Community Reinvestment Act Public Hearing

Citing the need to stabilize communities affected by high levels of foreclosures, federal bank and thrift regulators have opened a period of public comment on a proposed change to the Community Reinvestment Act (CRA). The change would encourage depository institutions covered by the act to support the Neighborhood Stabilization Program (NSP) administered by the U.S. Department of Housing and Urban Development (HUD). The change would increase bank incentives to invest in or facilitate NSP-eligible activities in approved target areas.

CRA requires federally regulated banks and thrifts to participate in meeting the credit needs of the entire community each serves, including low and moderate income neighborhoods, in a manner consistent with safe and sound practices. The regulatory agencies are mandated to assess each institution's participation and take it into account when evaluating an application by the institution for new branches or acquisitions. NSP is a program authorized by Congress to provide funds to states and local governments that have experienced high levels of foreclosure or which have a high incidence of subprime mortgage loans or loans in various states of default.

NSP funds can be used in five categories of projects:

To establish financing mechanisms for purchase and redevelopment of foreclosed upon homes and residential properties. Mechanisms could include soft-seconds, loan loss reserves, and shared equity loans for low-and moderate-income homebuyers;
To purchase and rehabilitate residential properties that have been abandoned or foreclosed with the goal or renting, selling, or redeveloping such properties;
To establish and operate land banks for homes and residential properties that have been foreclosed upon;
To demolish blighted structures; and
To redevelop demolished or vacant properties.

Under current CRA assessment guidelines, a financial institution receives positive consideration in their CRA examination for community development loans, qualified investments, and community development services, all of which must have a primary purpose of "community development." The proposed change would revise "community development" by adding to its definition loans, investments, and services that support enable, or facilitate NSP-eligible activities in designated target areas identified in plans approved by HUD under the NSP."

For example, the regulations suggest that under this revised definition a bank could receive favorable CRA consideration if it donated ORE properties to a non-profit housing organization in a NSP-designated area.

The four regulatory institutions proposing the change are the Office of Thrift Supervision, Federal Reserve Bank, Federal Deposit Insurance Corporation, and the Office of Comptroller of the Currency. They state that allowing institutions to receive CRA consideration for NSP-eligible activities will create an opportunity to leverage government funding targeted to areas with high foreclosure or vacancy rates."

The agencies have also created some exceptions to CRA rules to increase the reach of the proposed changes. CRA activities expressly encourage activities that benefit low-or-moderate income individuals or areas, while NSP programs have greater leeway in designating target areas. Therefore, restricting CRA consideration of NSP-eligible activities to the financial institution's CRA assessment area might not fully promote Congress's objectives for NSP. For example, a bank may hold several properties in its ORE inventory which are negatively impacting their neighborhoods but are outside of CRA designated areas. An exception could be made to allow the institution to donate or otherwise support NSP goals with this property.

Because NSP does not have a sunset date but must depend on continued funding from Congress, the proposed changes to CRA rules will also not be tied to a termination date.

The CRA announcement states that the proposed rule imposes no new requirements on institutions but simply expands the categories of activities that qualify under CRA as community development. No institution will be required to meet these new definitions, and no new reporting requirements will be required.

Comment:

Is it too much to hope that this announcement is another sign that two separate programs, separately created, separately funded, and administered; regulating two separate groups of institutions yet targeting essentially the same audience might actually be sort of coordinated? It is the second example of this type of semi-joint ownership we have seen in a week, with the first being the joint HUD/Veterans Administration initiative to assist homeless vets.

Since our optimism has been heightened, might we suggest that another agency tag on to today's announcement. What if the Department of Labor proposed to make job training funds and/or stimulus funds available to communities that are able to secure both NSF funding and bank participation so they might put together a complete package to hire and train low-income and unemployed individuals to rehabilitate those homes?

Regulators Tie CRA to HUD Development Program

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