For more than 20 years, the low-income housing tax credit (LIHTC) has been the most effective tool used to attract capital for the creation and preservation of affordable rental housing. In addition to producing much-needed rental housing, the housing credit has also created significant numbers of jobs. According to a 2007 study by the National Association of Home Builders (NAHB), a typical 100-unit multifamily development generates 151 jobs during construction and an additional 38 permanent jobs after construction is complete.

LIHTCs and the Community Reinvestment Act (CRA) have an intertwined history. The housing credit has been the principal financial tool used by major banks to the investment test requirements of the CRA. As a result, banks represent a significant segment of the housing credit’s investor base. Ernst & Young estimates that more than $75 billion was invested in housing tax credits between 1987 and 2008, with much of this investment activity provided by financial institutions motivated by the CRA.

While the level of investment activity required by the CRA is a function of a bank’s capital, the placement of investments is determined by geographic location of deposits. As a result, much of the current demand by banks for housing credit investments is centered in parts of the country with the largest concentrations of deposits, primarily urban markets on both coasts and a few large cities in the Midwest.

Unless steps are taken to achieve a better geographic balance of investment activity—efforts that would focus banks’ LIHTC investments on areas where the need for affordable housing is unmet rather than solely the CRA investment test requirements—investor demand will remain centered on major metropolitan areas, with the consequence that needed affordable rental housing in many areas of the country will not be built.

Proposals that address both of these federal programs are appropriate in an effort to help stabilize the market for affordable housing while at the same time creating much-needed jobs. Many of the markets where the need for affordable housing is not being met suffer from high unemployment and would benefit greatly from the jobs created from additional investment in rental housing.


A bank should receive CRA consideration against its overall investment test rating for housing credit investments in markets where the need for affordable housing is not being met and where job creation is a necessity.

Those markets would be identified by determining 1) areas where the need for affordable housing remains highest, 2) markets where capital is not available and housing needs are not being met, and 3) communities where the need for economic stimulus is the greatest.

This consideration should be granted regardless of assessment area definitions that apply to the bank. However, such investments should be limited to a set percentage (say 5 percent) of the bank’s overall investment test requirements, thereby ensuring that the bank would continue to meet the needs of its existing assessment areas.

There is precedent for such an action. The Office of the Comptroller of the Currency (OCC) issued Bulletin 2006-6 to encourage redevelopment in the areas affected by hurricanes Katrina and Rita, granting CRA consideration for investments in those areas by a bank located outside of the Gulf Opportunity (GO) Zone, provided the bank met the CRA needs of its local communities.

At a minimum, the principle inherent in the OCC’s action described above should be applied to benefit areas where the need for affordable housing is going unmet and where the housing market is destabilized as the result of the economic downturn. However, the exception for the GO Zone did not go far enough, as LIHTC investment activity and pricing in the GO Zone has lagged behind that in other areas of the country.

Instead, a more objective measure should be used to determine investment test consideration. If a bank has a satisfactory rating on its most recent CRA examination, it should be granted the flexibility to make investments (with a limit on the amount and only in areas predetermined by the OCC) outside of its existing assessment areas. This consideration should also be extended to investments in existing assessment areas where a bank, by making an additional investment, would exceed its investment targets, if the areas are distressed markets as identified by the OCC. This flexibility would provide a bank with the certainty needed to pursue investments in these markets.


The OCC should amend the definition of “community development” to include designated “distressed rental housing areas.” These areas, as suggested earlier, would be determined by the OCC using objective standards based on credible and verifiable third-party sources.

There is a model for how such a proposal could be implemented. In 2005, the “community development” definition was revised to provide CRA credit for underserved and distressed middle-income rural areas and for designated disaster areas. This action was meant, in part, to benefit residents of the GO Zone.

Ann Jaedicke, OCC deputy comptroller for compliance policy, in testimony to the House of Representatives in February 2008, advocated for “additional mortgage relief efforts in middle-income communities significantly affected by the subprime mortgage turmoil as well. Specifically, … a targeted amendment to the interagency CRA regulations. This amendment would provide a CRA incentive for community development investments that revitalize and stabilize middle-income urban and suburban communities that are “distressed” based on unprecedented levels of foreclosures and related economic factors. With this change, the banking agencies could give favorable CRA consideration for—and thereby encourage—loans, services, and investments in more communities suffering from the consequences of foreclosures.” The intent was to implement these efforts by amending the definition of “community development.”

Community impact

The effects of such a provision could be significant. Assuming an annual investment test goal for each of the top 10 U.S. banks of $1.5 billion and allowing each bank to invest up to 5 percent of that amount would result in as much as $750 million in private capital to underserved markets. Assuming an investment of $60,000 per unit, $750 million in LIHTC equity would produce 12,500 affordable apartments and create more than 23,000 jobs (using the statistics provided by Ernst & Young and the NAHB).

This proposal would provide a boost in much-needed private investment in distressed markets until the housing market stabilizes and the economy improves.

Sindy Spivak is tax credit investment manager and Brian Tracey is tax credit investment executive for Bank of America Community Development Banking.