One session at the recent Ballard Spahr and CSG Advisors Western Housing Conference included an interesting discussion about the effects of Community Reinvestment Act (CRA) investment on affordable housing in the nation. Panel members shared some insight into how banks fulfill some of their CRA requirements by investing in affordable housing for low or moderate income individuals.
Under CRA and related regulations and guidelines, banks are evaluated on a periodic basis by federal examiners to determine if they are, among other things, providing enough lending, investing and financial services to low and moderate income individuals in the geographic areas where they operate. These evaluations result in ratings ranging from “Outstanding” to “Substantial Noncompliance.” A bank’s CRA rating is taken into account by the banking regulatory agencies when a bank seeks to expand through merger, acquisition or branching. The OCC posts its latest examination procedures here.
Large national and multinational banks collect a substantial amount of deposits in highly populated metropolitan areas such as New York, Los Angeles, San Francisco and Atlanta, so these large banks make substantial investments in those areas in order to comply with their CRA goals. Interestingly, one panel member mentioned that a disproportionate amount of CRA investment is also made in some less populated states like Utah and South Dakota because several large banks maintain a substantial amount of assets in branches located in those states.
Banks receive CRA credit by investing in affordable housing, so they are motivated to make mortgage loans and/or purchase bonds or other securities backed by mortgage loans made to low and moderate income individuals. Banks are also motivated to purchase Low-income Housing Tax Credits (LIHTC) for affordable multifamily housing projects. One panelist mentioned that pricing for LIHTC in the larger metropolitan areas can be as much as 25% higher than in less populated areas where banks do not have as much CRA investment need. Some of this pricing difference can be attributed to higher property values and rental rates in high population areas, but CRA is also a factor. Does this mean that CRA requirements encourage banks to invest in high population areas at the expense of investment in less populated areas? The panel discussed a potential change to allow banks to receive CRA credit for investments on a larger regional basis.
Another challenge facing CRA is the move towards online banking. CRA regulations will need to adapt to address the way that banking services are delivered to consumers today.
More information on CRA can be found on the OCC website.