit for activities anywhere in the country, with extra credit in rural communities with high poverty."

Roberts also pointed out that banks will be able to combine all contiguous nonmetropolitan counties in a state into a single assessment area, which eliminates a previous hurdle where rural communities ricocheted between a dearth of community development activities and having properties that needed more investment than any bank's investment footprint merited. Now all qualifying counties can make one large assessment area, making investments more predictable and applicable.

Another beneficiary is unsubsidized affordable housing, often called naturally occurring affordable housing (NOAH).

The previous regulations were blurry concerning NOAH and CRA credit, but the new regulations provide specific standards under which investments in NOAH properties qualify for CRA credit–specifically adding credit for qualified NOAH outside LMI neighborhoods.

"That's a huge impact because there are as many middle- and upper-income neighborhoods that meet the [new CRA investment standards for affordable rental housing] as there are LMI neighborhoods," Roberts said.

The regulations also specifically award CRA credit for investment in mixed-income housing: Mixed-income LIHTC property gets full credit for the full financing or loan; government-supported property without LIHTCs receives CRA credit for the full property if the majority is affordable and partial credit if not; and if the property fits neither of those categories but remains affordable, it gets full credit if the property is primarily for LMI tenants and zero credit otherwise.

Better than Before?

With the rule taking full effect starting in 2026, Roberts sees an improvement over the previous version.

"With the caveat that assumes banks are going to seek an outstanding rating, I think this is significantly better," Roberts said. "It's much better for the LIHTC and NMTC, because the focus on the impact factors as well as the nationwide development investment metric, which is an important element for banks. If I were a bank and wanted to get to outstanding, one of the first things I'd do is to make a lot of investment in LIHTC and NMTCs."

Learn more about Novogradac's expertise and many services