Preservation of Affordable Multifamily Housing

Compliance Corner: Preserving Affordable Rental Housing Is a Key Consideration under CRA

by Kristopher M. Rengert, Community Development Expert, OCC

This issue of Community Developments illustrates how banks help to further the preservation of affordable multifamily housing in communities across the United States. Banks may receive positive CRA consideration for their participation in affordable multifamily housing preservation activities.

Generally, under the CRA, positive consideration will be given to activities that support the provision of affordable housing (including multifamily rental housing) for low- or moderate-income persons. These activities must benefit the bank’s assessment area(s) or the broader statewide or regional area that includes the bank’s assessment area(s).

These activities are measured by the lending, investment, and service tests through which examiners consider the community reinvestment performance of large banks. Thinking about these tests should be useful for other types of banks (e.g., small, intermediate small, wholesale, or limited purpose banks) in considering how their affordable multifamily housing preservation activities might be viewed in their respective CRA examinations.

The Lending Test

The 2001 Interagency Questions and Answers Regarding Community Reinvestment (66 Federal Register, p. 36626) provides criteria for community development loans. These loans include, but are not limited to, loans to:

• Borrowers for affordable housing rehabilitation and construction and permanent financing of multifamily rental property serving low- and moderate-income persons.
  
  
• Nonprofit organizations serving primarily low- and moderate-income housing or other community development needs.
  
  
• Financial intermediaries including Community Development Financial Institutions (CDFIs), CDCs, minority- and women-owned financial institutions, community loan funds or pools that primarily lend or facilitate lending to promote community development.
  
  
• Local, state, and tribal governments for community development activities.

This guidance also notes that the rehabilitation and construction of affordable housing may include the abatement or remediation of, or other actions to correct, environmental hazards, such as lead-based paint, present in the housing, facilities, or site.

In the 2001 Interagency Questions and Answers Regarding Community Reinvestment (66 Federal Register, p. 36632), the regulatory agencies explain that lending commitments (for example, letters of credit) are considered for the lending test at the option of the lending institution. Commitments must be legally binding between an institution and a borrower. Information about lending commitments will be used by examiners to enhance their understanding of an institution’s performance.

Articles throughout this issue of Community Developments describe how many of these community development lending activities might work in an affordable multifamily housing preservation context:

• Providing bridge financing for acquisition and predevelopment costs.
  
  
• Extending loans at below-market interest rates.
  
  
• Bolstering financial intermediaries supporting preservation: providing loan funds through financial intermediaries for predevelopment and interim development costs.
  
  
• Providing standby letters of credit to enhance the credit rating of 501(c)(3) bonds by reducing the risk faced by the bond buyers. The letter of credit can help reduce the interest rate paid by the preservation organization.

Similarly, providing loan financing on market-rate terms may also receive positive CRA consideration as previously described from the 2001 Questions and Answers. But below-market interest rate terms might receive more positive consideration than standard terms, as these might be thought to be innovative or flexible lending practices.

The Investment Test

In the 2006 Interagency Questions and Answers Regarding Community Reinvestment (71 Federal Register, p. 12433), the regulatory agencies provide expanded guidance on qualified investments. These investments include, but are not limited to, investments, grants, deposits, or shares in or to:

• Organizations engaged in affordable housing rehabilitation and construction, including multifamily rental housing.
  
  
• Projects eligible for low-income housing tax credits.
  
  
• State and municipal obligations, such as revenue bonds, that specifically support affordable housing.

Michael Bodaken and Todd Nedwick, in their article, describe how some of these community development investments might work in an affordable multifamily housing preservation context:

• Share in the risk of predevelopment financing: provide predevelopment funding in the form of a grant for feasibility studies, planning activities, or other early stage requirements, with the expectation of more substantial participation if and when the project is developed.
  
  
• Providing favorable permanent financing terms: purchasing 40-year private placement bonds (as opposed to shorter term bonds).
  
  
• Purchasing LIHTC: purchasing the tax credits associated with an affordable multifamily housing preservation project. National banks may make these investments under the Part 24 Public Welfare Investment Authority (see OCC's Part 24 page).

Other qualified investments may also apply to the affordable multifamily housing preservation arena. For instance, banks (or their CDCs) might make investments, grants or deposits in organizations engaged in affordable multifamily housing preservation activities.

The Service Test

Large banks are subject to the Service Test as part of their CRA examinations. In the 2006 Q and A (71 Federal Register, p. 12432-3), the regulatory agencies provide expanded guidance on community development services. These services include, but are not limited to:

• Providing technical assistance on financial matters to nonprofit, tribal, or government organizations serving low- and moderate-income housing.
  
  
• Lending employees to provide financial services for organizations facilitating affordable housing construction and rehabilitation or development of affordable housing.
  
  
• Providing technical assistance on financial matters to small businesses or community development organizations, which might include:
  
  

  – Furnishing financial services training for staff and management.
  
  – Contributing accounting/bookkeeping services.
  
  – Assisting in fund raising, including soliciting or arranging investments.

Multifamily affordable housing preservation often can be quite complex, involving multiple layers of financing. Many organizations working in this arena would benefit from assistance from bank staff to help them in organizing their particular deals, as well as in attracting additional potential participants.

The OCC’s DCAOs can provide technical assistance to national banks seeking further information about how their support of affordable multifamily rental housing might receive positive CRA consideration. National banks can also contact their bank examiners or DCAOs if they have questions about what qualifies for CRA. Please see OCC's page for DCAOs.