The federal financial regulatory agencies1/ recently issued changes to the Community Reinvestment Act (CRA) rules in an effort to encourage financial institutions to help stabilize foreclosure-ravaged communities. The rule changes, which took effect January 19, 2011, expand the CRA's definition of community development to include certain activities that support the objectives of the U.S. Department of Housing and Urban Development's $7 billion Neighborhood Stabilization Program (NSP). The NSP provides grants to government entities and nonprofit organizations for the purpose of facilitating or participating in the purchase and redevelopment of foreclosed properties. (For more on the NSP and eligible uses of NSP funds, see the "NSP 101" sidebar below.)
Under the rule changes, financial institutions can receive favorable CRA consideration for "loans, investments, and services ... that support, enable, or facilitate projects or activities"2/ that are consistent with the NSP's requirements. The supported projects and activities do not have to be NSP-funded, but they must meet one or more of the NSP's five eligible-uses criteria. The supporting loans, investments, and services must benefit low-, moderate-, and middle-income people or geographies located in NSP target areas that Housing and Urban Development (HUD) has designated as "areas of greatest need." The favorable CRA consideration will be available for up to two years after the date by which grantees must spend NSP funds. Examples of eligible loans, investments, and services include donating foreclosed, bank-owned properties to a nonprofit housing organization; providing financing for the purchase and rehabilitation of foreclosed properties; and providing technical assistance to support the redevelopment of demolished properties. In practice, financial institutions categorized as large banks are most likely to take advantage of the rule changes, since large banks have the heaviest community development obligations under the CRA. (For more on this, see the "Nuts and bolts of the CRA" sidebar below.)
The rule changes have two key provisions that expand the CRA's definition of community development. The provisions are departures from the CRA's longstanding emphasis on encouraging activities that benefit low- and moderate-income communities (i.e., those with median family income that is less than 80 percent of area median family income) located within a financial institution's assessment area. First, the rule changes extend CRA consideration to loans, investments, and services that benefit middle-income people and geographies (i.e., those with family or median income between 80 and 120 percent of the area median income) located within HUD-designated areas. Second, the rule changes extend CRA consideration to loans, investments, and services made outside of a financial institution's assessment area, so long as the institution has adequately addressed the community development needs inside its assessment area. The two provisions are not without precedent; in 2006, regulators expanded the definition of community development in a similar way, in part to encourage financial institutions to make loans, investments, and services that benefit areas of the Gulf Coast devastated by hurricanes Katrina and Rita.
The federal financial regulatory agencies' recent rule changes mark the start of a comprehensive review of the CRA regulations. Community Dividend will provide updates on significant developments in the review process in the months ahead.
The federal government initiated the Neighborhood Stabilization Program (NSP) in 2008 in order to channel funding to communities hit hard by the foreclosure crisis. The program is administered by the U.S. Department of Housing and Urban Development (HUD) and consists of three distinct funding allocations, each with its own legislative lineage.
The first round of the program, known as NSP1, was established through the Housing and Economic Recovery Act of 2008. It used a needs-based formula to distribute a total of $3.92 billion in emergency funds to state and local governments for "the redevelopment of abandoned and foreclosed homes and residential properties in order that such properties be returned to productive use or made available for redevelopment purposes."*/ NSP1 funds were distributed in 2009 and must be spent within four years of the date they were awarded.
The second round of the program, NSP2, was established through the American Recovery and Reinvestment Act of 2009. It was administered as a component of HUD's Community Development Block Grant program and used a competitive bidding process to award $2 billion in grants to nonprofit organizations and government entities. NSP2 grants were announced on January 14, 2010, and all funds must be spent within three years of the date awarded.
Among its many provisions, the Dodd-Frank Wall Street Reform Act of 2010 established the third round of the NSP, known as NSP3. This latest iteration of the program awarded a total of nearly $1 billion to 283 public and nonprofit entities nationwide. Grants were distributed according to a needs-based funding formula established by HUD. NSP3 awards were announced September 8, 2010, and must be spent within three years of the date awarded.
All NSP grantees must submit action plans to HUD that describe how the funds will be used. In addition, according to provisions of the Dodd-Frank Act, all NSP funds must be used with respect to the needs of low- to middle-income people and must be put to one or more of the following five uses:
- Establishing financing mechanisms for the purchase and redevelopment of foreclosed properties;
- Purchasing and rehabilitating foreclosed homes, in order to sell, rent, or redevelop them;
- Establishing and operating land banks for foreclosed homes;
- Demolishing blighted structures; and
- Redeveloping demolished or vacant properties.
For additional information on the NSP, including maps that indicate NSP-eligible areas, visit www.hud.gov/nsp or www.hudnsphelp.info.
Nuts and bolts of the CRA
The Community Reinvestment Act (CRA), enacted in 1977, requires depository financial institutions to meet the credit needs of their communities, including low- and moderate-income (LMI) neighborhoods, consistent with safe and sound banking practices. To ensure financial institutions are complying with the CRA, examiners from the federal financial regulatory agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision) periodically evaluate each institution's performance in meeting the credit needs in its geographically delineated market area, or assessment area. The evaluation criteria the agencies use depend on an institution's asset size.
Large banks, defined as institutions with assets of more than $1.122 billion, are evaluated on their record of meeting three CRA tests: a lending test, an investment test, and a service test. In other words, regulators assess whether large banks have provided loans, investments, and services to LMI individuals and neighborhoods in their assessment areas. Large banks receive favorable CRA consideration if activities in each of those categories constitute community development, which the CRA defines as:
- Affordable housing for LMI individuals;
- Community services targeted to LMI individuals;
- Activities that promote economic development by financing small businesses or small farms;
- Activities that revitalize or stabilize LMI geographies, designated disaster areas, or distressed or underserved middle-income geographies;*/ or
- [As of January 19, 2011] Activities that, pursuant to the requirements of the program, benefit low-, moderate-, and middle-income individuals and geographies in Neighborhood Stabilization Program target areas designated as "areas of greatest need."
Intermediate small banks, those with assets of $280 million to $1.122 billion, are evaluated on their record of meeting two CRA tests: a lending test and a community development test. The extent of the community development test varies depending on each intermediate small bank's circumstances. Small banks, those with assets of less than $280 million, are evaluated on just one CRA test, the lending test, but can try to enhance their CRA rating by asking regulators to evaluate their community development activities as well.