Susan Gittelman
Recent housing legislation spearheaded by Congress increased the supply of tax credits to address a nationwide housing shortage. But a new proposal from the Federal Deposit Insurance Corporation and the Office of the Comptroller of Currency would move in the opposite direction by reducing demand for the credits.
The Community Reinvestment Act (CRA), enacted in 1977 and updated in 1995, requires financial institutions (mostly banks) to invest in the communities where they do business. Banks are rated on how well they fulfill their community investment obligations such as investing in housing credits, and these CRA ratings are public.
Banks account for 80 percent of investment in housing tax credits, and beyond the public relations and economic returns these investments generate, they are motivated to enhance their CRA ratings because the ratings are a factor when they seek regulatory approval to merge and/or expand.
What the Agencies Want to Change
Banks are currently separated into three categories for CRA purposes: small, intermediate small and large. Both intermediate small and large banks are incentivized to make CRA investments, but large banks have the strongest incentives and the most stringent investment tests.
Last month, FDIC and OCC, two of the three federal bank regulatory entities, proposed raising the thresholds for each category.
The size cap for small banks would rise from $412 million in assets to $1 billion. For intermediate small banks (now just called “intermediate”), the top threshold would rise from $1.649 billion to $10 billion, and those classified as large would go from more than $1.649 billion in assets to over $10 billion. Public comments on the proposed regulatory changes are due by Oct. 13.
Under the proposal, the number of banks categorized as “large” would drop by 61 percent nationally; just 6 percent of banks would be subject to the most stringent CRA obligations. The number of banks most motivated to make housing and other community development investments in Massachusetts would decrease 23.5 percent, from 98 banks to 75.
“Only four Massachusetts-based banks and five in all of New England would remain in the ‘large’ category,” Thomas Callahan told me. He’s executive director of the Partnership for Financial Equity, a group of financial industry professionals, community leaders and government officials dedicated to closing racial wealth gaps and improving the financial futures of low- and moderate-income households.
Fewer Resources for Affordable Housing
The proposal is perplexing in light of passage of the One Big Beautiful Bill and more recently the 21st Century ROAD to Housing Act.
OBBB increased the supply of critical low-income housing tax credits and ROAD significantly increased demand for these and other credits by raising the Public Welfare Investment Cap, which governs banks’ ability to invest in such activities. This proposed regulatory change would significantly dampen demand for those very credits.
“More than 800 banks would no longer be required to do community development,” said Kevin Hill, senior policy advisor at the National Community Reinvestment Coalition (NCRC). “Another 417 would be subject to less stringent requirements.”
The FDIC and OCC are also requesting feedback on two alternatives. A less aggressive one would cap the intermediate category at $3.252 billion instead of $10 billion, and a far more aggressive approach would classify banks with up to $30 billion in assets as intermediate.
“Many of our housing credit investors are motivated by CRA,” said Rob Charest, senior managing director of equity production at Boston Financial. “Looking more broadly at the market, I’m not sure how impactful the change from $1 billion to $10 billion would be, but increasing to a $30 billion large bank threshold would likely reduce demand for credits.”
Will the Fed Agree?
The third major regulator of banks is the Federal Reserve, which has not joined the proposal.
“FDIC and OCC may want to roll back CRA more than the Fed is comfortable with,” said the NCRC’s Hill.
Just to make a complicated issue even more daunting, Massachusetts is one of only five states with local CRA regulations that mirror the current federal guidelines and are unlikely to change. And while banks might welcome relaxed regulation, they don’t like having to juggle multiple regulatory regimes.
Peter Flynn, director of acquisitions at Red Stone Equity Partners LLC, which matches housing developers with banks, put it succinctly: “Uniformity is important to banks.”
One rationale for the FDIC/OCC proposal is reducing what it costs banks to maintain and document CRA compliance. But that rationale is not well grounded in data. Bank surveys find that the CRA only accounts for 7 percent to 10 percent of total compliance costs and it generates trillions of dollars annually in loans and investments in housing and other critical priorities.
There is no doubt that the proposed changes to federal Community Reinvestment Act regulations will curtail demand for housing credits and other community investment vehicles. At a time when we face a national affordability crisis and the need to significantly boost housing production, these rule changes should be rejected.
Susan Gittelman is executive director of B’nai B’rith Housing, a nonprofit affordable housing developer currently working in Boston, MetroWest and the North Shore.
