Our nation is grappling with dual crises that disproportionately affect low-income communities, which have already suffered from decades of neglect and disinvestment. Unfortunately, while our communities struggle, a federal regulator recently moved forward a major re-write of Community Reinvestment Act rules that we believe will result in uncertainty and undermine our efforts to invest in critically needed affordable housing for Michiganders that need it most.
In Michigan, there is bipartisan agreement that safe, affordable housing is key to a family’s ability to succeed. Having a safe place to call home has never been more apparent than the stay-at-home orders we experienced in Michigan have highlighted. Even before the COVID-19 crisis, however, the need for more affordable housing options was severe. More than 292,904 Michigan households are considered severely rent-burdened, spending more than half of their income on rent.
At Cinnaire, we work with our partners, including bank investors in Low Income Housing Tax Credits (LIHTC), to make more affordable homes available to Michigan households. We foster these collaborative partnerships to help bring capital to worthwhile developments in places where safe housing options simply aren’t meeting the critical need. CRA has been essential to the success of the LIHTC and helped provide access to capital for Community Development Financial Institutions (CDFIs), including Cinnaire, that focus on communities that are harder for the traditional banking sector to reach.
Both banks and communities have come to rely on CRA rules that encourage partnerships and strong understanding of community needs. These key factors are why we urged federal regulators to take care when updating the rules. In our comment letter to the federal regulators, Cinnaire encouraged them to base any rule changes on sound data and work in concert with other federal regulators, including the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve. Certainty and consistency are essential to sound, long-term decision making.
Unfortunately, we believe that the Office of the Comptroller of the Currency’s (OCC) recent final rule – which was made final without the FDIC or the Federal Reserve – will make our work more challenging and cause unnecessary uncertainty.
We appreciate the need for clarity, transparency and modernization of outdated rules. However, we are deeply concerned that the cumulative effect of the rule’s evaluation framework will result in significantly less capital becoming available for affordable housing and community development financing, resulting in far fewer affordable homes being created or preserved in low- and moderate-income communities in Michigan. In particular, we believe that the rule’s metric – which compares the dollar volume of a bank’s CRA activities to its deposits – will encourage banks to focus on large, low-cost, and less complex transactions. Many impactful activities, including affordable housing developments, are complex and innovative.
The rule also eliminates the separate investment test for banks, which has been a major driver of investment in Low Income Housing Tax Credits as well as the New Markets Tax Credit and Historic Tax Credit. Nationwide, it is estimated that 85% of LIHTC investors are CRA motivated banks. CRA rules should encourage these successful public-private partnerships to drive capital in underserved communities, not disincentivizing them.
The new rule will not be enforced for 2-3 years, depending on bank size. In addition, the OCC has yet to release key thresholds that banks will need to meet under the new rule. As a result, it remains to be seen how each bank will respond. However, we do know that the rule will present significant data collection challenges for banks, which will need to devote time and resources to understanding the complex rule and building out new compliance systems.
The dual crises that have recently gripped our nation have highlighted social and economic inequalities that have existed in society for a long time. CRA has the potential to be a strong tool to address and remedy these underlying issues. Federal regulators should go back to the drawing board and develop a broadly supported rule that encourages investment in underserved communities across our country.
This article was originally published in mbaBanking, the official publication of the Michigan Bankers Association.