Final Community Reinvestment Act Regulations Released
On October 24, 2023, the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation released final regulations on the Community Reinvestment Act (CRA), which were proposed in May 2022. (As of this report, final regulations have not been officially published in the Federal Register, but we will continue to monitor for their official publication.) The Housing Advisory Group submitted comments on the proposed regulations on August 5, 2022.
An overview of the final rule is available here. At a very high level, the agencies describe the final rule’s impact on the Low-Income Housing Tax Credit as follows:
The final rule updates the CRA regulations to provide clarity and consistency in the application of the rule. Specifically, the final rule “encourages CD activities that are responsive to the needs of LMI individuals and communities, small businesses, and small farms by clarifying what activities will receive CRA credit (such as affordable housing), providing for a public list and approval process to confirm an activity’s eligibility, and evaluating CD activities in light of their impact.”
The final rule “adds additional metric to CD 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.” In addition, the final rule “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.”
While we are still in the process of reviewing the final rule, agencies note in the preamble to the final regulations that with respect to the “separate investment test”:
“Upon consideration of commenter feedback, the final rule adopts a new impact and responsiveness review factor in § __.15(b)(10) for an investment in projects financed with LIHTCs or NMTCs. The agencies believe that adding an impact and responsiveness factor for these investments will mitigate commenter concerns about the final rule potentially discouraging tax credit transactions relative to the current CRA regulations by eliminating the separate investment test in the current CRA evaluation framework for large banks, in favor of evaluating community development loans and investments together in the Community Development Financing Metric. As discussed further in the section-by-section analysis of § __.24, the agencies appreciate concerns about the importance of and need for community development investments. In addition, the agencies understand that, as some commenters suggested, CRA-motivated capital is one of the primary sources of funding for LIHTC and NMTC transactions. Accordingly, the agencies are adopting an impact and responsiveness factor for these project types to recognize these investments.”
In general, the effective date of the final rule is the first day of the first calendar quarter that begins at least 60 days after official publication in the Federal Register, which Federal Reserve staff have indicated they expect would be April 1, 2024. Banks subject to the final rule would generally be required to begin complying with most provisions on January 1, 2026 (with certain reporting requirements becoming applicable on January 1, 2027).