The Community Reinvestment Act (CRA) should be updated give financial institutions credit for activities that support, enable, or facilitate projects carried out under the Neighborhood Stabilization Program (NSP), says a recent public comment letter submitted by Woodstock Institute.
The letter pointed to the growing number of vacant and foreclosed properties that have been shown to destabilize communities by lowering property values, straining municipal resources, and increasing violent crime. Investment in projects designed to mitigate the effects of the foreclosure crisis is a primary credit need in many hard hit communities, and the consideration of NSP-related investments, loans, and services under CRA will help evaluate how financial institutions are meeting this need.
The proposal, introduced in June 2010 by the four federal banking regulators charged with implementing the CRA, represents a minor break from the long-standing focus of the act on requiring banks to serve low-income communities.
“Woodstock Institute strongly believes that the purpose of the Community Reinvestment Act is to encourage financial institutions to invest in the low- and moderate-income communities they serve,” said Dory Rand, Woodstock Institute president. “But the limited and temporary consideration of NSP-eligible activities in middle-income communities is appropriate given the severity and broad scope of the foreclosure crisis.”
Woodstock called for two provisions to ensure that CRA credit is only given for projects that directly address the problems associated with mounting foreclosures in some of the hardest-hit communities. The Institute called for limiting qualifying projects to HUD-approved “areas of greatest need” as designated by approved NSP action plans. It also called for a sunset date of two years after the last date NSP funds are required to be spent by grantees.
Areas designated in NSP action plans as “areas of greatest need” often have depressed economies and real estate markets that threaten neighborhood recovery. Supporting development in NSP target areas, above and beyond activities enumerated in NSP action plans, contributes to the long-term prospects for successful neighborhood stabilization. The letter recommended that regulators consider for CRA credit all investments, loans, and services such as mortgages, small business loans, or community development loans extended to borrowers in NSP target areas.
The letter also requests that, in situations where financial institutions donate blighted bank-owned (REO) property, CRA credit should be contingent on support for demolition costs.
“While the donation of REO property in good condition can be a useful service that meets community development needs, REO property in poor condition can carry associated costs and liabilities for the organization receiving the donation,” said Rand.
Banks should be eligible for favorable consideration for donating REO properties when consistent with local and/or regional government or nonprofit redevelopment plans. However, favorable consideration should not be provided unless the bank demonstrates that the proposed donation property would further such efforts. Donations of REO properties that must be demolished should not be considered positively for CRA purposes unless the donating financial institution contributes the associated costs, such as demolition and environmental remediation.