Potential Impact of Office of the Comptroller of the Currency’s New Final Community Reinvestment Act Regulations on Affordable Housing
As the Department of Treasury and banks deal with the economic fallout from the COVID-19, the Office of the Comptroller of the Currency (OCC) released final rules to “strengthen and modernize implementation of the Community Reinvestment Act (CRA).”The CRA was enacted in 1977 to encourage banks to serve their communities by providing credit for, and not just collect deposits from, low-income communities. The OCC is one of three regulators charged with evaluating CRA compliance. Each bank obtains an overall CRA rating of Outstanding, Satisfactory, Needs to Improve, or Substantial Noncompliance for each State and metropolitan statistical area in which they operate.
The last major regulatory overhaul of CRA regulations was in 1995. Unlike the several prior attempted CRA reforms, which the OCC conducted jointly with at least one of the two other CRA regulators, the final rules published on Wednesday, May 20, 2020 were promulgated by the OCC alone. This drew criticism from bankers and housers alike.
According to the OCC’s published Supplementary Information, “[t]he proposed changes generally expanded, not reduced, the type of activities that would have qualified for CRA credit but remained consistent with the statutory purpose of encouraging banks to serve their entire communities, including LMI [low- and moderate-income] neighborhoods.” Simply by virtue of supply-and-demand, expanded opportunities for CRA credit will reduce banks’ desire to lend to affordable housing projects. Below are a few provisions of the new regulations that will directly affect affordable housing lending and development.
As banks desired, the OCC recognized that “legally binding commitments to lend that provide credit enhancements are necessary to get many affordable housing projects off the ground,” and the OCC agreed that the full dollar amount of legally binding standby letters of credit should count for CRA purposes; however, the OCC declined to give the same treatment to general lines of credit that are not drawn. Letters of credit to credit-enhance bond-financed loans are ubiquitous in New York’s affordable housing; and this should help make those transactions more attractive to banks in New York seeking CRA credit.
As a major blow to mixed-income housing development in areas such as New York and New Jersey, the OCC rejected including middle-income rental housing in high-cost areas as CRA-qualifying, as some housing advocates proposed. For CRA credit under the affordable housing criterion, the OCC requires CRA lending and investments be focused on LMI individuals and families.
On the flip side, the OCC will count lending to “naturally occurring affordable housing,” as long as the housing is “likely to partially or primarily benefit individuals or families” whose incomes “do not and are not projected at the time of the transaction to exceed” 30% of 80% of area median income (AMI). Notwithstanding the undeniable benefits of preserving naturally occurring affordable housing, it is easy to imagine this indeterminate standard being abused if it is not clarified by further regulations. Additionally, providing banks CRA credit for naturally occurring affordable housing will also decrease demand for banks to lend to government-subsidized projects, including the type that housing practitioners traditionally execute: transactions involving bonds and/or low-income housing tax credits (LIHTC). Assuming credit profiles are similar, if the CRA’s affordable housing criterion is equally satisfied by loans to unrestricted, unsubsidized, naturally occurring affordable housing projects and traditional government-subsidized or LIHTC projects—with their associated increases in governmental approvals, time, and cost—which would banks rather make?
In addition, the final rule retained the major change introduced with the proposed rule, in January 2020, that affordable housing advocates found most troubling: the “one ratio approach” to CRA evaluation. The OCC retorts in the final rule that critics “misapprehend[ed] what was proposed; the proposal did not contain one ratio. The proposal’s performance standards that the agencies would have used to assess banks’ CRA performance would involve tens, if not hundreds, of measures for most banks.” But in any event, the substantive problem with the “one ratio” is that it does not differentiate between equity investments and loans.
Under the new regulations, there will be no difference for a bank whether it invests equity in a LIHTC project or makes a loan to it. Previously, CRA evaluation was conducted in three different areas: lending, investments, and services. By having their lending and investments evaluated separately, banks were incentivized to both make loans and provide equity to affordable housing projects. The new regulations aggregate all types of qualifying activities into a single amount based on total dollars and compare it to a bank’s retail domestic deposits. The OCC insists this dollars-to-dollars comparison is most fair and simpler. But LIHTC projects, and prices for LIHTC, have benefited from competition among banks seeking not only the after-tax yield, but also CRA credit. Without one of the two main reasons to compete for LIHTC, pricing for LIHTC will likely suffer.
The final rules take effect on October 1, 2020; and there is a two-year transition period during which compliance with the new rules is voluntary. Most banks must fully comply with the new rules beginning January 1, 2023, and banks subject to the small and intermediate bank performance standards must fully comply beginning January 1, 2024, on which date the old regulations completely expire.
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 News Release 2020-63 (May 20, 2020), https://www.occ.treas.gov/news-issuances/news-releases/2020/nr-occ-2020-63.html (last visited May 21, 2020).
 P.L. 95-128, 91 Stat. 1147 (1977), codified at 12 U.S.C. 2901 et seq.
 The OCC regulates CRA compliance for all nationally-chartered banks and savings associations. The Federal Reserve Board regulates all state-chartered banks that are part of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) regulates all state-chartered banks that are not part of the Federal Reserve System.
 Community Reinvestment Act Regulations, 12 CFR 25 et seq., available at https://www.occ.treas.gov/news-issuances/federal-register/2020/nr-occ-2020-63a.pdf.
 See Brendan Pedersen, OCC goes it alone on narrower CRA rule, American Banker, (May 20, 2020), https://www.americanbanker.com/news/occ-goes-it-alone-on-narrower-cra-rule (last visited May 21, 2020) (“The speed with which the agency has delivered a final rule — which stretches more than 370 pages — has shocked many observers in Washington.”); see also Ben Lane, OCC going it alone on Community Reinvestment Act reform, with Otting reportedly set to step down (May 20, 2020), HousingWire, https://www.housingwire.com/articles/occ-going-it-alone-on-community-reinvestment-act-reform-with-otting-reportedly-set-to-step-down/ (last visited Mary 21, 2020).
 Community Reinvestment Act Regulations, supra note 3, at 21.
 Id. at 34; 12 CFR §§ 25.15(c)(1), 25.22(a)(2), 195.22(a)(2), and §195.25(c)(1).
 Community Reinvestment Act Regulations, supra note 3, at 35.
 Ibid; 12 CFR § 25.04(c)(1)(A).
 Community Reinvestment Act, supra note 3, at 132.
 Community Reinvestment Act Regulations, supra note 3, at 194-97; 12 CFR § 25.01(c)(7).
Jeet M. Gulati