The Midwest, which is sometimes referred to as the “flyover” part of the country, has often been overlooked when it comes to investment dollars earmarked for low-income and revitalization areas, but the modernization of the Community Reinvestment Act (CRA) by two government agencies could change that.
The CRA was established in 1977 to eliminate the practice by financial institutions of “redlining”. It has not been substantively updated in nearly 25 years. Now there is a proposal in the works to overhaul it. Prior to this proposal, limitations often caused CRA investments to favor the large metropolitan areas on the east coast, west coast, and in the south, where many large banks are headquartered, ignoring central parts of the nation.
Proposals by two agencies, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) that control about 85% of the financial institutions include the following changes:
Assessment Area Expansion
Online banking has dramatically changed the geographical make-up of a bank’s customers, but the CRA program has remained focused on physical branch locations. If the proposal moves forward, institutions with more than 50% of deposits originating from outside the current assessment area will be required to analyze the locations of the depositors. If a zone is found to have more than 5% of the institution’s deposits, it will be added to the assessment area. The impact is that banks will receive credit for qualifying activities conducted outside of their current assessment areas, which could help more remote areas of the country. Naysayers claim that the new rules will allow banks to skirt local obligations.
The proposal keeps current tax incentive activities in place, such as Low-Income Housing Tax Credits (LIHTC), Historic Tax Credit (HTC), and New Markets Tax Credits (NMTC), but adds new emphasis on distressed, underserved, and “Indian Country” investments. Likely, Opportunity Zone Investments will be included.
Institutions with $500 million in assets will have a new performance standard that will measure the ratio of CRA investments/loans to total investments/loans. However, this may decrease the equity investments since loans are less difficult to underwrite. To eliminate undue burden, banks with less than $500 million in assets are able to choose whether or not to opt-in to the new framework.
Legislative response has been mixed with supporters and detractors. More guidance on the proposal continues to be disseminated. Developers who count on investments from financial institutions may want to contact their federal delegation to have their opinion heard on these changes prior to the end of the public comment period in March.