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FDIC Federal Register Citations National Association of Affordable Housing Lenders
Robert E. Feldman Executive Secretary Attention: Comments/Legal ESS Federal Deposit Insurance Corporation 550 17th Street NW Washington, DC 20429
RIN number 3064-AC50
To Whom It May Concern:
The National Association of Affordable Housing Lenders (NAAHL) represents America’s leaders in moving private capital to those in need. NAAHL encompasses 200 organizations committed to increasing private capital lending and investing in low- and moderate-income communities. Members are the “who’s who” of private sector lenders and investors in affordable housing and community and economic development: banks, thrifts, local and national nonprofits, mortgage companies, loan consortia, financial intermediaries, pension funds, foundations, and public agencies.
As you know, our practitioners’ experience confirms that mid-course corrections in the 1995 regulations are particularly important for the long-run effectiveness of the Community Reinvestment Act (CRA). Unfortunately, current regulations discourage banks from providing really innovative, responsive, complex community development loans and investments. The rules need updating to provide a better balance between the quantitative and qualitative measures. For example, pioneering efforts to provide conventional mortgages on tribal lands have value beyond the number of LMI families housed there.
After nearly a decade of doing community development (CD) in spite of, rather than because of, the CRA regulation, our members were particularly disappointed that the FDIC and OTS missed an historic opportunity to develop a good rule. As senior members of the House Financial Services wrote to you:
“Merely exempting some mid-sized financial institutions from the investment test does not address the underlying problem with how investments are currently evaluated. The investment test has been criticized for not adequately encouraging institutions to make complex investments that are critically needed in low- and moderate-income communities, such as for multi-family affordable housing. The proposal would not solve this problem. Instead of trying to remedy the problem of having a significant portion of financial institutions chasing after the same type of community investments, the proposal would simply eliminate the investment requirement for more than 1100 mid-sized financial institutions.”
We agree, and encourage you to withdraw this rule and focus on an interagency rule which incorporates the NAAHL proposals for practical solutions to existing problems. The agencies now need to move beyond the very thoughtful analysis in the January 2004 joint NPR of identified problems with the current regulations, and honor the longstanding commitment to update the regulations. Both small and large banks deserve regulations that recognize quality as well as quantity in meeting the credit needs of the community, and provide consistent treatment. And all communities deserve evidence that institutions with deposits backed by the FDIC are meeting the credit needs of their communities, including low- and moderate-income communities.
Three important principles guide NAAHL’s approach to CRA and Community Development (CD), informing our comments.
(1) Sustainability: No loan or investment should be made which is not viable in its own right – meaning that it can achieve its developmental purpose over time without continued, sustaining, financial intervention. However, a comprehensive community development (CD) strategy will include grants and other types of financial assistance to low- and moderate-income (LMI) individuals and organizations.
(2) Flexibility: The key to what is allowable and creditworthy under CRA should be “what works”, i.e., what loans, investments, and services contribute to improvement in the lives of LMI individuals.
(3) Responsiveness to community/market needs: Banks should be able to create, change, and modify their CRA programs to reflect changed conditions and needs in their markets and communities. Examiners should recognize such changes in community and market conditions and reward CRA programs that work.
The Community Development Oriented Plan
NAAHL proposed in 2001 an option (not dissimilar to the choice available with the “Strategic Plan”), allowing a bank to choose to be assessed under tests which differentiate between the community reinvestment responsibility to provide financial services to the institution’s assessment community on the one hand, and the pressing need to assist LMI individuals and/or revitalize the communities within which they live or work. These alternative tests could be:
· Retail Banking Test – consisting of mortgage loans, small business loans, consumer loans (optional), and retail banking services.
The Retail Banking Test would measure the institution’s success in meeting the credit and financial service needs of its assessment area. These activities (whether lending or services) will be included in the Retail Banking Test as a component of the institution’s assessment area activity and to ascertain the institution’s distribution of these activities within the assessment community.
· Community Development Test – consisting of community development lending, community development investments, and community development services.
Community development encompasses those activities of a financial nature or otherwise, which have the effect of improving the life condition of LMI individuals, or of stabilizing and revitalizing the communities in which they live or work. In order to receive community development credit for CRA purposes, a project need not have community development as its “primary purpose”, so long as a significant consequence of the project or activity benefits LMI individuals or communities.
For example, all of a mixed-income development transaction where the market-rate units enable affordable units should count (not just the affordable portion) because the transaction meets the community’s need for LMI housing. Another example is a city-sponsored project in a community, which is not LMI, where the institution finances or supports downtown revitalization, or rehabbing of an older shopping center where LMI individuals are likely to find employment.
In addition, it should not be required that an activity be explicitly “financial” if it works to the benefit of LMI individuals or communities. Volunteering to help build homes for LMI persons through for Habitat for Humanity is a legitimate service benefiting LMI households. The regulations should recognize its value.
The Community Development Test should include, but not be limited to, activities such as the following:
Funding of CDFIs and other community development intermediaries; Funding community development venture capital funds; Loans/investments/grants in projects or to organizations which provide housing affordable to LMI individuals, or to LMI communities; Loans/investments/grants in projects or to organizations which provide jobs, supportive services, or other relevant benefits to LMI individuals or LMI communities; Facilitating the creation of affordable housing through the use of low income tax credits; Purchase of mortgage-backed-securities backed by loans to LMI individuals; Participation in government sponsored programs, such as the SBA, with evaluation based on the LMI definition that the specific government entity uses; Grants to organizations engaged in community development activities; Providing financial education and banking services tailored to the needs of the unbanked; Equity investments in organizations, small businesses, or other projects for the purpose of community development; The initiative shown by the institution in developing unique/special LMI targeted lending programs; and Related activities such as: · Providing standby letters of credit or other credit enhancements supporting community development projects (to be included and itemized in the CRA Loan Disclosure); · Applications to the Federal Home Loan Bank for support of community development projects, the contingent liability taken on with such projects, and employee time spent in administering and monitoring these activities; · Employee time devoted to a large variety of community development activities, such as construction of homes through the auspices of organizations such as Habitat for Humanity; · Bank officers and other employees participating in community development organizations, even if they include non-financial activities.
When examining an institution’s community development program, the Examiner would look to the totality of the bank’s community development activity, recognizing that the balance among community development lending, investments, services and other related activities may vary substantially from bank to bank and community to community, so long as the total impact of the bank’s community development outreach is consistent with its performance context and institutional expertise, and meets a reasonable standard related to community needs.
If an institution were to choose this alternative plan for satisfying its community reinvestment responsibility the weighting for each test would be agreed upon prior to the examination, with the weighting for the Community Development Test to be no lower than 25% and no higher than 50% of the total. In keeping with the overriding consideration of flexibility in the direction each institution takes in meeting its community development responsibilities, we believe that weighting should be determined within the context of the individual institution’s business strategy and the needs of its community. As an example, an institution which does not offer a particular product line would be evaluated with weightings based on the products it does offer.
HMDA and Small Business loans will continue to be reported as they currently are, and considered in the retail banking test. Standby letters of credit or other credit enhancements supporting community development projects will be reported and included under the Community Development Test, as noted above. There will be no double counting of loans, investments, or services.
At the time when the Regulator notifies a bank of an upcoming CRA Examination, but no more than 12 months prior to an exam, the bank will inform the Regulator of its wish to be examined under the standard Lending, Investment, and Service tests, or its preference to be examined under the Retail Banking and Community Development tests. This flexibility allows that even though a bank might normally be expected to opt for and develop its CRA plans for one or the other of the alternate examination processes, changing bank circumstances and community/market conditions may prompt the bank to change its program in such a way as to make the alternative testing standard appropriate.
Thank you for the opportunity to suggest this approach once again. We look forward to continuing our dialogue on these important matters.
NPR Requests
NAAHL comments on specific questions included in the August NPR are as follows.
Q: Whether this proposal presented here would: enhance the effectiveness of the CRA regulations and CRA evaluations by addressing concerns about community development needs, including those of rural communities; and reduce regulatory burden by updating the regulation in light of changes in the banking industry over the past ten years.
A: This proposal does not address concerns about community development needs, including those of rural communities. Rather this proposal merely excludes an unprecedented percentage of insured institutions from CRA obligations at a time when communities need more private partners, not fewer.
Q: The NPR asks for comment on what weighting should be given to community development (whether criterion or test) in the CRA evaluation.
A: We recommend discarding the term “criterion” since it is new, undefined, and likely to create confusion rather than clarity. The “criterion” appears to some to be a token effort to suggest that a bank should be involved in at least one community development activity. In its stead, the agencies should renew their combined focus on improving the rule as NAAHL has proposed with a meaningful community development test option.
Q: The January Joint NPR also had requested comments on the “Small Bank” definition. That Joint NPR made an attempt to justify its proposed doubling of “the bank asset size part of the small institution definition and (removing) the holding company part of the definition”. It said that these changes “would better bring the current regulation in line with the percentage of the industry deemed to be small institutions under the 1995 regulatory amendments”.
A: NAAHL and others expressed concerns, and questioned whether there had been any agency analysis of the impacts such changes might have on investments and lending in rural communities and states. Imagine our surprise when the FDIC’s August NPR, without any evidence of any of the analysis we and others requested for doubling the threshold, now proposes quadrupling the threshold, thereby significantly increasing the percentage of the industry deemed to be “small”. The only justification given is that 475 of 534 commenters “favored increasing the size limit” and “a higher asset threshold than the amount proposed in the NPR. The most common amount mentioned…was…$1 billion”.
Q: The NPR proposes that community development activity could benefit either low- and moderate-income individuals or individuals who reside in rural areas. It further asks for comment on whether a definition of “rural” would be helpful, and if so, how that term should be defined.
A: The proposal is confusing for a variety of reasons: It adds a new element to community development, introducing a concept
of benefit to individuals who reside in rural areas. We recommend that community development credit be accorded to all institutions for loans, investments, and services provided to low- and moderate-income individuals in those areas, and for loans, investments or services that help to stabilize and revitalize included communities. This approach makes the treatment of banks in “rural areas” roughly equivalent to those in metropolitan areas.
What’s At Stake
Finally, the NPR concludes that “the proposed changes would not diminish in any way the obligation of all insured depository institutions subject to CRA to help meet the credit needs of their communities.”
In fact, there is much more at stake here than meets the eye. Proposals couched as reducing “regulatory burden” are really major changes from these institutions’ current CRA responsibilities to meet the credit needs of their communities.
-- These banks would now have a “pro forma” evaluation, instead of their current obligation to demonstrate how they met the credit needs of their communities across their geographies and across the income levels of their assessment areas -- These banks would not be responsible for community development loans or investments.
---In lieu of the existing retail service and investment requirements, the NPR proposes only that an examiner ask a bank if it had provided its community ANY community development loans, investments or services. An urban bank would pass the test by distributing FDIC consumer information like Money Smart; a rural bank would pass the test if it did anything designed to stabilize or revitalize the community, with no low/mod requirement---such as a loan on a golf course, or involvement with the chamber of commerce. We hope you will return your focus to crafting a better rule. Sincerely, Judy Kennedy President
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| Last Updated 11/12/2004 | regs@fdic.gov | |