I have written a number of articles about the new CRA and the problems its requirements will impose on banks. But there are also problems posed by what the new Rule omits.

The Community Reinvestment Act is all about “meeting the need for credit services” in the communities served by a bank. The original primary intent of the law and its regulations was to require banks to lend back into the communities they serve, particularly in response to the community’s needs. In fact, for decades regulators have recognized loan programs that are particularly “responsive to community needs.”

It is surprising therefore, that the new regulation omits recognition of several types of credit that pertain to housing. No one would claim that housing needs are a low priority. In fact, housing needs likely come second only to food needs. So why have the regulators dropped from CRA focus on multifamily mortgages and home equity lines of credit, or so-called “HELOCs”? These are 2 types of community needs that are very important and that require long-term bank credit. Nevertheless, and in contradiction to long term practice, those housing credit programs have largely been dropped from CRA emphasis in the new CRA.

 Families at every income level rely on rental housing to provide shelter. In urban areas, a large part of the entire (even middle- and upper-income families) community counts on multifamily housing for their needs. For decades the CRA has recognized that multifamily housing is an important “need” of the entire community. In fact, the regulation, in recognition of the importance of multifamily housing, allowed multifamily mortgages to be double counted if they were multifamily affordable housing. The lender would get credit for multifamily housing under the “Lending Test” and under the “Community Development Test” too.

In the new rule, no form of multifamily mortgages will be recognized under the “Retail Lending Test.” The only multifamily mortgages that count under the new CRA are those that qualify as affordable housing under the Community Development Financing Test.

The failure to recognize multifamily mortgages for consideration under the Retail Lending Test overlooks the needs of middle-income families that live in millions of apartments in their towns and cities all around the country.  While CRA emphasizes the low-and moderate-income communities, it is not supposed to be focused exclusively on the needs of the LMI community. Indeed, regulators themselves repeatedly have said about the new CRA that the regulation requires banks to meet the needs of the entire community! So why exclude an important form of housing for the middle class?

Another form of housing credit omitted by the new CRA are home equity lines of credit. Many families rely on HELOCs not only to finance home improvements, but to pay for higher education for their children. In many cases, small business owners rely on HELOCs to sustain their businesses. HELOCs offer many attractive features including flexibility to pay interest only and to borrow only what you need when you need it. So, why have regulators excluded HELOCs from getting CRA credit?

Housing and housing credit are very high priority needs in every community and for families at every income level. It is surprising therefore that, given the regulation that has always emphasized the “needs of the community” and valued programs that are “responsive” to those needs, the new CRA completely ignores the importance of multifamily housing and omits a large part of the home mortgage market (HELOCs) when measuring a bank’s meeting the needs of the community for credit services.

[View source.]