Affordable housing leaders are taking a close look at changes that could significantly reform Community Reinvestment Act (CRA) requirements.

Federal banking regulators—the Office of the Comptroller of the Currency, the Federal Reserve, and the Federal Deposit Insurance Corp.—released their final rule Oct. 24.

According to the agencies, the changes revise regulations “to better achieve the CRA’s core purpose of encouraging banks to help meet the credit needs of their local communities.” It also aims to provide greater clarity and consistency in the application of CRA rules.

The final rule continues to be studied by many in the affordable housing sector.

“It will take time and a lot of conversations with financial institutions to gauge how they interpret the new regulations,” says David Gasson, a partner at MG Housing Strategies. “In my opinion, it is not nearly as certain as the old investment test, and I am not yet comfortable that equity investment will be as strongly incentivized. That said, we have time to digest the new regulations and see how banks intend to invest or lend.”

Emily Cadik, CEO of the Affordable Housing Tax Credit Coalition (AHTCC), agrees on the need for careful review in the days ahead.

“It will take some time for the affordable housing community and for investors to digest the new regulations, so the ultimate impact on affordable housing may not be known for a little while,” she says. “We were very pleased to see the final regulations adopt several recommendations that the AHTCC and others in the affordable housing community had made to support affordable housing investment, including increased weighting of community development activities, and the creation of a community development metric and impact factor that recognize the importance of low-income housing tax credit (LIHTC) investments. However, over 80% of housing credit investments are motivated by CRA, and even minor changes to the regulations can have a major impact on affordable housing investment, so we will be analyzing the impact closely.”

Buzz Roberts, president and CEO of the National Association of Affordable Housing Lenders, is also studying the regulations.

“The final CRA rule is long and complex, so we are still reviewing it. But it appears to be a major improvement over both the status quo and the proposed rule. In particular, community development—including affordable housing, neighborhood revitalization, and partnerships with Community Development Financial Institutions—will get equal weight with retail activities like home mortgages and small business lending,” he says. “Moreover, equity investments, such as LIHTCs and New Markets Tax Credits, will get special attention. Banks will also get full credit for community development activities nationwide, not just in their branch footprints, which should help make today’s CRA deserts bloom.”

According to the federal agencies, the final rule establishes a revised regulatory framework for the CRA that, like the current framework, is based on bank asset size and business model. Key elements of the final rule include the following:

  • Applying four new performance tests to evaluate the CRA performance of large banks (assets of $2 billion or more): the Retail Lending Test, Retail Services and Products Test, Community Development Financing Test, and Community Development Services Test;
  • Evaluating intermediate banks (assets of $600 million or more but less than $2 billion) under the new Retail Lending Test, and either the current rule’s Community Development Test or, at the bank’s option, the new Community Development Financing Test;
  • Evaluating small banks (assets less than $600 million) under the current rule’s Small Bank Performance Test unless the bank opts into the new Retail Lending Test;
  • Evaluating limited-purpose banks (including banks designated as wholesale under the current rule) under the Community Development Financing Test for Limited Purpose Banks;
  • Retaining a strategic plan option, with modifications to reflect the new performance tests and updates to the approval standards; and
  • Clarifying community development activities by updating the definition of community development, providing a process by which banks may request confirmation that an activity is eligible for community development consideration, and providing for a publicly available interagency illustrative list of qualifying community development activities.

The final rule takes effect April 1, 2024, with staggered compliance dates of Jan. 1, 2026, and Jan. 1, 2027.

The Federal Reserve released a fact sheet on the final rule.

The National Housing Conference (NHC) praised the overall changes.

“The final rule is the product of years of work to bring CRA into the 21st century,” says David M. Dworkin, NHC president and CEO, in a statement. “This regulation is the result of more than a decade of consultations with community and banking groups and years of work by regulators to get it right. They got it right. While not everyone is going to like everything in the final rule, it succeeds in significantly improving the status quo and leaves room for ongoing clarification and adjustment over a 24-month implementation period.”

According to NHC, one of the longstanding concerns has been the lack of transparency regarding which investments would qualify for CRA treatment. “Clarity and consistency are crucial, but they must be achieved thoughtfully to avoid unintended consequences,” Dworkin said. “The final rule effectively makes the process less opaque and can be further refined through the Q-and-A process and examiner guidance.”

For fair housing advocates, the final rule falls short.

“The National Fair Housing Alliance is extremely disappointed regulators failed to use this rewrite of the CRA rules to tackle head on the barriers to credit that Black, Latino, and other people of color face in markets throughout the country,” says Nikitra Bailey, the organization’s executive vice president. “Although the regulators have a statutory obligation under the Fair Housing Act to promote fair housing, they failed to explicitly incorporate race into the CRA, which means that white communities, including low-income communities, will continue to have better access to fair and responsible mainstream financial services, while communities of color will continue to be disproportionately locked out.”