In cautious political climate, CRA reform takes center stage
The affordable housing industry is coming off a year in which the market for tax credits dramatically recovered from a period of capital flight. However, a tumultuous political climate could place the LIHTC program under fire, as debt-reduction and tax code overhaul become increasingly salient issues. Both the strength of the tax credit market, and the current political environment, have industry advocates cautious about asking for anything from the new congress.
At a recent industry conference, Bob Moss, Senior VP and Director of Origination at Boston Capital, cautioned, “I think you have to be really careful about asking for stuff [in this political climate]”. Joseph Hagan, President and CEO of the National Equity Fund, quickly chimed in, “I think we have to be very limited in what we ask for. Everyone in congress is saying they want to reduce the deficit.”
In spite of the cautious atmosphere, there is one proposal that has emerged as an industry-cause. Given its cost neutrality and regulatory (as opposed to legislative) nature, CRA reform continues to have broad support from both industry and government players alike.
The Community Reinvestment Act (CRA) was enacted in 1977 to encourage commercial banks and saving associations to meet the needs of low- and moderate-income borrowers. As the banking industry and lending practices have evolved, CRA regulations have periodically adapted to reflect those changes.
Most recently, with the bursting of the housing bubble and the economic downturn, CRA regulations were altered to cover lending activities included in the President’s Housing and Economic Recovery Act (HERA) as well as the Neighborhood Stabilization Program. However, questions remain over the program’s functionality.
Last July and August The Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), The Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) held a series of public hearings on CRA reform. While the perspectives and opinions offered during the series of four meetings varied greatly, there was general agreement that CRA assessment does not appropriately reflect the diffuse nature of modern lending practices.
CRA reform is a rare case where actors on multiple sides of the issue seem to agree, with both lenders and LIHTC developers pushing for an expansion of assessment areas. Matt Parks, director of investments for Discover Bank, had the following to say about potential reform:
As a CRA Officer of a Direct Bank with customers disbursed throughout the country, we are frequently challenged to invest in viable projects within a narrow assessment area that is shared with many large bank competitors. Although we collaborate on many projects, we find ourselves focused on such a limited number of projects, but with significant investment objectives. This narrow focus and unrealized supply, unfortunately does not find its way to viable projects in other areas of the country that could benefit greatly from the attention and available investment capital…. but, with a broader and well defined regional area, banks similar to mine can become more confident in extending the reach of our CRA investments.
Patrick Sheridan, Senior VP of Housing Development at Volunteers of America, echoed the sentiment that assessment areas should be expanded, “The largest problem with the CRA is that it doesn’t cover all areas of the country equally. If fixed, much of the country would see much more consistent investment.”
Sheridan and other members of the development community are optimistic about the reform process signaled by the government hearings. “The CRA reform that was being talked about was not a legislative fix so it could be something that is feasible that could benefit the industry” said Sheridan, “Because it is a regulatory as opposed to legislative fix and it is budget neutral, it has a much higher likelihood of happening.”
“We’ve shifted our priorities”, said Joseph Hagan during the same panel in which he urged caution, “one of the things we are looking at is non-legislative issues, like CRA reform”. It remains to be seen, however, even with the consensus and cost neutrality, whether Washington and the affordable housing industry will see their priorities align.