In the midst of the devastation wrought by the COVID-19 crisis and the need to focus on immediate responses, it is difficult but essential to recall what else is important to the future of our ability to continue creating high quality affordable homes. One of the most effective tools to our success in building affordable homes has been the Community Reinvestment Act (CRA), and it is at risk in this very moment.
In its forty plus years of existence, the CRA has served as a primary source of financing for affordable housing developments across the country by motivating banks to compete for the right to make loans and investments on favorable terms. As described in more detail below, two arms of President Trump's administration have proposed changes to core provisions that, if adopted, would fundamentally undermine and weaken CRA, putting at risk critical bank investments in affordable housing and other community-benefitting activities, which were the clear focus of the CRA when it was passed by the United States Congress in 1977. I strongly encourage anyone reading this who has not already submitted comments on these regulations to do so by the April 8th deadline.
The proposed CRA regulation changes from the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) would significantly lessen the incentives that benefit low-income households and disadvantaged communities by instead giving CRA credit for many new and less beneficial activities, and by weakening evaluation standards.
In short, the proposed changes to the CRA regulations would:
1. Undermine CRA's focus on investing in low- and moderate-income (LMI) communities. The proposal would dramatically lessen CRA's focus on LMI people and communities, in contradiction to the intent of the law, to meet their financial needs, including addressing redlining and disinvestment from LMI and communities of color. Most distressingly, the proposal would reward making investments that only "partially" benefit LMI people and neighborhoods, such as large infrastructure and energy projects, athletic stadiums, storage facilities, and luxury housing in Opportunity Zones. Investment in low-income housing and people will all become substantially less attractive.
2. Water down the definition of affordable housing. The OCC and FDIC propose to expand the definition of affordable housing to include middle-income housing (incomes up to 120% of area median income) in high-cost areas. Our recent policy brief entitled Who Can Afford to Rent in California's Many Regions finds that only 4% of median income households (which at 100% AMI earn significantly less than the proposed 120% AMI threshold) in California are severely cost burdened, as opposed to 50% of very low-income households and 76% of extremely low-income households. In addition, the proposal would count non-income restricted rental housing as affordable housing and give CRA credit for its construction if LMI people could theoretically afford to pay the rent, even if the actual occupants are not low or moderate income. We strongly urge the OCC and FDIC to keep the focus of affordable housing on households earning less than 80% of AMI - and particularly on those earning less than 50% of AMI and 30% of AMI, who have by far the greatest needs and are most likely to become homeless.
3. Undermine the evaluation system to the point where banks can ignore it. The agencies are proposing an evaluation system that would further inflate CRA ratings in a way that would render them meaningless. Currently, 98% of banks pass CRA exams; the proposal would likely push this higher by lowering the bar for a satisfactory rating. The agencies propose using a version of the ratio measure that consists of the dollar amount of CRA activities divided by deposits. From there, they propose dramatically increasing the scope of the activities and the places banks can receive credit (increasing the numerator), while at the same time also decreasing what are considered deposits by excluding brokered and municipal deposits (shrinking the denominator).
Banks will have much less incentive to invest in Low-Income Housing Tax Credit investments or make low-interest construction and permanent loans for affordable housing because they will need less CRA investment overall. Simultaneously, the proposed regulations promote easier investments with less public benefits. For example, banks will be able to achieve "Outstanding" ratings by investing in subprime credit card lending, large infrastructure and energy projects, athletic stadiums, storage facilities, and luxury housing as long as they are in Opportunity Zones, even if those activities have no proven benefit to LMI communities.
The agencies also propose to allow banks that receive "Outstanding" ratings to be subject to exams every five years instead of the current two to three years. This aspect of the proposal deviates from the agencies' statutory duties to ensure banks are continuing to respond to community needs. Banks with a five-year exam cycle would likely relax their efforts in the early years of the cycle. Banks would also have less accountability to maintaining acceptable CRA performance when they seek permission to merge with other banks.
4. Invite regulatory arbitrage. Under the proposed changes, banks will be able to choose their regulator based on which one provides a friendlier CRA framework. Small banks under $500 million in assets will be able to opt out of the new rules and lower their reinvestment obligations.
All banks, especially large banks, should have the same, strong, reinvestment obligations. When regulators choose different rules, and banks can choose their regulators, communities lose.
The federal government should never turn its back on its responsibility to follow the intent of Congress in passing a fundamental law such as CRA. Please join me in strongly urging the OCC and FDIC to withdraw this proposal and maintain the benefits of the current CRA regulations by filing your comments.
Language adapted from the California Reinvestment Coalition and the National Community Reinvestment Coalition