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FDIC Federal Register Citations


RECAPITALIZATION ADVISORS, INC
.

August 23, 2004

Robert E. Feldman
Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429 Re:

RIN 3064-AC50, FDIC proposed rule to increase the small institution threshold

To Whom It May Concern:

The proposed increase in the small institution threshold for federal depository institutions (FDI's) would, if implemented, reduce the demand for Low Income Housing Tax Credits (LIHTC's), New Markets Tax Credits (NMTC's), and other urban-development initiatives, particularly in poorer, rural areas. It would also reduce the long-term source of innovation for community development lending.

Because the Community Reinvestment Act (CRA) is a proven powerful driver of urban reinvestment generally, for a nation that is not only growing in population but increasingly urbanizing, such a decision should in our view be made not on narrow technical grounds but in the context of what makes sound policy. We therefore ask that the FDIC maintain the small institution threshold at its current level of $250 million and work with the other federal CRA agencies to do the same.

1. CRA and affordable housing

Throughout its history, the CRA has served to stimulate not only bank investment but also bank innovation, particularly in affordable housing. To put out the money, the banks had to learn the business areas. As they did, they increased their knowledge, sophistication, risk tolerance, and ability to handle and manage risk. Knowledge exchanges and partnerships that would have been unthinkable in 1970 have been formed and are now regarded – by both banks and their community-development customers – as valuable intangible assets.

CRA has served as taxpayer-encouraged R&D within these financial institutions, leading them back into the urban fringes and, via the LIHTC and NMTC, into the urban core. It continues to do so today.

In short, CRA is part of a system that works.

2. Impact on affordable housing of raising the small institution threshold

At issue is not an arcane standard but a huge middle range of institutions. If the $1 billion were adopted by for all FDIC-insured institutions, 1,655 institutions with approximately $757 billion in assets would at a stroke be exempted from the community development investment requirement.

The impact on affordable housing would be national, but also worse for specific communities.

1. Immediate national impact: reduced demand for tax credits -> reduced production of affordable housing. The newly-exempted institutions would no longer receive the same benefit for purchasing LIHTC's or NMTC's. Demand for those investments would fall. CRA-motivated buyers dominate LIHTC demand, with (in our rough estimate) more than 90% of the market. Falling demand will reduce tax credit prices and therefore reduce investment in affordable housing. Currently, the LIHTC is the only major federal program for production of affordable housing, involved in 50-70% or more of all new affordable housing nationwide.1 In 2002, the program created 125,265 new affordable apartments using equity provided by tax credit investors.2

2. Deferred national impact: diminishing innovation/ capacity development in affordable housing and community development.3 Capacity grew in FDI's only over time. Smaller institutions are often best able to reach into marginal or smaller communities to make innovative investments. Raising CRA thresholds takes out of the game the very mid-size players who are, in our view, the main driver of innovation, both as to geography and as to product and investment types. By exempting the innovators, the proposed change will atrophy the R&D essential to the overall financial ecosystem's success.4

3. Targeted impact: some areas will lack any CRA-required investing institutions. Some communities, particularly poorer, rural areas, would find themselves without any institutions required to make CRA investments. Two states – Idaho and Wyoming – will have no FDI's above the small institution threshold. The costs of the new regulations in reduced investment for community development would thus be concentrated on those least able to afford the loss.

3. Conclusion: Keep investment-test thresholds low

The CRA has been an ongoing motive for investments in community development. The proposed change, aimed at reducing regulatory burdens, does so at the expense of the most vulnerable communities. The CRA is an essential part of the affordable housing finance ecosystem. Rising inflation and an expanding economy mean that ceiling should rise from time to time. But the rise should not have the net effect of reducing the overall population of affected institutions.

We therefore urge you to maintain the small institution threshold at its current level of $250 million and work with the other federal CRA agencies to do the same.

Respectfully submitted,

David A. Smith
President, Recapitalization Advisors, Inc.

Ethan Handelman
Associate, Recapitalization Advisors, Inc.

__________________________

1 Report to the Millennial Housing Commission, LIHTC Effectiveness and Efficiency, May 15, 2001, Section 1A et seq. http://www.recapadvisors.com/policy/report1outline.html.

2 Data include allocated 9% credits and 4% credits accompanying volume-cap bond allocations. National Council of State Housing Finance Agencies, State HFA Factbook, 2002, p. 59.

3 The CRA is unique to the United States – major developed nations such as the UK have no analog. For a detailed US-UK comparison, see www.affordablehousinginstitute.org/how/us_uk_ecosystem.html. Such nations suffer from a striking shortage of affordable housing/ community development financial tools and programs, and a diminished capacity both to create complex transactions and to advocate effectively for affordable housing.

4 For a discussion of affordable housing ecosystems, see www.affordablehousinginstitute.org/how/why_ecosystem.html.


Last Updated 08/24/2004 regs@fdic.gov

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