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.
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