OCC and FDIC Release CRA Modernization Proposal

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The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) are soliciting comment on a new proposal to modernize Community Reinvestment Act (CRA) regulations.

Notice of Proposed Rulemaking

OCC Summary

NPR-Summary-preview-final

OCC Fact Sheet

OCC_CRA_FactSheet-final

The proposal will have far-reaching implications for CDFIs and community development as a whole. Financial institutions often look to CDFIs when they seek to meet the requirements of the CRA. Nationwide, CDFIs have forged strong partnerships with banks and thrifts, working to establish CDFIs as an integral part of the financial services and community development delivery system. Banks help capitalize CDFIs with grants and equity as shareholders and provide them with deposits, loans, and investments. In return, banks receive CRA consideration for serving borrowers outside their normal customer profile through a responsible CDFI partner.

CDFIs rely on CRA to secure capital from private financial institutions. Without CRA, the CDFI industry today would be a fraction of its current size and the scale of its lending and impact correspondingly reduced.

The Proposal

An initial read of the proposal confirms that loans and investments to CDFIs will continue to receive CRA consideration. While the proposal does not adopt the so-called “One Metric”, it does take a largely quantitative approach to measuring compliance with CRA. While the overall impact of this proposal is not yet clear, some have argued that an expansion of qualified activities has the potential to crowd out investment in activities that qualified for CRA consideration under the previous regulatory regime. A purely quantitative approach also removes context community development activities.

We are reviewing the proposal and the Coalition will be providing comments. It includes 22 specific questions (scattered throughout) where the agencies are seeking comment. We’ve isolated them and you can download all the questions in a Word DOC below. The document includes citations where you can find the sections relevant to the questions.

Questions for Comment, WORD DOC

Below, we’ve highlighted some of the notable sections.

Qualifying Community Development Activities (click to expand)

The proposal broadly outlines the community development loans and investments that would qualify.

In general: Retail loans, community development loans, community development investments, and community development services that help meet the credit needs of a bank’s entire community, including low- and moderate-income communities, are qualifying activities if they meet the criteria in this section at the time the activity is originated, made, or conducted. If the activity is subsequently purchased by another bank, it is a qualifying activity if it meets the criteria in this section at the time of purchase.

Community development loans, community development investments, and community development services. A community development loan, community development investment, or community development service is a qualifying activity if it provides financing for or supports:

1) Affordable Housing

(i) Rental Housing:

  • That is likely to partially or primarily benefit low- or moderate-income individuals or families as demonstrated by median rents that do not and are not projected at the time of the transaction to exceed 30 percent of 80 percent of the area median income;
  • That partially or primarily benefits low- or moderate-income individuals or families as demonstrated by an affordable housing set-aside required by a federal, state, local, or tribal government;
  • That is undertaken in conjunction with an explicit federal, state, local, or tribal government affordable housing program for low- or moderate-income individuals or families;
  • That partially or primarily benefits middle-income individuals or families in high-cost areas as demonstrated by an affordable housing set-aside required by a federal, state, local, or tribal government; or
  • That is undertaken in conjunction with an explicit federal, state, local, or tribal government affordable housing program for middle-income individuals or families in high-cost areas; or

(ii) Owner-occupied housing purchased, refinanced, or improved by low- or moderate-income individuals or families, except for home mortgage loans provided directly to individuals or families;

(2) Another bank’s community development loan, community development investment, or community development service;

(3) Businesses or Farms that meet the size-eligibility standards of the Small Business Administration Certified Development Company, as that term is defined in 13 CFR 120.10, or the Small Business Investment Company, as described in 13 CFR part 107, by providing technical assistance and supportive services, such as shared space, technology, or administrative assistance through an intermediary;

(4) Community support services which means activities, such as child care, education, health services, and housing services, that partially or primarily serve or assist low- or moderate-income individuals or families;

(5) Essential community facilities that partially or primarily benefit or serve:

  • Low- or moderate-income individuals or families; or
  • Low- or moderate-income census tracts, distressed areas, underserved areas, disaster areas consistent with a disaster recovery plan, or Indian country;

6) Essential infrastructure that benefits or serves:

  • Low- or moderate-income individuals or families; or
  • Low- or moderate-income census tracts, distressed areas, underserved areas, disaster areas consistent with a disaster recovery plan, or Indian country;

(7) A family farms:

  • Purchase or lease of farm land, equipment, and other farm-related inputs;
  • Receipt of technical assistance and supportive services, such as shared space, technology, or administrative assistance through an intermediary; or
  • Sale and trade of family farm products;

(8) Federal, state, local, or tribal government programs, projects, or initiatives that:

  • Partially or primarily benefit low- or moderate-income individuals or families;
  • Partially or primarily benefit small businesses or small farms as those terms are defined in the programs, projects or initiatives; or
  • Are consistent with a bona fide government revitalization, stabilization, or recovery plan for a low- or moderate-income census tract; a distressed area; an underserved area; a disaster area; or Indian country;

(9) Financial literacy programs or education or homebuyer counseling;

(10) Owner-occupied and rental housing development, construction, rehabilitation, improvement, or maintenance in Indian country;

(11) Qualified opportunity funds, as defined in 26 U.S.C. 1400Z-2(d)(1), that benefit low- or moderate-income qualified opportunity zones, as defined in 26 U.S.C. 1400Z-1(a);

(12) A Small Business Administration Certified Development Company, as that term is defined in 13 CFR 120.10, a Small Business Investment Company, as described 13 CFR part 107, a New Markets Venture Capital company, as described in 13 CFR part 108, a qualified Community Development Entity, as defined in 26 CFR 45D(c), or a U.S. Department of Agriculture Rural Business Investment Company, as defined in 7 CFR 4290.50;

(13) Ventures undertaken, including capital investments and loan participations, by a bank in cooperation with: a minority depository institution, women’s depository institution, Community Development Financial Institution, or low-income credit union, if the activity helps to meet the credit needs of local communities in which such institutions are chartered, including activities that indirectly help to meet community credit needs by promoting the sustainability and profitability of those institutions and credit unions.

New or Expanded Qualifying Activities (click to expand)

Small Businesses and small farms

The proposal would increase support for small businesses and small farms by raising the eligible size of loan that qualifies as a small business loan or small farm loan in LMI areas and indexing that ceiling to inflation going forward. The proposal would also provide credit to banks for certain lending to family farms regardless of the location of the farm.

Summary, page 2: https://cdfi.org/wp-content/uploads/2019/12/NPR-Summary-preview-final.pdf

Small business means a business that has gross annual revenues of no greater than $2 million. The FDIC will annually adjust the $2 million threshold for inflation, and the adjustment to the threshold will be made publicly available.

https://www.occ.gov/news-issuances/federal-register/2019/nr-ia-2019-147-federal-register.pdf (Page 130)

Community Facilities

Adding a criterion for essential community facilities, such as schools and hospitals, that benefit or serve LMI individuals, LMI census tracts, or other targeted areas of need, such as distressed areas or Indian country

https://www.occ.gov/news-issuances/federal-register/2019/nr-ia-2019-147-federal-register.pdf (Page 27)

Alignment with federal, state, local, or tribal government programs

The proposal allows activities to qualify if they align with other initiatives benefiting LMI.

Adding a criterion for federal, state, local, or tribal government programs, projects, or initiatives that partially or primarily benefit LMI individuals, small businesses, small farms, LMI census tracts, or other targeted areas of need, such as distressed or underserved areas. Although many programs, projects, or initiatives covered by this criterion would qualify under the current CD definitions, this new criterion would ensure that all activities that meet this definition receive CRA credit.

https://www.occ.gov/news-issuances/federal-register/2019/nr-ia-2019-147-federal-register.pdf (Page 28)

Financial Literacy Programs

Adding a criterion for financial literacy programs or education or homebuyer counseling that benefits individuals of all income levels. The agencies believe that financial literacy is an important issue irrespective of income level. Moreover, some stakeholders expressed support for providing CRA credit for financial literacy programs for all individuals. These stakeholders cited high levels of student and credit card debt and a lack of retirement and other savings as reasons for providing broader consideration of financial literacy-related activities.

https://www.occ.gov/news-issuances/federal-register/2019/nr-ia-2019-147-federal-register.pdf (Page 28)

Expanding the Affordable Housing Criterion

Expanding the affordable housing criterion by clarifying that it:

Encompasses “naturally occurring affordable housing” (e.g., unsubsidized rental housing with rents that are affordable to LMI individuals and families). The current regulations could be interpreted to provide consideration these types of activities; however, the regulations do not expressly include these activities as qualifying CD activities and the CRA guidance is not sufficiently clear about whether they receive CRA credit. The proposal would clarify the criteria to incentivize banks to meet the affordable housing needs of their communities through a variety of activities; and

Includes rental housing for low-, moderate-, and middle-income individuals in high-cost areas. The Interagency Questions and Answers Regarding Community Reinvestment (Interagency Questions & Answers) explain that examiners can account for conditions in high-cost areas in banks’ CRA evaluations. The proposal would clarify the criteria to incentivize banks to meet the affordable housing needs of their communities through a variety of activities including workforce housing that would allow public employees, such as teachers, police officers, and firefighters, to live close to the communities they serve.

https://www.occ.gov/news-issuances/federal-register/2019/nr-ia-2019-147-federal-register.pdf (Pages 26-27)

The proposal adds a new criteria for affordable housing in Indian country:

Adding a criterion for owner-occupied and rental housing development, construction, rehabilitation, improvement, or maintenance in Indian country. This criterion would address concerns expressed by stakeholders about the significant housing needs in Indian country that affect individuals of all income levels.

https://www.occ.gov/news-issuances/federal-register/2019/nr-ia-2019-147-federal-register.pdf (page 28)

Infrastructure

Adding a criterion for essential infrastructure, such as roads, mass transit, or water supply and distribution, that benefits or serves LMI individuals, LMI census tracts, or other targeted areas, such as Indian country. As discussed above, certain essential infrastructure projects may receive credit under the current CRA regulations as CD activities. The addition of the essential infrastructure criterion would acknowledge the importance of these types of projects to communities by ensuring that essential infrastructure activities receive CRA credit if they include some benefit for LMI individuals, LMI census tracts, or other areas of need (e.g., an investment in a mass transit project that serves the public, including LMI individuals, would be a qualifying activity).25 The addition also would recognize that essential infrastructure projects are often community-wide projects for which it is not feasible to allocate the benefit to specific populations or areas.

https://www.occ.gov/news-issuances/federal-register/2019/nr-ia-2019-147-federal-register.pdf (pages 27-28)
Qualifying Activities Illustrative List (click to expand)

The proposal also provides a non-exhaustive list of examples of activities that would qualify. A quick scan of that list reveals many activities that overlap with the work of CDFIs. We’ve provided a few examples below, but we recommend you scan the full list, which is available on pages 86-101: https://www.occ.gov/news-issuances/federal-register/2019/nr-ia-2019-147-federal-register.pdf

Retail loans

Retail loans. A home mortgage loan, small loan to a business, small loan to a farm, or consumer loan is a qualifying activity if it is:

Examples of retail loans to LMI family or individual

  • Loan classified on the bank’s Call Report as a 1-4 family residential construction loan to an LMI individual.
  • Closed-end loan or open-end line of credit classified on the bank’s Call Report as a loan secured by a 1-4 family residential property to an LMI individual.
  • Loan classified on the bank’s Call Report as secured by a multifamily residential property to an LMI individual.
  • Home mortgage loan guaranteed by the Federal Housing Administration (FHA) to an LMI individual.
  • Home mortgage loan guaranteed under the FHA’s 203(b) Mortgage Insurance Program to an LMI individual.
  • Home mortgage loan guaranteed under the FHA’s Limited 203(k) Program to an LMI individual.
  • Home mortgage loan guaranteed under the U.S. Department of Housing and Urban Development’s (HUD) Indian Home Loan Guarantee Program (Section 184) to an LMI individual.
  • Home mortgage loan guaranteed by the U.S. Department of Agriculture’s (USDA) Rural Housing Service to an LMI individual.
  • Home mortgage guaranteed by the U.S. Department of Veterans Affairs (VA) to an LMI individual.
  • Credit card to an LMI individual. Low-cost education loan to an LMI individual, such as to fund school tuition and/or expenses.
  • Home equity line of credit to an LMI individual, such as for home improvement.
  • Non-credit card revolving credit line, such as for purchase of home appliances, to an LMI individual.
  • Consumer loan to an LMI individual for purposes other than purchasing an automobile, such as to fund unexpected medical expenses.
  • Automobile loan to an LMI individual to purchase a car. Installment loan to an LMI individual to purchase home appliances

Examples of retail loans to small businesses

  • Loan or line of credit of $2 million or less to a business with gross annual revenues of $2 million or less when classified on the bank’s Call Report as a commercial and industrial loan.
  • Loan or line of credit of $2 million or less to a business with gross annual revenues of $2 million or less when classified on the bank’s Call Report as a loan secured by nonfarm nonresidential properties.
  • Loan of $1.5 million under the U.S. Small Business Administration (SBA) Certified Development Company/504 Loan Program that covers 50 percent of the project’s cost and is secured by a first lien on real property.
  • Loan of $700 thousand to a business with gross annual revenues of $2 million or less to make improvements to its manufacturing facility under the SBA 7(a) loan program.
  • Loan of $2 million to a business with gross annual revenues of $2 million or less to finance the purchase of machinery under the USDA’s Rural Development Business and Industry Guarantee Loan Program.

Examples of loan participations in CDFIs, MDIs, etc.

Ventures undertaken, including capital investments and loan participations, by a bank in cooperation with a minority depository institution, women’s depository institution, Community Development Financial Institution, or low-income credit union, if the activity helps to meet the credit needs of local communities in which such institutions are chartered, including activities that indirectly help to meet community credit needs by promoting the sustainability and profitability of those institutions and credit unions.

  • Bank employees provide training to CDFI staff on underwriting small farm loans to help the CDFI expand its product offerings to its community.
  • Loan to enable a minority- or women-owned depository institution or low-income credit union, or CDFI to partner with schools or universities to offer financial literacy education to members of its local communities in which such institutions are chartered

Community Development Loans, Investments, and Services

Community development loans, community development investments, and community development services. A community development loan, community development investment, or community development service is a qualifying activity if it provides financing for or supports:

Affordable Rental Housing that is likely to partially or primarily benefit low- or moderate-income individuals or families as demonstrated by median rents that do not and are not projected at the time of the transaction to exceed 30 percent of 80 percent of the area median income;

  • A loan to a non-profit organization for the purpose of providing affordable housing to LMI individuals where the median rents do not exceed 30 percent of 80 percent of the area median income.
  • A loan to a for-profit business for the purpose of providing affordable housing to LMI individuals where the median rents do not exceed 30 percent of 80 percent of the area median income.
  • Public welfare investment, under 12 CFR part 24, that will use tax credits from the Federal Historic Tax Credit Program to finance the adaptive reuse and renovation of a hotel into rental units with median rents that will not exceed 30 percent of 80 percent of the area median income.
  • A loan for a mixed-use property in an underserved non-metropolitan middle-income geography that will be used to help seasonal businesses provide affordable housing to seasonal LMI workers at rents that do not exceed 30 percent of 80 percent of the area median income
Calculating the qualifying activities value

Qualifying activities would be quantified as follows:

• Qualifying loans and CD investments would be valued based on their average month-end on-balance sheet dollar value, except that qualifying retail loans originated and sold within 90 days of their origination date would be valued at 25 percent of their origination value.

• Legally-binding commitments to invest that are reported on the Call Report, Schedule RC-L, would be valued based on their average month-end dollar value.

• Qualifying commitments to lend would be valued based on the average month-end dollar value of the allowance for credit losses on those commitments that are reported on the Call Report, Schedule RC-G.

• CD services and monetary or in-kind donations would be credited at the value of the monetary donation or in-kind activity or at the hourly salary as estimated by the Bureau of Labor Statistics for the job category of the service provided for the number of hours provided. If a CD activity partially benefits the intended population or area, then the quantified value would be a pro-rata share of the full quantified dollar value of the activity, as described above, equal to the percentage of partial benefit.

….

A bank would calculate its bank-level and assessment area qualifying activities values by taking the sum of the quantified values of all qualifying activities, adjusted by any applicable multiplier, as follows:

Qualifying loans on balance sheet for at least 90 days and CD investments

PLUS

Twenty-five percent of the origination value of qualifying loans sold within 90 days of origination

PLUS

CD Services and Monetary and In-Kind Contributions

For more information on calculating the qualified activities value, see page 139. Community development activities and investments into CDFIs count double: https://www.occ.gov/news-issuances/federal-register/2019/nr-ia-2019-147-federal-register.pdf

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