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via email
From: Abbie McBride
Sent: Monday, November 03, 2003 5:51 PM
To: 'regs.comments@occ.treas.gov';
regs.comments@federalreserve.gov';
Comments;
regs.comments@ots.treas.gov'
Cc: Nancy O. Andrews; Mark Pinsky (E-mail); Judith Kennedy (E-mail)
Subject: Comments on Advanced Notice of
Proposed Rulemaking on the propose d Risk-Based Capital Rules
November 3, 2003
Mr. John D. Hawke, Jr.
Office of the Comptroller of the Currency
250 E Street, SW, Washington, DC 20219
Fax: (202) 874-4448 regs.comments@occ.treas.gov
Attention: Docket No. 03-14
Ms. Jennifer J. Johnson, Secretary,
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW, Washington, DC 20551
Fax: (202) 452-3819
regs.comments@federalreserve.gov
Attention: Docket No. R-1154
Mr. Robert E. Feldman, Executive
Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW, Washington, DC 20429
Fax: (202) 898-3838 comments@fdic.gov
Attention: Comments, FDIC
Regulation Comments, Chief Counsel's
Office,
Office of Thrift Supervision
1700 G Street, NW, Washington, DC 20552
Fax: (202) 906-6518
regs.comments@ots.treas.gov
Attention: No. 2003-27
To Whom It May Concern:
On behalf of the Low Income Investment
Fund (LIIF), a network national nonprofit community development
financial institution (CDFI), I am pleased to provide comments in
response to the Advanced Notice of Proposed Rulemaking on the proposed
Risk-Based Capital Rules, published on August 4, 2003.
LIIF is a national nonprofit CDFI,
headquartered in Oakland, California dedicated to high-volume lending
and technical assistance to organizations working to alleviate poverty
in low income neighborhoods. LIIF fosters healthy communities by
providing a bridge between capital markets and low income neighborhoods.
LIIF encourages comprehensive strategies that address the diverse needs
of people and communities.
Since its inception in 1984, LIIF has
provided approximately $353 million in financing and technical
assistance for projects benefiting low income communities, leveraging
investments of over $3 billion: an eight to one ratio. These projects
have made a significant difference in the lives of low income families,
supporting:
* 44,350 units of low income and special needs housing
* Over 13,000 child care spaces;
* 1,125 spaces in charter schools
for children; and
* 1.2 million square feet of
commercial space.
In fiscal year 2003 (ending June 30,
2003), LIIF provided $40.4 million in financing to organizations serving
working to expand the supply of quality affordable and special needs
housing, child care, education and other vital community facilities.
Seventy-five percent of this lending was directed towards very-low
income families and individuals.
LIIF applauds U.S. bank regulators and
others who recognized the vital role of Community Reinvestment Act (CRA)
investments in the U.S., and negotiated for a special rule for
"Legislated Program Equity Exposures." This section wisely preserves the
current capital charge on most equity programs made under legislated
programs that involve government oversight. CRA-related investments are
generally held harmless under the proposed rule. Insured depository
institutions investing in such programs therefore would set aside, by
and large, the same amount of capital for CRA investments under the new
rules as they do now-about $8.00 for every $100 of capital invested.
Given that CRA investments in affordable
housing, and community and economic development, have a different
risk/return profile than other equity investments, that treatment is
appropriate. Based on considerable experience in the U.S. to date, CRA
equity investments may sometimes provide lower yields than other
investments but they also have lower default rates and volatility of
returns than other equity investments. For example, LIIF's delinquency
rate as of September 30, 2003 was 0.14 percent, and LIIF has written off
less than 0.16 percent of all capital disbursed since its inception.
LIIF is extremely concerned about the
potential consequence of the proposed rules that could affect adversely
the amount of equity capital flowing into investments under the CRA.
Specifically, the "materiality" test of the proposed rules requires
institutions that have, on average, more than 10 percent of their
capital in ALL equity investments, to set aside much higher amounts of
capital on their non-CRA investments, such as venture funds, equities
and some convertible debt instruments.
As drafted, this calculation includes even CRA investments that are
specifically excluded from the new capital charges.
Including CRA
investments, with their very different risk/reward profile, in the
"materiality" bucket of more liquid, higher-yielding, more volatile
equity exposures could have an unintended chilling effect on the flow of
equity capital to communities in need. CDFIs and their bank partners
have invested substantially in affordable housing and economic
development (for example, through Low Income Housing Tax Credits (LIHTC)
or New Markets Tax Credits (NMTC)) that currently approach, or even
exceed, the 10 percent threshold just from CRA-qualified investments
alone. If the materiality test is adopted as proposed, it could
discourage banks from making CRA investments to avoid triggering the
higher capital charges on non-CRA investments. We understand that these
higher capital charges could be twice as much on publicly-traded
equities; and three times as much on non-publicly traded ones.
Financial institutions' support for
affordable housing and community revitalization is well-established
public policy in the United States. Bank regulators and the Congress
have encouraged and created incentives for investment in poor
communities through such public policy initiatives as the 1992 Public
Welfare Investments (Part 24), the 1995 CRA revisions that specifically
encouraged equity investments, and both the LIHTC and NMTC program
incentives. Furthermore, in 2000, the Federal Reserve Board released a
study confirming that CRA-related investing is by-and-large profitable
and, more importantly, it satisfies the double-bottom line-social impact
and financial reward, with little or no risk to investors. These facts,
combined with a remarkable performance record of CRA-related investments
and more than a $1 trillion invested to date, provide a strong rationale
to exclude CRA investments from the materiality test calculation.
We respectfully submit these comments on
behalf of LIIF and the community development finance industry as a
whole. Please contact me at (510) 893-3811 ext. 310 or amcbride@liifund.org
if you have any questions or would like any additional information on
this matter. Thank you for your consideration.
Sincerely,
Abigail McBride
Director of Development
Low Income Investment Fund
cc: Judy Kennedy, National Association of
Affordable Housing Lenders
Mark Pinsky, National Community Capital Association
Nancy O. Andrews, President and CEO, LIIF
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