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