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NATIONAL ASSOCIATION OF AFFORDABLE HOUSING LENDERS
April 2, 2004
Robert Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Attention: Comments
Dear Mr. Feldman:
Members of the National Association of Affordable Housing Lenders (NAAHL)
appreciate the opportunity to comment on the proposed changes to the
Community Reinvestment Act (CRA) rules.
NAAHL represents America’s leaders in moving private capital to those
in need. Our nearly 200 member organizations include 71 insured
depository institutions, 50 non-profit providers, GSEs, insurance
companies, pension funds, foundations and others committed to increasing
private capital lending and investing in low- and moderate-income
communities.
We are very concerned that the proposals contained in the joint
interagency Notice of Proposed Rulemaking (NPR) regarding the Community
Reinvestment Act could turn back the clock on efforts to meet the credit
needs of our communities. This will summarize our major concerns.
THE NPR FAILS TO ADDRESS LEGITIMATE PROBLEMS
Nine years have elapsed and a century has turned since the current
rules were written. And what we have learned is that these regulations
pressure institutions to do what is right for the call report, and
actually discourage them from tackling the toughest credit needs of
their communities. We learned that the existing regulations discount the
importance of doing the really hard stuff, like the multi-layered,
subsidized, affordable rental housing deals and the redevelopment of
distressed neighborhoods. We learned that the regulations force
institutions to twist straightforward loans in low- and moderate-income
neighborhoods into “investments” to meet an arbitrary benchmark test set
by examiners. We learned that, in some communities, there are very
limited opportunities for sustainable business investments, and finding
the eligible “needle in the haystack investment” forces lenders to use
resources unproductively.
The tremendous importance of what we learned over the past decade
confirms the regulators’ wisdom in calling for a thorough review of the
regulations in 2002. Nonetheless, after this extensive review process
and the proposed Notice’s thoughtful discussion of the many issues NAAHL
and others raised about the economic distortions associated with the
current lending and investment test regulations, the Notice for the most
part fails to address the problems.
We do not agree with the stated view of the Notice that the problem
is solely one of “implementation”. Rather, we believe that the rules are
the problem, effectively discouraging institutions and their community
partners from using limited resources to meet the greatest needs. And
given that the agencies have spent the past 2 to 3 years reviewing
concerns with the current regulations before agreeing to this very
limited proposal, the prospect for “future guidance” that helps restore
some balance seems very dim indeed.
THE NPR PROVIDES THE WRONG SOLUTION TO THE PRACTICAL PROBLEMS WITH
THE REGULATION
Rather than put forward the optional “Community Development Test”
NAAHL proposed to address the real-world shortcomings in the 1995
regulations, or make any constructive effort to support the complicated,
multi-layered, multi-subsidy housing and community and economic
development projects most needed in low- and moderate-income
communities, the Notice merely responds to one subset of the investment
test problem – “comments that smaller institutions at times have
difficulty competing for investments” – by simply relieving more than
1,200 institutions from investing, as well as from detailed reporting on
loans and services.
At the FDIC meeting on the Notice, agency staff reported that this
change was being made without any analysis of the impacts of such a
change on affected communities.
We urge that the agencies make some effort to strengthen the
community and qualitative focus of the current regulations for all
institutions, in the spirit of the mandated review of how the
regulations have worked over nearly a decade. Just doubling the
threshold for compliance, without understanding all of the ramifications
of that decision, is the wrong solution.
THE NPR APPEARS A RETREAT FROM EXISTING, STRONGER STANDARDS AGAINST
PREDATORY LENDING
Despite strong language in the Preamble about the regulators’
intention to examine “all credible evidence” that an institution might
be involved in abusive lending practices, that broader standard is very
unclear throughout the rest of the proposals. Some even interpret the
proposals as providing a new “safe harbor” for abusive practices other
than asset based lending. If the agencies’ intent was to clarify the
kind of “credible evidence” that could impair an institution’s overall
CRA rating, the Notice should be revised to make that clear.
We urge you to reconsider the significance of what you proposed to
do, as well as the importance of what you did not do. As always, we are
happy to meet with you to discuss our concerns, and look forward to
working with you to address legitimate, practical problems with the CRA
regulations, to further our mutual goal of meeting communities’ credit
needs.
Sincerely,
Judith A. Kennedy
President
National Association of Affordable Housing Lenders
______________________________________
October 19, 2001
Ms. Jennifer Johnson
Secretary, Board of Governors of
The Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551
Re: Docket No. R-1112 – Advance Notice of Proposed Rulemaking
Regarding the Community Reinvestment Act Regulation
Dear Ms. Johnson:
The National Association of Affordable Housing Lenders (NAAHL)
represents more than 200 organizations, including more than 85 insured
depository institutions, and 800 individual community investment
practitioners who are committed to increasing the flow of private
capital into low- and moderate-income communities. As you know from our
ongoing dialogue with all of the bank regulators, our experience
suggests the importance of several mid-course corrections to the rule,
both to ensure the sustainability of this business, and encourage
meaningful community investment in this new millennium. Our thoughts on
the specific issues are as follows.
Large Retail Institutions: Lending, Investment, and Service Tests
Do the regulations strike the appropriate balance between
quantitative and qualitative measures, and among lending, investments,
and services? If so, why? If not, how should the regulations be revised?
It is important to restore some balance between consideration of
quantitative and qualitative factors to ensure both that CRA business is
not over-subsidized in a non-sustainable way, and to permit the
institution to do what is right for the community rather than for the
call report.
The Problem
While the 1995 regulation made great progress in bringing credibility
to CRA performance, some aspects of it have gone too far in the
quantitative direction. The emphasis on statistical information -- to
provide the public with information about the extent to which insured
depository institutions make loans and investments -- can be so great as
to obscure the community needs, performance context, and business case
for some loans and investments. This overemphasis also obscures the fact
that all communities do not have the same needs, just as all
institutions do not have the same expertise. This inevitably results in
some unintended distortions. For example, a community may not have much
demand for investments or even certain types of loans, such as mortgages
for multifamily housing. Nonetheless, examiners are reluctant to
acknowledge the performance context in which institutions operate,
requiring that institutions make their “numbers”. This can result, at
best, in non-productive resources being spent finding the needle in the
haystack, or at worst, in perverse economic consequences when too many
lenders are chasing the same deal. It focuses institutions on competing
where markets are well served, when it would be more valuable for the
community for institutions to address unmet needs.
In addition, many practitioners’ experience with the investment test
leads them to question whether it should continue as a standalone test,
as well as the weight given to it. Most NAAHL members believe that
mid-course corrections are particularly important for the long-run
effectiveness of CRA. Various proposals for reform seem to reflect
differences both in assessment area needs and an institution’s market
niche, as well as the proliferation of some hyper-competitive market
areas, along with the extent to which an institution’s examiners
appreciate the performance context.
It is clear that the quantitative emphasis, combined with low or no
demand for viable investments in some communities, results in pricing
distortions and unsustainable business in some markets. In addition,
where there is high demand for loans but little or no need for
investments in an assessment area, the pressure to find “investments”
causes non-productive bank resources to be spent twisting a
straightforward business opportunity like a loan into a qualifying
“investment”. Finally, many investments, such as in small tax credit
deals, are largely illiquid, yet regulators are reluctant to continue to
give CRA credit for the period in which the bank’s capital is tied up in
these deals.
It is understandable that examiners find it difficult to evaluate
activities that are not easily measurable. Initiatives that are truly
innovative or complex are very resource-intensive, and because they
often address the most acute needs in a community, generate low numbers.
Nonetheless, careful, qualitative assessment of these initiatives, such
as lending on tribal lands or stimulating new commerce in Appalachia, is
critical to encouraging institutions to address the greatest needs.
Recommendations
To address the imbalance between quantitative and qualitative factors
in assessing CRA performance, we have several suggestions. First, both
non-profit organizations and insured depository institutions suggest
that all of the qualitative aspects of CRA performance be reorganized
into a single, separate community development test. This new test would
incorporate all community development lending, community development
investments, and community development services.
Such a regrouping should not only provide a better balance, but also
afford more flexibility to institutions to design CRA programs that
match community needs with their business strategies. It should be
simpler to analyze an institution’s community development activity as a
whole. Most important, it should make it easier for an institution to
make the greatest effort where the greatest need exists, without a
requirement to meet artificial ratios, twist loans into “investments”,
or make “investments” that are written off as grants.
The purpose of the combined test would be to follow the format of the
wholesale/limited purpose Community Development Test, whereby an
institution can choose to focus on one or more of the three components.
This type of flexibility will allow an institution to target its
resources to areas of need based on their local communities and
synergies with the institution’s areas of expertise and operational
infrastructure.
Second, greater emphasis must be given to the Performance Context in
evaluating banks’ performance. All communities do not have the same
needs, and all institutions do not have the same business strategies.
Examiners must consider unique community needs as well as how well
markets are being served and legitimate barriers to real needs.
Third, our members also are concerned about consistent application of
the rules across all regulators and all geographic areas. Inconsistent
interpretation and application of the rules has been a continuing
problem and should be addressed by regulators in the context of the CRA
rewrite.
Does the Lending Test effectively assess an institution’s record of
helping meet the credit needs of the entire community?
Yes -- to an extent. However, as we described above, the undue
emphasis on quantitative measures compels lenders to focus on products
and services that produce the right “numbers”, rather than consider –
and respond to – the greatest needs of the community. The pressure to
satisfy quantitative measures leads to uneconomic business in more and
more markets, thereby jeopardizing the sustainability of the business.
Too often, examiners tend to equate activities that are “innovative” or
“flexible” with “unprofitable”. Based on the considerable experience
practitioners now have with the 1995 rule, we believe that the rule
needs to provide institutions with greater flexibility both to respond
to each community’s unique needs and to align their CRA activities with
their business expertise, rather than just play the “numbers” game.
We also believe purchased loans should be given equal weighting to
loan originations because loan purchases are equally important in
providing liquidity, which helps to lower the cost of mortgage lending.
Does the Investment Test effectively assess an institution’s record
of helping to meet the credit needs of an entire community?
Investments can be critical to meeting the credit needs of some low-
and moderate-income (LMI) individuals and communities. Nonetheless, the
overarching measure of a lender’s performance in meeting the credit
needs of the local community should be how well the institution
addresses that community’s unique needs, and not an artificial
requirement to achieve certain volumes.
Unfortunately, the Investment Test has had many unintended results,
some of which we described above. While this test undoubtedly was
intended to increase a lender’s flexibility in addressing community
needs, it has increasingly become something of a millstone. Different
communities require a different mix of loans, services and investments
to meet their unique credit needs. This separate test and the
quantitative emphasis to performance undermine the institution’s ability
to choose whether investments will help it to meet the credit needs of a
particular community.
In some communities, there are very limited opportunities for
sustainable business investments. Many so-called investments are, in
fact, grants with no expectation of a yield or principal repayment. And,
in some affluent communities, there are actually no legitimate
investments that benefit low- and moderate-income persons. As a result,
“junk” investments have been created and marketed, which provide
“numbers” for institutions, often carry high risk and very low yield but
do not, in fact, address the real credit needs of the community.
In addition, the current regulations result in little or no credit
for investments that occurred prior to the review period that are still
on a bank’s books. Institutions that are attempting to meet important
credit needs with long-term, largely illiquid or below-market-rate
investments in local affordable housing or other eligible activity
should receive continued credit for such investments.
Does the Service Test effectively assess an institution’s record of
helping to meet the credit needs of its entire community?
The test has been effective, but now needs to be updated to be more
flexible. The rapid growth of alternative delivery methods, such as the
internet, telephone and mail, allow delivery of services in new and
important ways. If an institution makes effective and extensive use of
these alternatives to meet the credit needs of its community, they
should be weighed heavily in the exam. Banks should be given credit for
all they are doing to serve a community beyond just specific branches –
for example, establishing a presence in a community facility,
maintaining a mortgage lending office, or providing ATMs.
Similarly, the “finance related” tie in the current regulations is
too restrictive. Bank employees volunteering with community-based
organizations should not be restricted to finance, investment or other
finance-related functions for an institution to receive CRA benefit.
Institutions should receive CRA credit for all volunteer activities
related to community building and development, such as helping to build
a home in Habitat for Humanity projects, which contribute to building
sustainable communities.
Are the definitions of Community Development appropriate?
Today, community development is a dynamic and innovative business,
but the current rules discourage an innovative response to a community’s
credit needs. The definitions should be expanded to allow more
flexibility in responding to a community’s needs. The application of the
“primary purpose” concept is too restrictive. We recommend that, going
forward, consideration of community development include, but not be
limited to, activities such as the following:
• loans to LMI individuals or communities;
• loans or investments in projects that provide housing, jobs or
other benefits to LMI individuals or communities;
• provision of financial services to LMI individuals or communities;
• grants to organizations that engage in community development
activities;
• equity investments in organizations or projects for the purpose of
community development;
• related activities, such as letters of credit or other credit
enhancements supporting community development projects or applications
to the Federal Home Loan Bank for supporting community development
projects.
Activities that enable community development also should count as
qualified investments. For example, all of an investment in a
mixed-income development where the market rate units enable affordable
units should count (not just the portion which is affordable) because
the investment meets the community’s need for credit to integrate LMI
households.
In addition, we support the need for a simplified method of
determining whether a multifamily project is “affordable housing for LMI
individuals”, thereby meeting the definition of “community development”.
One method we support was recommended in Fannie Mae’s 1999 comment
letter to the FFIEC (see the attached copy).
Small Institutions
Do the provisions relating to asset size and holding company affiliation
provide a reasonable and sufficient standard?
These provisions would provide a reasonable and sufficient standard
if they followed the asset size of the bank, as opposed to the current
practice of following the holding company’s asset size.
Limited Purpose and Wholesale Institutions: The Community Development
Test
Are the definitions of “wholesale” and “limited purpose” institutions
appropriate? If so, why? If not, how should the regulations be revised?
The definition of limited-purpose bank should be expanded to include
retail banks that have no branches or that have branches that are
incidental to the primary business strategy of the bank. We support
expanding the availability of the Community Development Test, allowing a
large retail institution to choose the option that best addresses the
community’s needs and the institution’s strengths.
Performance Context
Are the provisions of the performance context effective in
appropriately shaping the quantitative and qualitative evaluation of an
institution’s record of helping to meet the credit needs of its entire
community?
The Performance Context should be an important element of the CRA
evaluation but, in many instances, it has been extremely difficult to
persuade examiners to acknowledge the specific, external environment in
which each bank operates. Even in extremely high-cost areas, like New
York City, or credit surplus areas, like Wilmington, examiners often
seem unable or unwilling to acknowledge the operating environment.
We recommend that the regulators reinforce the critical importance of
this necessary, intellectual framework with which to evaluate
institutions. Examiners should receive needed training and resources to
enhance their expertise in this work. To the extent possible, regulators
should pool resources and data to provide all examiners across all
agencies with readily accessible information. The examiners should share
with their regulated institutions their assessment of the external
environment, and the institution should have the opportunity to review
and comment in a productive dialogue with its examiners.
Assessment Areas
Do the provisions on assessment areas, which are tied to geographies
surrounding physical deposit-gathering facilities, provide a reasonable
and sufficient standard for designating the communities within which the
activities will be evaluated during the examination?
If a bank is adequately meeting the credit needs of its assessment
area, then all qualified lending, investing and services outside its
assessment area should be given favorable consideration. This important
flexibility should help communities with unmet needs, and reduce
economic distortions in hyper-competitive markets.
Data Collection
Are the data collection and reporting and public file requirements
effective and efficient approaches for assessing an institution’s CRA
performance while minimizing burden?
Collecting the required data, making sure that it is accurate, and
maintaining the public file is an increasingly burdensome and expensive
undertaking. As more and more institutions operate in many states, and
with the recent addition of disclosures mandated by the Sunshine
regulations, a tremendous amount of labor and paper goes into this work.
The cost/benefit relationship of these requirements should be
re-evaluated. It is also important to note that every change in data
collection requirements necessitates substantial systems changes and
costs at every institution, and further reduces the ability to track
trends in lending over time. We suggest that it should be an accepted
principle that such changes should only result from a major need in
furtherance of CRA.
In this new millennium of technological communications and
multi-state financial institutions, the current rules requiring multiple
public files now kill way too many trees for little or no benefit. Very
few people go into branches and ask for CRA file information. Each
institution should provide one paper set of data only, and each branch
office should be required to have written contact information to respond
to inquiries that tells people the various ways to access all of the
institution’s information.
Finally, race and ethnic data should not be included in the CRA exam.
Fair lending is about fair treatment of protected groups, including
racial and ethnic minorities, many of whom are not of low- or
moderate-incomes.
We appreciate all of the effort the agencies have made to eliminate
unintended barriers to meeting the credit needs of low- and
moderate-income persons and communities. We hope that you will take this
opportunity to make corrections to the 1995 rule to further increase the
flow of private capital and strengthen institutions’ ability to meet
these credit needs in the new millennium, and we look forward to working
with you on these goals.
Sincerely,
Judith A. Kennedy
President
_______________________________________
April 5, 2002
John D. Hawke, Jr.
Comptroller of the Currency
Office of the Comptroller of the Currency
Independence Square
250 E Street, SW
Washington, DC 20219-0001
Dear Jerry,
This responds to your challenge to NAAHL to develop a proposal for
updating the CRA regulation. By way of background, the 3 principles
underlying NAAHL’s approach to CRA and Community Development and
informing this proposal are:
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.
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.
Responsiveness to community/market needs: Banks should be able to
create, change, and modify their CRA oriented programs to reflect
changed conditions 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:
As an option (not dissimilar to the choice available with the
“Strategic Plan”), a bank could choose as an alternative to the standard
Lending, Investment, and Service Tests, to be assessed under two new
tests which differentiate between the community reinvestment
responsibility to provide financial services to the institution’s
assessment community on the one hand, and the narrower but pressing need
to assist LMI individuals and/or revitalize the communities within which
they live or work. These alternative tests would be:
• Retail Banking Test – consisting of mortgage loans, small business
loans, consumer loans (optional), and retail banking services. This
would be similar in scope to the existing small bank test.
• Community Development Test – consisting of community development
lending, community development investments, and community development
services.
The Retail Banking Test will 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.
The Community Development Test -- Definition and Purpose:
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.
The Community Development Test will 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.
Weighting:
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 and the flexibility Examiners
have to evaluate the totality of an institution’s program without rigid
adherence to hard and fast allocations, 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.
HDMA, Small Business, and (Optional) Consumer Loans:
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. For examination purposes, all
activities will be categorized as falling under the Retail Banking Test
or the Community Development Test.
Determination of Which Test to be Examined under:
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. We would look
forward to continuing our dialogue on these important matters.
Sincerely,
Judy Kennedy
President
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