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How the New CRA Will Affect Mortgage Lending

Top of the Ninth

December 1, 1995


How the New CRA Will Affect Mortgage Lending

This column is excerpted from a November presentation at a Federal Home Loan Bank of Des Moines meeting in St. Paul.

Among other things, we are regulators, and I suspect what many of you want to know is what business will be like under the new Community Reinvestment Act regulation, especially how the new CRA relates to housing activities.

The regulatory agencies released a new CRA regulation in May of this year. Several aspects of this new regulation have been well publicized in the industry press. Most notably, the new regulation calls for a performance-based evaluation of how well financial institutions are meeting the credit needs of their communities.

Second, financial institutions will be evaluated on their lending, service and investment performance. For example, if a bank makes a grant to a nonprofit developer of affordable housing services, the grant will be considered under the investment test, while home ownership counseling will be considered under the service test, and loans made to families purchasing the affordable housing will be considered under the lending test.

Under the lending and service tests, the regulators will consider the extent of a financial institution's community development activities, along with other lending and service efforts. Under the investment test, the only activities that the regulators will consider are community development activities.

However, unlike in the past, when examiners had considerable latitude in what activities were deemed "community development," the new regulation sets out a much more precise definition of these activities.

Looking just at housing development, the only activities that will meet the definition of "community development" under the new regulation are:

  • affordable housing for low- and moderate-income individuals;
  • services targeted to low and moderate-income individuals; or
  • activities that stabilize or revitalize low- or moderate-income areas.

One other type of activity that does not involve housing-loans to small businesses and farms-is also considered a community development activity under the new regulation.

However, the only housing activities considered "community development" are those that provide, directly through a financial institution or indirectly through an intermediary, housing or housing related services to low- and moderate-income persons or in low- and moderate income neighborhoods.

And further, low- and moderate-income is defined using the Census Bureau definition of less than 80 percent of the median family income for the metropolitan statistical area (MSA), or in the case of an area outside an MSA, the statewide non-metropolitan median family income.

This new definition of community development presents lenders, intermediaries and community groups with a couple of challenges. The first challenge is that those planning community development projects be precise if a financial institution is involved, and if that financial institution wants to have these activities considered community development under the new regulation.

Simply stated, if a financial institution is involved in providing affordable housing services through a partnership with a nonprofit developer, it must realize that its regulator will use this new strict definition of community development activities. In particular, in smaller communities where there are no low- or moderate-income areas, only loans, services or investments benefiting low- and moderate-income individuals will be considered community development activities.

Also, if a community group or a nonprofit developer is in partnership with financial institutions, it will have to provide specific information to these financial institution partners on the targeted population or area. Specifically, is the targeted population or area low- or moderate-income, as defined by the regulation? And then, the developer will need to be certain that its programs reach these stated targets.

The second challenge calls for an attentiveness to the larger issues. Providing affordable housing to lower-middle income families and the maintenance of lower-middle income neighborhoods are important to the stability of our cities and towns. While housing activities that serve these individuals and neighborhoods will not be considered community development under this new CRA regulation, it's important not to lose sight of the goals of providing affordable housing and stabilizing and revitalizing your communities. These projects may well be key to the development or redevelopment of your communities, and therefore, worthy of the time, effort and money.

Finally, the new CRA regulation should not be leading the decision-making process; on the contrary, lenders, as community leaders, should decide what is good for the community and participate wholeheartedly in those activities.

The Federal Reserve Bank of Minneapolis has long supported programs that aim to provide affordable housing and to stabilize and revitalize our communities.

For example, this Reserve Bank provides software on the Internet designed to help loan counselors and lenders qualify lower-income residents for housing loans. This software, called Partners and developed by the Federal Reserve Bank of Atlanta, opens up a new method of providing assistance to those who help low-income home buyers.