Rewrite of CRA Regulations Provides Opportunity to Increase Benefits

Published by Michael Novogradac on Friday, February 1, 2019
Journal cover thumb February 2019

This year, Community Reinvestment Act (CRA) regulations are in the spotlight, as we are in the early stages of the first significant rewrite since 1995 of the rules that guide how regulators evaluate bank activity in low- and moderate-income neighborhoods.

The 1995 regulations revolutionized affordable rental housing investing and lending, and the 2019 changes could similarly affect other community development incentives, including the nascent opportunity zones (OZ) incentive. This could be a revolutionary year for the CRA, one with repercussions that will be felt for a generation.

CRA 101

The CRA was part of the Housing and Community Development Act of 1977, requiring that federal regulators examine and assess the record of each financial institution that receives Federal Deposit Insurance Corporation (FDIC) insurance. Regulators evaluate how each institution fulfills its obligations in all communities in which it is chartered to do business–specifically in relation to low- and moderate-income neighborhoods.

Three regulators handle CRA reviews: The Office of the Comptroller of the Currency (OCC), which oversees national commercial banks and federal savings thrifts; Federal Reserve Board (Fed), which oversees bank holding companies and state-chartered banks that are members of the 
Fed; and the FDIC, which oversees state-chartered banks that are not members of the Fed.

Banks earn a CRA rating of “outstanding,” “satisfactory,” “needs to improve” or “substantial noncompliance.” Those ratings are used by regulators considering applications for mergers, acquisitions, branch openings and more.

Bad CRA ratings hurt business.

The CRA rules were largely static from their passage in 1977 until 1995, when regulations were issued, intending to make examinations more consistent, clarify standards and reduce cost and compliance burdens. There were further regulatory changes in 2005 and 2007, as well as proposed revisions in 2010, but the 1995 regulations essentially remain intact.

Obviously, the world has changed since 1995. In addition to the transformation of affordable housing and community development, there are practical issues facing regulators, including such things as how banks operate (Internet banks didn’t exist in 1995), the duration between examinations and rating announcements, and a different economy. There have been several significant pieces of major banking legislation, but as mentioned earlier, CRA regulations have remained largely unaltered.

Journal February 2019 Washington Wire CRA Timeline

Timeline in 2019

While there’s no guarantee that updated regulations will come this year, we have a reasonable idea of how it may play out.

Last year saw three significant CRA events:

In April, the Treasury Department issued a memo to the OCC, FDIC and Fed, urging CRA reform.

In late August, the OCC issued an advanced notice of proposed rulemaking (ANPR), seeking comment from stakeholders on the best ways to modernize the CRA. It included a series of 31 questions to draw out comments of various reform concepts.

Comments were due by Nov. 19, 2018, which began a review period.

Currently, CRA regulators are reviewing the public comments and discussing what a proposed revision to CRA regulations would look like (one caveat: the ANPR was issued by the OCC only, but to be applicable to all regulated banks, changes to the CRA regulations would need to be adopted by all three regulatory bodies).

The review and revision discussion will likely take months, so probably at some point later this year, the agencies will jointly issue a proposed rule that contains changes to existing regulations, with a comment period to follow, as well as public hearings.

While there will certainly be many twists and turns, a reasonable expectation is that the final rule will be issued in 2020, with the new regulations going into effect in 2021. Given the nature of the more than 1,500 comment letters submitted and the need to update the regulations, we expect significant changes.

What Happened Last Time

The 1995 CRA regulations were a dramatic change with the effects still felt–particularly in affordable rental housing.

In 1995, the low-income housing tax credit (LIHTC) was just eight years old and had been permanent for only two years. Before the 1995 CRA regulations were issued, the vast majority of LIHTC investors were individuals, but the prioritization of investment in affordable housing contained in the 1995 regulations help change the LIHTC investor base–now an overwhelming percentage of LIHTC investment comes from banks that are CRA motivated. 

Without the 1995 CRA regulations, the LIHTC may not have become the most effective affordable rental housing tool in our nation’s history.

The LIHTC isn’t the only community development incentive positively affected by CRA regulatory guidance.  The new markets tax credit (NMTC) became law five years after the regulations were issued and the percentage of NMTC investors who are CRA motivated is probably higher than that for the LIHTC. Part of that is the nature of the NMTC program, which requires that investments be made in low-income communities–a perfect fit for the CRA.

Best Outcome

So what should be included in the CRA regulation revisions? There is plenty of time for discussion, but three Novogradac Working Groups have weighed in with their suggestions via comment letters, which frame what the regulatory agencies should do (all are available in the CRA Resource Center at

All letters called for new CRA regulations to reject a single-ratio test, which would use a simple mathematical ratio–such as dollar volume divided by size–to determine the amount of investment needed for full CRA credit. Each working group said a single-ratio test would hamper investment in the areas banks serve, including hurting rural investment.

The LIHTC Working Group letter pointed out that while affordable housing investment has been encouraged by CRA regulations, CRA-motivated investment has been more connected to where CRA obligations exist as opposed to where affordable housing need is greatest. The letter recommended an expansion of bank assessment areas to include areas where banks do substantial business–even if they don’t have physical branches and ATMs there. The LIHTC Working Group also asked for clearer definitions of what constitutes a “broader regional area” for CRA credit and for a clearer definition of what it means to be “responsive” to needs in a bank’s assessment areas.

The NMTC Working Group letter highlighted that most NMTC investment by banks could disappear without CRA motivation. It also echoed a concern by those in affordable housing that a proposal to provide double credit for NMTC (and LIHTC) investments could have the unintended consequence of reducing NMTC investment, since it would provide the same CRA consideration for half the investment.

The NMTC Working Group also recommended additional consideration for CRA activity outside a bank’s assessment area if that activity is in highly distressed areas such as rural populations and persistent-poverty counties. The letter also called for the OCC to encourage investment in federal Indian reservations, off-reservation trust lands, Hawaiian home lands and Alaska native village statistical areas, as well as disaster areas–where the activity is made in an NMTC-eligible census tract.

The OZ Working Group’s letter called for many of the same provisions and added a recommendation that the OCC establish an OZ safe harbor for banks, clearly defining characteristics of OZ investments eligible for CRA credit. The OZ Working Group also called for CRA consideration for all OZ investments meeting the safe harbor definition, whether or not they are within the banks’ CRA-defined assessment area–an OZ-influenced version of the suggestions made by other groups to reward investment in areas that need it most.

Opportunity Zones and the CRA

The OZ Working Group letter highlights that there is a convenient overlap of rewriting CRA regulations and the launch of the OZ incentive. There is a large intersection between the OZ incentive and the NMTC program, since both focus on low-income communities (although the ability to designate census tracts adjacent to low-income communities as OZs means that some OZs would not necessarily count under the 1995 CRA regulations).

The effect of updated CRA regulations on OZs is unclear, since we don’t have final OZ guidance from the Treasury Department nor the new proposed CRA regulations. One thing is clear, though: Well-written CRA regulations could help influence banks to invest in the most-needed OZs, much in the same way as the 1995 regulations pushed LIHTC investment. While banks don’t have significant capital gains–the driving force in OZ investment–clear CRA regulations concerning OZs could encourage the most impactful OZ investments.

A CRA emphasis on the hardest-hit OZs would be a strong incentive for banks to join high-net-worth individuals and other corporate investors in funding qualified opportunity funds, which will fuel OZ investment.

Potential Impact

The 1995 CRA regulations have helped drive billions of dollars of investment into areas that need it most through the LIHTC, NMTC, historic tax credit and renewable energy tax credit incentives. While we don’t know yet what the OCC, Fed and FDIC will propose, we know that whatever form the next round of CRA regulations take will likely have a major impact.

The 1995 CRA regulations drove investment in affordable housing. If written well, the 2019 update could encourage even more investment in affordable housing, community development, historic preservation and renewable energy, while simplifying the process for banks.