On October 24, 2023, the Office of the Comptroller of the Currency, the Federal Reserve Board, and the Federal Deposit Insurance Corporation issued a final rule to strengthen and modernize regulations implementing the Community Reinvestment Act (CRA) to better achieve the purposes of the law. The Community Reinvestment Act (CRA) was enacted in 1977 and encourages banks to help meet the credit needs of their communities in which they operate, with a focus on low- and moderate-income communities. The last comprehensive interagency revision to the CRA regulations occurred in 1995.
The final rule adopts a new metrics-based approach to evaluating bank retail lending and community development financing. The final rule includes the following key changes:
- Reduces complexity and data requirements while providing a consistent and comprehensive approach to evaluating banks under the Retail Lending Test.
- reduces the number of major product lines potentially evaluated under the new Retail Lending Test from six to three.
- limits the evaluation of automobile lending to banks subject to the Retail Lending Test
- Adjusts retail lending performance ranges while maintaining high standards; also increases weighting of CD financing activities.
- adjusts benchmark standards to make conclusions under the Retail Lending Test more achievable while still maintaining appropriate and locally calibrated standards
- for large banks, gives equal weight to retail activities and CD activities (compared to a proposed 60 percent retail/40 percent CD split). The equal weight was broadly supported by stakeholders to encourage banks to focus on CD activities in addition to retail activities by providing additional emphasis in the banks’ ratings
- Retains evaluation of banks with significant retail lending outside of branches while increasing tailoring of the retail lending assessment area approach (RLAA).
- tailors requirements for delineating retail lending assessment areas
- reduces the number of product lines potentially evaluated in RLAAs: home mortgage loans or small business loans are only evaluated if the specific product line meets the triggering thresholds; other product lines are not evaluated in RLAAs
- Adds metric and impact factor to evaluate bank Community Development (CD) investments under the CD Financing Test.
- adds additional metric to community development financing evaluations, focusing on certain CD investments relative to deposits for banks greater than $10 billion, to enable examiners to evaluate bank investments under the Low-Income Housing Tax Credit and the New Markets Tax Credit programs. Strong bank performance under the metric would be a basis for positive consideration.
- creates an impact factor to recognize the important affordable housing and community development contributions of Low-Income Housing Tax Credit and New Markets Tax Credit investments
- Provides additional flexibility under the strategic plan option while continuing to meet the credit needs of communities.
- clarifies the option for any bank to request evaluation under a strategic plan and provides additional flexibility for banks with nontraditional business models
- strategic plans would need to reflect community input and meaningfully reflect that the bank seeking a plan will continue to meet the credit needs of communities they serve
The final rule takes effect April 1, 2024, with staggered compliance dates of Jan. 1, 2026, and Jan. 1, 2027. The Federal Reserve released a fact sheet on the final rule.
Community Reinvestment Act Final Rule’s Potential Impact on the Low-Income Housing Tax Credit (LIHTC) Market
The CRA final rule is intended to modernize regulations and address issues that market participants have been concerned about for years. Financial institutions are a significant LIHTC investor and use the credits to help fulfill their CRA requirements. The CRA’s new provisions could potentially impact bank demand for LIHTCs. It is unknown if the final rule will incentivize banks more toward community development lending than LIHTC equity investing. Reduced LIHTC demand from banks would likely lead to lower credit pricing, reducing the equity available to fund deals. Like any significant rule change, it will take time for the affordable housing industry to understand any potential outcomes. Over 80% of housing credit investments are motivated by CRA, and even minor changes to the regulations can have a major impact on LIHTC investment. Our team will continue to monitor the CRA final rule’s implementation and its effect on the affordable housing industry.
Butler Snow’s Texas Regulatory & Government Practice Group provides real estate consulting, advisory and regulatory compliance services related to real estate development and the use of public finance incentives. Our team has experience representing financial institutions, national developers, syndicators, REITs and development management companies. We are here to help. Please reach out with questions related to the Community Reinvestment Act, LIHTCs or other tax incentives.
