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Vonda Eanes, Director for CRA and Fair Lending Policy, OCC
The Community Reinvestment Act (CRA) was passed in 1977 to prevent redlining and to encourage national banks and federal savings associations (collectively, banks) to help meet the credit needs of all segments of their communities, including low- and moderate-income (LMI) neighborhoods and individuals. Today, banks are assessed by federal financial institution regulators, such as the OCC, to evaluate their performance in activities that comport with the CRA. Qualifying CRA community development activities must fall under one of the categories listed under the definition of community development1 and meet the geographic requirements of the regulations by benefiting a bank's assessment area or a broader statewide or regional area that includes the bank's assessment area.2
This article provides examples of how banks may receive consideration under the CRA for qualifying housing rehabilitation efforts.
Affordable housing is a core component of community development under the CRA regulations. Banks may receive CRA consideration for loans, qualified investments, and community development services with a primary purpose of revitalizing or stabilizing LMI areas, or providing affordable housing for or community services to LMI individuals, including consideration of activities related to community stabilization, such as the rehabilitation of affordable housing.
Loans for single-family affordable housing rehabilitation may qualify as community development. For example, financing loans to nonprofit organizations serving primarily LMI individuals, or loans to other community financial intermediaries that develop or provide financing for affordable housing targeted to LMI individuals, may be considered community development as long as these loans are not otherwise evaluated under the retail portion of the applicable lending test. Rehabilitation activities that may receive CRA consideration include, but are not limited to, abatement, remediation, or other actions to correct environmental hazards, such as lead-based paint, asbestos, mold, or radon that are present in the home or property.
Similarly, banks can receive community development consideration for making qualified investments that support affordable housing rehabilitation efforts. Qualified investments include, but are not limited to, investments, grants, deposits, or shares in or to certain types of organizations that focus on community development activities.3 Activities that can be considered under the CRA as community development include grants and investments to entities engaged in affordable housing rehabilitation or to financial intermediaries. The intermediaries include community development financial institutions, community development entities, and community development corporations, and minority- and women-owned financial institutions, community loan funds, and low-income credit unions that primarily lend or facilitate lending in LMI areas or to LMI individuals to promote community development. Additionally, grants to support the work of nonprofit counseling agencies that provide homeownership or home maintenance counseling for LMI individuals may be considered as CRA-qualified investments.
An in-kind donation or discounted sale of a property classified as other real estate owned (OREO) to a qualified community development organization to rehabilitate for use as affordable housing targeted to LMI individuals may be considered a community development activity. In the case of a sale, the amount of the qualified investment would be the portion of the in-kind donation that represents the difference between fair market value (FMV) and the discounted disposition price of the property. If the property is donated outright, then the property's FMV would be the amount of the in-kind donation. FMV should be established based on an accepted method of valuing OREO property.4
Community development services include technical assistance activities on behalf of nonprofit or governmental community development organizations to help these entities set up programs to purchase, or purchase and rehabilitate, affordable housing. Examples of technical assistance activities include serving on a loan review committee or lending employees to assist in developing guidelines and underwriting standards for an acquisition and rehabilitation program when the properties will be used for a qualified CRA purpose, such as affordable housing for LMI individuals. Technical assistance may be particularly useful to help community-based organizations understand the intricacies and risks of rehabilitation lending. A bank could provide technical assistance to a nonprofit affordable housing organization by managing the rehabilitation phase directly or by helping to develop systems for the nonprofit organization to manage construction draws and disbursements.
Community development services also include providing credit counseling, home buyer and home maintenance counseling, financial planning, or other financial services education to LMI borrowers or to promote community development and affordable housing.5 Home purchase and home maintenance counseling can increase homeownership sustainability. Such counseling programs could be particularly helpful for borrowers who plan to rehabilitate a property and could benefit from working with a counseling agency that is qualified to provide guidance on managing the rehabilitation phase.
Generally, activities that revitalize or stabilize LMI geographies by attracting new—or retaining existing—businesses or residents meet the CRA definition of community development.6 Revitalization-related activities in designated disaster areas are also considered community development.7 Activities are presumed to revitalize or stabilize such areas if they are consistent with a bona fide government revitalization or stabilization plan or disaster recovery plan.8 For example, the targeted neighborhood rehabilitation programs sponsored by the City of Detroit (see "Detroit Home Mortgage: Innovative Rehabilitation Financing") would be examples of a government revitalization initiative. Programs to rehabilitate affordable housing for LMI individuals may meet the CRA definition of community development even if they are not located in LMI areas, areas designated for revitalization, or disaster recovery areas.
On August 21, 2017, the OCC issued OCC Bulletin 2017-28, "Mortgage Lending: Risk Management Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization," to spur community revitalization by banks that want to offer higher-loan-to- value mortgage (LTV) programs. This bulletin proves guidance for managing risks to banks and borrowers associated with programs in which certain residential mortgage loans are originated when the LTV ratio at origination exceeds 100 percent. Higher-LTV programs addressed by the bulletin are those in communities officially targeted for revitalization. This designation can be made by a federal, state, or municipal government or by a government-designated entity such as a land bank. The higher-LTV loans are those to borrowers who will occupy the property, and loans should have an original balance of $200,000 or less. The mortgage should be a permanent first-lien for either the purchase or purchase and rehabilitation of a property. In some situations a buyer may need to pay cash for a property and secure financing later. This situation is covered by the guidance if the buyer receives a bank loan commitment within six months to cover the purchase price plus projected rehabilitation costs. More information about these programs is provided in the article "OCC Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization."
A higher-LTV loan program may be considered a community development activity if it revitalizes or stabilizes an LMI area by helping to attract new or retain existing residents or businesses.9 Activities related to such a program may receive consideration for their innovativeness, flexibility, or complexity. For a large institution whose lending test includes an evaluation of community development lending, consideration may be given for the extent to which innovative or flexible terms or products augment the success and effectiveness of community development loan programs or address credit needs of LMI individuals or areas. The large institution investment test evaluates the innovativeness and complexity of qualified investments.10 Similarly, the large institution service test evaluates the innovativeness and responsiveness of community development services.11
Under the community development performance criteria, a higher-LTV loan program that helps to revitalize or stabilize an LMI area may be considered responsive in helping to meet credit needs in the community, particularly if there is a financial education component.12 Offering homeownership education and home maintenance counseling programs may help borrowers understand potential risks and, ultimately, may improve loan performance.
Banks can also partner with community-based organizations to increase the success of higher- LTV programs. CRA consideration as a community development service may be available for banks with qualifying higher-LTV programs when technical assistance is provided to partners, such as nonprofit organizations and financial intermediaries that are engaged in rehabilitation efforts.
For more information, contact Vonda Eanes at vonda.eanes@occ.treas.gov.
1 See 12 CFR 25.12(g).
2 See "Interagency CRA Questions and Answers Regarding Community Reinvestment," 81 Fed. Reg. 142, July 25, 2016, pages 48506, 48529, __.12(h)—6.
3 Ibid., pages 48506, 48532, .12(t)—4.
4 Consult the appropriate supervisory office for more information.
5 "Interagency CRA Questions and Answers Regarding Community Reinvestment," 81 Fed. Reg. 142, July 25, 2016, pages 48530-31, 12(i)—3.
6 Ibid., page 48527, .12(g)(4)(i)—1.
7 Ibid., page 48527, .12(g)(4)(ii)—2.
8 Ibid., page 48527, .12(g)(4)(i)—1 and .12(g)(4)(ii)—2. An "eligible community" for a higher-LTV program must be officially targeted for revitalization by a federal, state, or local government entity or agency, or by a government-designated entity such as a land bank. See OCC Bulletin 2017-28, "Risk Management Guidance for Higher-Loan-to-Value Lending Programs in Communities Targeted for Revitalization."
9 Ibid.
10 Ibid.
11 12 CFR 25.24(e)(2).
12 "Interagency CRA Questions and Answers Regarding Community Reinvestment," 81 Fed. Reg. 142, July 25, 2016, page 48536, 12 CFR 25.22(a)—1.
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Collection: Community Developments Investments
Before-and-after image of a home in New Orleans rehabilitated by Redmellon Restoration & Development, a mission-driven real estate development company.
Call (202) 649-6420 or email communityaffairs@occ.treas.gov. This and previous editions are available on the OCC's website at www.occ.gov/communityaffairs.
Articles by non-OCC authors represent the authors’ own views and not necessarily the views of the OCC.
