Leadership Changes Under
a New Administration
“To everything (turn, turn, turn) …” —Pete Seeger
Anew Administration often brings new leadership to the Federal agencies that govern CRA. In November 2017, Joseph M. Otting became the newest Comptroller of
the Currency. Following his first few days in office, Comptroller
Otting was interviewed by American Banker magazine and said
that among his priorities in revising the CRA are simplifying the
program, including updating the CRA assessment areas to reflect
changes in the role of bank branches and to revise the rating
system to make the process more effective in expanding loans
to low- and moderate-income communities. He went on to say
that all parties involved in the CRA process—banks, community
advocates and the regulators—would like to see the process
changed. While there is nothing concrete available to date, an
Advanced Notice of Proposed Rulemaking is anticipated. It is not
clear if it will be issued as an Interagency Notice.
With the new administration comes conversations about
the impact of tax reform. In 2017, the new administration’s
tax reform was passed and raises uncertainty regarding the
effect of reduced corporate tax rates and whether companies
will continue community development investments they
have utilized in the past. Most notable of these would
be the Low Income Housing Tax Credit (LIHTC)
and New Market Tax Credit (NMTC) markets.
Historically, LIHTC investments have been
used by financial institutions to defray federal
income taxes and to promote affordable housing
development. For some financial institutions,
LIHTC investments make up a majority of the CRA
investments that they hold. What will the impact
of new tax reform have on the demand for tax credits,
and how will the industry respond? As of the writing of this
article, we don’t have the answers but hope that we are all part
of the dialogue to determine the best solutions for preserving
community development in light of changing tax regulation.
Dodd Frank has also appeared in our crystal ball in the
form of Section 1071, which proposes ECOA Section 704B
data collection regarding small business and minority- and
women-owned businesses applications. However, given the
Bureau’s new agenda, the future of Section 704B is cloudy due
to the Financial Creating Hope and Opportunities of Investors,
Consumers and Entrepreneurs (CHOICE) Act, which would
eliminate Section 1071 data collection requirements. It has
passed the House and is now being reviewed by the Senate.
Our Magic 8 Ball tells us “Outlook Hazy”.
you checked your lobby notices? Pay attention to new office addresses or
title changes (associated with your regulator, or internal departments) that
might trigger updated CRA notices. And don’t forget: the contents of your
public file must be current as of April 1st of each year.
Safe and Sound vs. Profit?
“No man can save two masters.”
—Matthew 6: 24
Can we serve two masters? There is often a push-pull between the balance
of safety and soundness (or profitability) and CRA, particularly in the area
of community development loans and investments.
CRA loans and investments should absolutely be made with safety and
soundness in mind. While a bank may elect to sacrifice some profitability
to secure a CRA transaction in a competitive market, it should not be
necessary to divorce itself from all rational thought in order to make a
CRA deal. There should be expectation of return and credit-worthiness
any time you are entering into a CRA-related loan or investment. There are
many investments that describe themselves as double or triple-bottom line
investments, such as those that seek to provide community development
credit plus reasonable returns. Plus, in some cases, environmental or social
benefits, as well. Once you can prove to your management team and/or to
your auditors that you are making wise use of the funding entrusted to you,
it may be much easier to satisfy your CRA community development goals.
Assessment Areas in the CRA Evaluation
“Location, Location, Location.”
—Lord Harold Samuel, British Real Estate Tycoon
How the financial institution defines its assessment areas is a
critical component in a CRA evaluation. The regulators expect
the bank to identify assessment areas surrounding each
of its branches, and require that the bank does not arbitrarily exclude Low- and Moderate-Income (LMI) areas,
or significantly minority-populated areas when defining
them. For institutions that have branches in more than one
Metropolitan Statistical Area (MSA) and/or in more than
one state, the expectation is that separate assessment areas be
delineated. Generally speaking, the assessment area may not extend
beyond the boundaries of the MSA or the state in which the bank has its
branches, and must be made up of whole geographies (i.e., census tracts).
One school of thought is to make the assessment area as small as possible.
For instance, if the bank has two branches located within one county and
one branch located in the adjacent county, they might select two assessment
areas, one within each county using the location(s) of the branches as the
center point and extending outward some prescribed distance.
The image on page 22 shows that by simply drawing a circle around the
branches, the bank could eliminate a significant number of LMI census tracts
from its defined assessment areas. While the map does not show minority populations, care must be taken to ensure that they are not arbitrarily
eliminated as well. In this example, these two counties are located within
the same MSA and the branches are very close in proximity; therefore,
selecting both counties as a single assessment area, or selecting the entire
MSA might be a preferred method for delineating the assessment area. In
so doing, it would be more difficult to argue that the bank had arbitrarily
eliminated LMI or significantly minority populated geographies.
The best way
uncertainly is to