Consumer Compliance Outlook
The Community Reinvestment Act and HUD's Neighborhood Stabilization Program
On April 6, 2011, the Federal Reserve System hosted an Outlook Live webinar for over 1,400 registrants on recent amendments to the Community Reinvestment Act (CRA) implementing regulations, which became effective on January 19, 2011.1 The amendments are intended to encourage financial institutions to participate in the Neighborhood Stabilization Program (NSP) administered by the U.S. Department of Housing and Urban Development (HUD) by allowing favorable CRA consideration for these activities.2 The participants included Theresa Stark, who discussed the CRA changes from a regulatory perspective; Mike Griffin, senior vice president of Key Bank, who provided a banker's perspective on the changes; and Matt Perrenod, chief lending officer of the Housing Partnership Network, Inc., who discussed the opportunities available to the industry using NSP dollars.
As a follow-up to the webinar, we are publishing answers for some of the questions that registrants e-mailed to Outlook Live.
In December 2010, the federal bank and thrift regulatory agencies (agencies) jointly announced amendments to the CRA regulations that support stabilization of communities affected by high foreclosure levels.3 Through the NSP, HUD provided funds to state and local governments and nonprofit organizations for the purchase and redevelopment of abandoned and foreclosed properties.
The agencies' final rule reflects the broad support expressed in public comments for the agencies' proposal to expand existing CRA consideration for neighborhood stabilization activities. NSP-eligible activities will receive favorable consideration under the new rule if conducted no later than two years after the date the grantee is required to spend the NSP program funds.
Allowing banking institutions to receive CRA consideration for NSP-eligible activities in additional NSP-targeted areas serves the purposes of the CRA and creates an opportunity to build upon government programs in areas with high rates of foreclosure and vacancy. CRA consideration is not limited to activities actually receiving NSP funds and may include other eligible activities in NSP plan areas.
CRA Amendments Related to NSP
The definition of “community development” in the CRA regulations was amended to include loans, investments, and services that support, enable, or facilitate projects or activities that (1) meet the eligible uses criteria in the Housing and Economic Recovery Act of 2008 (HERA)4 and (2) are conducted in designated target areas identified in NSP plans approved by HUD. See __.12(g)(5). Section 2301(c)(3) of HERA established five eligible uses for NSP funds:
- establishing financing mechanisms (such as soft second mortgages, loan-loss reserves, and shared equity arrangements) to purchase and redevelop homes or residential properties that have been foreclosed upon;
- purchasing and rehabilitating properties that have been abandoned or foreclosed upon in order to sell, rent, or redevelop those homes or properties;
- establishing and operating land banks for homes and residential properties that have been foreclosed upon;
- demolishing blighted structures; and
- redeveloping demolished or vacant properties.5
Under §2301 of HERA, NSP plans approved by HUD must designate “areas of greatest need” for targeting these eligible activities to address the adverse consequences of high foreclosure levels. In identifying areas of greatest need, HUD must consider the number and percentage of home foreclosures, homes financed by a subprime mortgage, and homes in default or delinquency in each state or local government area. These areas may include middle-income areas, and, as such, activities in those areas are not typically eligible for CRA consideration. By allowing CRA consideration of NSP-eligible activities in NSP target areas, the amendments to the CRA regulations are intended to create opportunities for local governments to leverage government funding by encouraging financial institution participation.
In addition to allowing for CRA consideration of NSP activities in middle-income areas, the amendments to the rule recognize that many of the foreclosed residential properties owned by an institution may be in locations outside its CRA assessment area. If an institution has adequately met the community development needs of its assessment area, it may receive favorable consideration for NSP activities conducted outside its assessment area.
This expanded consideration for NSP activities under the final rule will be available for up to two years after the last date on which grantees are required to spend appropriated funds for the NSP program. See __.12(g)(5)(ii).
Questions and Answers
1. Which neighborhoods qualify for NSP funds?
The vast majority of NSP-targeted areas are listed on a map database on HUD's
website . Some geographies are in HUD-approved state NSP1 plans but are not listed on the website. Information about those areas can be found in the individual plans.
2. Would lenders receive full assessment-area-level credit for providing funding to third-party intermediaries such as LISC or Enterprise that subsequently fund NSP projects?
The CRA regulations have always allowed financial institutions to receive CRA consideration for activities conducted through a third party or intermediary. Nothing in the NSP amendments would prevent a financial institution from conducting NSP-eligible activities through an intermediary.
3. Are there examples of communities or markets engaging in the private purchase of notes?
Organizations working in communities with high levels of foreclosed properties need to conserve the limited subsidies available through programs such as the NSP. One way to do this is for community development organizations to purchase defaulted notes prior to foreclosure. The Housing Partnership Network, a business collaborative of some 94 housing and community development organizations, has been encouraging servicers and investors to reduce principal balances in loan modifications. Mission-driven community organizations are beginning to purchase loans from loan pools so that they can work with borrowers to modify them and avoid foreclosure. In cases where homeowners cannot afford a modification, purchasing the note allows these community organizations to take possession of the home before it becomes vacant, avoiding the vandalism and theft that unnecessarily devalue properties.
Purchasing and modifying delinquent loans takes time, and patient capital is needed to fund the effort; however, some communities are making progress in this effort. One example is Oregon, where a plan to purchase notes was approved by the Treasury using the Hardest Hit Fund, part of the Troubled Asset Relief Program funds. While approximately 19 states assist delinquent borrowers, Oregon is the first to buy notes in partnership with not-for-profit organizations (Mercy Housing and Enterprise). Other states, including Arizona, New Jersey, Illinois, and Ohio, are considering this model.
4. How hard is it to find the owner of a note?
It is easier to find the owner of a note than it used to be. The work done in the last few years on issues related to real estate owned has opened the way. Major servicers are making the information available to the Neighborhood Community Stabilization Trust and others to enable practitioners to do a reverse look and find the owner of particular notes. It can be challenging to purchase securitized notes because servicers' authority varies with respect to the disposition of assets. Nonetheless, as the government-sponsored enterprises are increasingly taking control of delinquent assets they guaranteed, a good pool of assets is now available from Fannie Mae and Freddie Mac.
5. Can you provide examples of NSP projects that qualify under the CRA, specifically in areas with high foreclosure rates?
One example discussed in the presentation was Opportunity Homes-Cleveland. This $8 million project focuses NSP dollars on six neighborhoods in Cleveland. It will redevelop 121 vacant homes for sale, demolish 100 vacant and blighted structures, and keep 100 families who are at risk of foreclosure in their homes. The project targets buyers at 60 to 120 percent of area median income (AMI), which is above the threshold of 80 percent of AMI under CRA.
6. Are enterprise zones included in the expanded definition, even though, by nature, they are usually more oriented toward business?
The CRA Interagency Questions and Answers specifically state that “examiners will presume that an activity revitalizes or stabilizes a low- or moderate-income geography if the activity has been approved by the governing board of an Enterprise Community or Empowerment Zone ... and is consistent with the board's strategic plan.”6 Nothing in the amendments to the CRA regarding consideration of NSP-related activities changes the treatment of community development activities conducted in enterprise zones.
7. May a financial institution receive community development consideration for activities in an NSP area by affordable housing agencies that do not receive funds from HUD but carry out the activities in an area designated as an area of greatest need? If so, may efforts that serve middle-income geographies and individuals be counted as well?
Yes. The specific aim of the federal banking agencies in amending the CRA was to leverage NSP funds in areas hard hit by foreclosures by expanding the CRA's consideration of NSP-eligible activities in NSP-targeted areas. This means two things: (1) NSP-eligible activities in middle-income areas that HUD has identified as areas of greatest need under the NSP program will receive CRA consideration and (2) NSP-eligible activities conducted outside an institution's CRA assessment area will be considered in its CRA evaluation provided the institution has done an adequate job of meeting the community development needs within its assessment area. Thus, if a community development activity qualifies as an “eligible use” of NSP funds, it is eligible for CRA consideration in NSP target areas, whether or not the particular project is funded with NSP dollars.
8. Will CRA consideration be the same for activities conducted outside a financial institution's assessment area as inside?
Yes. As long as the financial institution has done an adequate job of helping to meet the community development needs of its assessment area, it can receive CRA consideration for NSP-related activities outside its assessment area as if they were done inside the area. The preamble to the CRA amendments makes clear that this flexibility was intended to encourage financial institutions to engage in neighborhood stabilization activities in areas outside their CRA assessment area where they make loans.7 But even if all of a financial institution's lending was done in its assessment area, the CRA regulations have always given consideration to community development activities in a broader statewide or regional area that includes the institution's assessment area.8 The recent amendments broaden this for NSP-related activities.
Specific issues and questions about receiving CRA consideration for NSP activities should be raised with your primary regulator.