FDIC Federal Register Citations

National Low Income Housing Coalition

September 20, 2004

Robert E. Feldman
Executive Secretary
Attention: Comments / Legal ESS
Federal Deposit Insurance Corporation
550 17th Street NW
Washington, D.C. 20429

To Whom It May Concern:

Subject: RIN 3064-AC50

The National Low Income Housing Coalition (NLIHC) is dedicated solely to ending America’s affordable housing crisis. Members of NLIHC include non-profit housing providers, homeless service providers, fair housing organizations, state and local housing coalitions, public housing authorities, housing researchers, private property owners and developers, state and local government agencies, faith-based organizations, residents of public and assisted housing, and other people and organizations concerned about low income housing across the country.

According to NLIHC’s March 2004 Losing Ground, nationally there are only 43 units both affordable and available to every 100 renter households with incomes less than 30% of the area median income. According to the Department of Housing and Urban Development (HUD), more than 5 million very low income renter households pay more than 50% of their incomes toward rent or live in severely substandard housing. Recent NLIHC research shows that waiting lists for public housing and rental assistance vouchers far surpass anticipated availability of affordable units. There is an absolute shortage of affordable housing units available to people with the lowest incomes in the United States.

Withdraw the Proposed CRA Changes
The Community Reinvestment Act (CRA) works effectively toward community-based solutions to housing needs. NLIHC implores the FDIC to withdraw your August 20 proposed changes to the CRA. Since the CRA’s inception in 1977, banks and community groups have successfully partnered in solutions to meet affordable housing needs. The CRA represents a cornerstone of our nation’s private investment in low income multifamily construction and affordable single family lending. The proposed changes would drastically reduce bank assets accountable to meaningful lending, investing and retail services in communities in desperate need of legitimate financial commitments.

By quadrupling the asset threshold under which banks are defined as small from $250 million to $1 billion, the proposed change eliminates 96% of FDIC-regulated banks from having to perform in three distinct categories: lending, investing and services to low and moderate income communities. The one area within the proposed changes where there would be continued CRA examination would be in the area of lending. However, the asset threshold increase to $1 billion only subjects such “small” banks to a much less rigorous lending examination, which we believe will result in many fewer affordable housing loans.

Affordable Housing Production and Preservation
Today, most federally-subsidized housing programs affordable to low income people require some level of private investment. The CRA helps ensure that this private financing is at the table. Without the strong CRA tests of today, applicable to all mid-size banks, such partnerships will go unattended and the units they produce will be lost.

For example:
• The low income housing tax credit program, the largest producer of low income housing units in the United States, relies extensively on the investment of mid-size banks to produce more than 115,000 units each year. Such production achievements will be at risk if mid-size banks are not held accountable for a full array of community-based investing.

• HUD production programs (Section 202 Housing for the Elderly, Section 811 Housing for Disabled People and the HOME program) must usually layer several financing sources in order to produce a single affordable property. These HUD programs rely on private investment sources. Again, it is the CRA that brings mid-size banks to the table on these deals. Any meaningful community development test would reward a bank of any size for such critical investment in affordable and accessible housing.

• Many older project-based Section 8 properties are in need of recapitalization. These properties, which often offer some of the only affordable and accessible units in their neighborhoods, rely on mid-size, local banks familiar with their communities and obligated to affordable housing because of strong, historical federal leadership on community investment. With weaker CRA regulations, as put forth in the proposed rule, these same mid-size banks would have no impetus to partner with affordable housing providers. A strong and relevant community development test would provide that impetus and reward banks for doing the most valuable work – making the complex projects work so these units remain affordable. The banks that do the most to produce and preserve affordable units should be credited by a CRA exam that counts every unit, whether that’s 100 units in an at-risk Section 8 property or one in a single family home. CRA can and should provide the backbone, the starting point and the reason for many banks’ community involvement.

• Public housing is another area of affordable housing increasingly reliant on private sector financing. During the last several years, HUD and Congress have urged public housing authorities to leverage public dollars with private financing. Much of this private financing has come due to involvement with efforts to comply with the CRA. Public housing authorities have also partnered with local banks to ensure the success of Section 8 vouchers-for-homeownership programs. Public housing authorities have been able to rely on mid-size banks to purchase tax exempt bonds to finance new construction of low income rental housing. If the proposed rule change is finalized, public housing authorities will have fewer private financing partners, if they have any at all.

Removal of Investment and Services Tests for Mid-size Banks
The FDIC proposal adds a community development criterion in lieu of the more precise investment and service tests applicable today. The new criterion could be satisfied by banks choosing whether to provide community development loans, investments or services instead of assessing their performance in all three of these areas.

The proposed community development criterion is not an acceptable proxy for meaningful community investment. It is a wholesale redefinition, one that will allow banks with assets of up to $1 billion to take the easiest path. Conceivably, a mid-size bank could meet its new community development criterion by underwriting events that have no long-term impact on low and moderate income communities, wholly contrary to the intent of the CRA, which is to bring credit and services in a purposeful way to underserved people and the communities where they live. In the least, the three-part test, of investment, lending and services, should be strengthened to accommodate and reward the creative and critical role banks have in affordable housing today.

The current investment test for banks with assets above $250 million includes a review of four key indicators: the dollar amount of qualified investments, the innovativeness or complexity or the qualified investment, the responsiveness of the qualified investment to credit and community development needs and the degree to which the qualified investments are not routinely provided by private investors. Each of these indicators is precious to producing and preserving affordable housing in the United States today. A broad community development criterion would allow almost 96% of all FDIC-regulated banks to ignore these critical community investment tools.

The current service test for banks with assets above $250 million includes an examination of bank branches in various income geographies, the availability of alternative banking systems (ATMs, etc.), the range of services provided to various income geographies and the extent to which banks provide community development services and the innovativeness and responsiveness of these services. A new community development criterion for mid-size banks offers a wide loop-hole for banks to avoid participation in meaningful community investment, lending and services. We oppose the creation of this loop-hole.

Weakening of Lending Test for Mid-size Banks
Under the proposed rule change, banks with assets of between $250 million and $1 billion would be recategorized as small banks for the purposes of testing lending activity under the CRA. Small banks (today defined as having less than $250 million in assets) today enjoy cursory lending exams. The FDIC’s August 20 proposal brings an additional 900 banks, with assets of more than $400 billion, under this cursory lending exam umbrella. Today, banks with assets of more than $250 million in assets are examined for the innovativeness and complexity of their loans, the amount and geographic distribution of their loans, the variety of income groups served by loans and the types of loans (mortgage loans to various income groups, small business and small farm loans, etc.)

A new cadre of banks, again 900 of them with assets of more than $400 billion, would not have to comply with these effective and action-oriented exams. Instead, under the FDIC proposal, they will be subject to the streamlined lending exam of the traditional small bank. This streamlined exam includes many fewer performance indicators, which tend to use “reasonable” as their quality standard (reasonable loan-to-deposit ratios, reasonable distribution of loans, etc.). The use of “reasonable” standards, instead of the hard ratios incorporated into the effective lending test for large banks, is an unacceptable substitute for affecting real investment in low income housing production and preservation. Banks with assets between $250 million and $1 billion must minimally be held to the same standards as banks with assets of more than $1 billion.

Proposed Rule is Even More Troublesome for Rural Areas
The proposed rule almost entirely eliminates any dedication of resources to low and moderate income rural communities. In rural areas, bank resources (lending, investment, retail services) will be completely at the whim of any bank with assets of up to $1 billion. If the FDIC adopts its proposed change, 86% of the rural banks it regulates will fall into the small lender category. Small lenders in rural areas will be held to the very weak test of a new community development criterion, as described above, but with one all-encompassing additional downfall: the proposed definition of community development in rural areas does not have any relationship to low and moderate income areas. Mid-size rural banks will have the ability to comply with community development criterion by lending, investing and providing services that benefit high income households and communities. Little could be more contrary to the intent of the CRA.

In addition, the change in the small bank definition has a disproportional impact on rural states and rural areas. The definition change will leave entire states, and many regions of other states, with no banks accountable to the three-part CRA exam. This will unquestionably lead to less investment in affordable housing for low and moderate income Americans in rural areas. In withdrawing its proposed rule, which would have only done half the damage the FDIC is proposing, the Federal Reserve Board in July 2004 stated, “On balance, the Board does not believe that the cost savings of the proposal [to increase the small bank asset threshold to $500 million] clearly justify the potential adverse effects on certain rural communities.”

The CRA should not treat rural areas, as the proposed changes do, as if they are immune to affordable housing problems. The data are clear that they are not. The FDIC should provide a community development framework with emphasis on targeting the most resources to the lowest income areas and households and assisting affordable housing developers (and affordable housing preservationists) with their most nuanced deals.

Thank you for considering our comments.

Sincerely,

Sheila Crowley
President