The Community Reinvestment Act (CRA) Recap and What to Expect in 2014

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1 The Community Reinvestment Act (CRA) Recap and What to Expect in 2014 Timothy R. McTaggart, Yuliya Benina, Barbara R. VanScoy April 9, 2014

2 2 We will be starting momentarily

3 Listen to the audio portion of today s webinar by dialing: North America: International: Audio Conference ID: #

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6 Feel free to submit text questions throughout the webinar

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8 8 Contact Brian Dolan at for CLE Information

9 Speaker: Timothy R. McTaggart Partner in the Washington office of Pepper Hamilton LLP Focuses his practice on bank and financial services regulatory matters. He also assists financial services clients on transactional and enforcement issues Has represented clients before the Consumer Financial Protection Bureau and the federal bank regulatory agencies, including the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System, as well as various state banking departments across the country Served as the Delaware State Bank Commissioner ( ), in this role had responsibility for regulating and supervising non-depository institutions, including mortgage companies. 9

Speaker: Barbara VanScoy (980) 365-8555 bvanscoy@ccmfixedincome.

research and client portfolio management. Is a well-regarded author, speaker and expert on the Community Reinvestment Act (CRA).

10 Speaker: Barbara VanScoy (980) Chief Impact Investment Officer and a Founder of Community Capital Management Responsible for fixed income and community development research and client portfolio management. Is a well-regarded author, speaker and expert on the Community Reinvestment Act (CRA). Through her work, Ms. VanScoy has created an extensive network of mortgage originators and municipal underwriters to encourage the production of affordable housing, job training programs and affordable healthcare facilities. 10

Barbara VanScoy Co-Founder & Chief Impact

11 WEBINAR: The Community Reinvestment Act (CRA): Recap and What to Expect in 2014 ~ The CRA Qualified Investment Fund ~ Wednesday, April 9, 2014 Presented by: Barbara VanScoy Co-Founder & Chief Impact Investment Officer Community Capital Management, Inc. Adviser to the CRA Qualified Investment Fund

12 CRA Regulatory Update - On March 18, 2013, the Agencies published for comment proposed clarifications that would revise five Questions and Answers (Q&As) and to re-designate one Q&A without substantive change. - In response to the comments received, the Agencies made minor clarifications to some of the new and revised Q&As that were proposed. - The final Q&As were adopted, effective November 20,

13 Community Development Activities Proposed Revisions to Q&A.12(h) 6 - Additional clarification for community development activities that benefit geographies or individuals located somewhere within a broader statewide or regional area that includes the institution s assessment area(s) but that will not benefit the institution s assessment area(s). - Proposed language/clarifications The Agencies proposed to remove the phrase adequately addressed the community development needs of its assessment area(s). Community development activities performed in a safe and sound manner in lieu of, or to the detriment of 13

14 Community Development Activities Revisions to Q&A.12(h) 6 - The Agencies note that all CRA-related activities must be performed in a safe and sound manner and the express reference to such activities is not necessary and the statement shall not be adopted. - The proposed phrase in lieu of, or to the detriment of may establish an unclear standard and be more restrictive than the current language. The Agencies did not adopt the proposed language. - The phrase adequately addressed the community development needs of its assessment area(s) was removed. - The Agencies clarified that a financial institution should be responsive to community development needs and opportunities in its assessment area(s). Specifically with respect to community development activities that are conducted in the broader statewide or regional area that includes the institution s assessment area(s). 14

15 Community Development Activities Revision to Q&A.12(h) 7 - The Agencies adopted Q&A.12(h) 7 as proposed, defining the term regional area as an intrastate area or a multistate area that includes the financial institution s assessment area(s). Regional areas typically have some geographic, demographic, and/or economic interdependencies and may conform to commonly accepted delineations, such as the tri-county area or the mid-atlantic states. Regions are often defined by the geographic scope and specific purpose of a community development organization or initiative. 15

16 Investments in Nationwide Funds Proposed Revisions to Q&A.23(a) 2 - The performance context of a particular institution is very important when determining whether investments in nationwide funds are appropriate. - The Agencies proposed revisions to address concerns that side letters and earmarking of projects is burdensome on institutions and funds and have seemingly become mandatory. - Financial institutions of all sizes may find such funds to be efficient investment vehicles to help meet community development needs in their assessment area(s) or the broader statewide or regional area that includes their assessment area(s). - Continued recognition that nationwide funds are important sources of investments in low- and moderate-income and underserved communities throughout the country and can be an efficient vehicle for institutions in making qualified investments that help meet community development needs. 16

17 Investments in Nationwide Funds Revisions to Q&A.23(a) 2 - Reference to performance context was eliminated. - Does not contain language regarding written documentation about earmarking and side letters. Nevertheless, the Agencies do not intend the absence of such language to mean that side letters and earmarking are no longer permissible. - A separate category for examining nationwide funds is not warranted. - The Agencies continue to believe that investments in nationwide funds are important sources of investments in low- and moderate-income and underserved communities throughout the country and can be an efficient vehicle for institutions to make qualified investments that help meet community development needs. 17

Nationwide Fund Case Study: CRA Qualified

CRA Shares (Ticker: CRAIX) is a market-rate bond

income securities whose proceeds are designed to

It was created in 1999 to help banks garner

18 Nationwide Fund Case Study: CRA Qualified Investment Fund The CRA Qualified Investment Fund CRA Shares (Ticker: CRAIX) is a market-rate bond fund that invests in high credit quality fixed income securities whose proceeds are designed to positively impact communities throughout the U.S. It was created in 1999 to help banks garner positive consideration on the investment test portion of their CRA exams. 18

19 CRA Regulatory Revisions: Impact on the CRA Qualified Investment Fund - The CRA Qualified Investment Fund continues to be an important source for investments in low- and moderate-income and underserved communities throughout the country. - The CRA Qualified Investment Fund continues to invest in community development activities within shareholders broader statewide or regional area that includes the institution s assessment area(s). We believe this helps expand both opportunities for institutions to meet community development needs and for underserved and distressed communities, especially those in rural areas, to receive community development capital and services. - Our experience is that nationwide funds are suitable for financial institutions of all sizes and with a wide range of geographic market coverage. A financial institution investing in a nationwide fund, whether large, medium or small in bank size, benefits from the product and geographic diversity that single investments cannot provide. We believe this diversification of risk provides greater safety and soundness than exposure to a single investment. 19

20 How does a Nationwide Fund like the CRA Qualified Investment Fund Assist Banks with CRA Investments? After each bank s exam, new qualified investments are purchased and earmarked in anticipation of the bank s next CRA exam. CRA investments identified. The CRA Fund invests in community development activities within shareholders broader statewide or regional area that includes the institution s assessment area(s). CRA Exam. CRA investments purchased. CRA investments earmarked to each Bank. The CRA Fund provides online documentation on each investment earmarked to each bank. 20

21 CRA Qualified Investment Fund Statistics Over 350 bank shareholders nationwide. Out of approximately 870 CRA exams, every shareholder has earned positive consideration for their investment in the Fund.* As of 12/31/13, the Fund has invested over $5.1 billion in community development initiatives on behalf of its shareholders in all 50 states, Puerto Rico and the U.S. Virgin Islands. The Fund has purchased CRA-qualified investments in every state and territory of the U.S. CRA Shares average bank investment in the Fund: $3.5 million. * CRA exams conducted by FDIC, OCC, and FRB. These regulators have not approved or disapproved of the Fund. 21

22 CRA Investment Profile: Solabella Apartments, Miami Gardens, FL (Miami-Dade County) Financial Sector: Multifamily Agency MBS Coupon: 4.03% Maturity: September 2028 Credit Rating: Agency Guaranteed Community Impact Solabella is a Low Income Housing Tax Credit property where 100% of the 92 units are restricted to residents with incomes at or below 60% of area median income. Solabella is located in a Difficult Development Area. Amenities include a playground/tot lot, accessible to children with disabilities and picnic area. Energy conservation features and Green Building options will be provided for all buildings in the development. Applicant programs offered to residents include: Welfare-to-Work, first time homebuyer seminars, health and nutrition classes, financial counseling, and literacy training. As of 12/31/13, this investment represented 0.24% of the Fund s assets. 22

23 CRA Investment Profile: Parkside of Old Town, Chicago, IL (Cook County) Financial Sector: Multifamily Agency MBS Coupon: 3.72% Maturity: February 2040 Credit Rating: Agency Guaranteed Community Impact Parkside of Old Town is part of the redevelopment plan of the former Cabrini Extension North, which includes approximately 18 acres on the city s Near North Side. The plan includes building new schools, expansion/improvements of existing parks, new public library, new shopping centers and improvements to infrastructure. Parkside of Old Town offers spacious rental apartments in the heart of the city near CTA train lines where 83 of the 111 are reserved for low- and moderate-income families. The property is located in a low-income census tract. Rental units features private parking, outdoor space, energy efficient furnaces and central air conditioners, wheelchair accessible and adaptable units. As of 12/31/13, this investment represented0.17% of the Fund s assets. 23

24 Volcker Rule - In December 2013, five federal agencies approved a final rule implementing the proprietary trading provisions, more commonly referred to as the Volcker Rule, of the Dodd-Frank Wall Street Reform Act. While the final rule prohibits federally insured depository institutions from engaging in most forms of proprietary trading, it includes exemptions from the restrictions for several types of investment activities. - Notably, banks will still be allowed to invest in municipal securities, including Housing Bonds, issued by state and local agencies and their instrumentalities. In addition, the final rule also permits banks to make investments in funds designed to promote the public welfare and other tax credit funds. - We have received several inquiries regarding the CRA Fund s compliance with the Volcker Rule. Per the final Volcker ruling, there is an exclusion for SEC-registered investment companies. The CRA Fund is a SEC-registered investment company; however, since we can t provide specific opinion/compliance with the rule, we recommend banks discussing the Volcker Rule further with their regulators. 24

25 Continuous Monitoring of CRA Regulations Ongoing Dialogue with Examiners White Papers CRA Questions & Answers Tracking Responses Conferences/Webinars 25

White Paper: Recent CRA Regulatory Changes and the CRA Qualified Investment Fund Visit www.crafund.

26 White Paper: Recent CRA Regulatory Changes and the CRA Qualified Investment Fund Visit Click on Resources Under CRA Investors, you will see the white paper available for download. 26

27 Community Capital Management: Contact Information Contact Barbara VanScoy Co-Founder/Chief Impact Investment Officer The CRA Qualified Investment Fund is distributed by SEI Investments Distribution Co. (SIDCO) which is not affiliated with Community Capital Management, Inc. Investing involves risk including loss of principal. Bonds and bond funds will decrease in value as interest rates rise. The Fund is not diversified. Carefully consider the fund's investment objectives, risks, charges and expenses. This and other information can be found in the Fund's prospectus which can be obtained by visiting Please read the prospectus carefully before investing. Plead the prospectus carefully before investing." This material presents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research of investment advice regarding the fund or any stock in particular. For institutional use only. 27

28 Road Map Proposal, finalization, and implementation of 2013 Interagency Questions and Answers Summary of 2013 Q&A guidance Future Examinations Impact of Volcker Rule and Basel III What is forthcoming for CRA? 28

29 Proposal, Finalization, and Implementation of 2013 Interagency Questions and Answers March 18, Proposed Interagency Q&As published Closely watched changes Approximately 200 comments received November 20, 2013 Q&As finalized and become immediately effective Nothing indicates changes are prospective only may apply to existing investment arrangements and community development activities Changes supplement the 2010 Q&A guidance, and except where 2010 Q&As are explicitly amended, the 2010 guidance remains in full force and effect 29

30 Summary of 2013 Q&A Guidance Regional and Statewide Activities Qualified Investments Community Development Redesignation of MWLICU provisions 30

31 Regional and Statewide Activities Revised Q&As address the rural-metropolitan imbalance Banking consolidation and concentration in metropolitan areas Unclear guidance on community activities outside of assessment areas ( AAs ) Concentration of community development activities in safe AAs leads to imbalance between metropolitan and rural areas 31

32 Regional and Statewide Activities Revised Q&A.12(h) 6 Will give credit for community development activities on regional or statewide basis that includes AA(s), as long as bank is responsive to community needs and opportunities in its AA(s) Activities need not directly benefit bank s AA (if bank is otherwise responsive) 32

33 Regional and Statewide Activities Old Q&A - Adequately addressed the community development needs of its AA(s) this phrase has been deleted. Proposed Q&A - CRA credit will be given as long as activities are conducted in a safe and sound manner and may not be conducted in lieu of, or to the detriment of, activities in the institution s AA(s). Not ultimately adopted, as (1) all bank activities must be conducted in a safe and sound manner and (2) the in lieu of, or to the detriment of language was seen as unclear, more restrictive, and not in line with the intention to encourage more community development activities in underserved areas. Was necessary clarity gained with revision? 33

34 Regional and Statewide Activities Revised Q&A.12(h) 7: Regional area may be: Intrastate or multistate Some geographic, demographic, and/or economic interdependencies Commonly accepted delineations, e.g. tri-county area or mid- Atlantic states 34

35 Investments in Nationwide Funds Banks will get credit for investment in nationwide funds that benefit AA and broader statewide or regional area (as long as bank is otherwise responsive to AA needs) Agencies decline to create a national needs category for nationwide funds allowing institutions to get credit for general nationwide investment Prevents further complicating CRA examinations 35

36 Investments in Nationwide Funds Implications Earmarking and side letters were considered mandatory and burdensome : Q&A.23(a) 2 Removes language explicitly authorizing earmarking/side letters Clarifies that earmarking/side letters are permissible, but not required Issues involving investments in nationwide funds, including how to attribute funds and to avoid double-counting, to be addressed through examination procedures Problematic examination procedures route (less clarity, not subject to comments) 36

37 Qualified Investments New Q&A.12(t) 9 examiners will give positive consideration to investments made to organizations with primary purpose of community development. Consideration is limited: Bank invests funds in organization organization invests funds in instruments with non-cd primary purpose bank uses investment income for CD positive consideration for investment income only Bank invests funds in organization for leveraging, to secure additional financing, or generate return with minimal risk until funds are deployed toward CD activity positive consideration for total amount of instruments and investment income 37

38 Community Development Community Services to LMIs Community Development includes community services provided to low or moderate income ( LMI ) individuals Q&A.12(g) 1 clarifies that the following may constitute LMI individuals: Students or their families from a school at which the majority of students qualify for free or reduced-price meals Individuals who receive or are eligible to receive Medicaid Recipients of government assistance programs that have income qualifications equivalent to, or stricter than, the definitions of LMI defined by the CRA regulations U.S. Department of Housing and Urban Development s Section 8, 202, 515, and 811 programs U.S. Department of Agriculture s Section 514, 516, and Supplemental Nutrition Assistance programs. 38

39 Community Development Technical Assistance Activities Revised Q&A.12(i) 3 makes explicit that the following technical assistance activities get CRA credit: Service on the board of directors of a community development organization Must be genuine benefit to the institutions communities Mere attendance will not suffice Services reflecting bank employees areas of expertise, e.g. HR, IT, and legal services. 39

40 Community Development Lending New Q&A.22(b)(4) 2 Lending performance is always a factor in lending test rating Record of community development lending may have positive, neutral, or negative impact on lending test rating Strong performance in retail lending may compensate for weak performance in community development lending, and vice versa 40

41 Community Development Lending Community Development Lending not mandated in all of bank s AAs Comments to Q&A.22(b)(4) 2 clarify If absence/lack of community development lending, examiners will consider context: Economic, demographic and competitive factors Bank s capacity or constraints Community needs and opportunities to make community development loans 41

42 Redesignation Without Substantive Change In 2010, Agencies revised regulations to coincide with Section 804(b) of CRA (CRA consideration for minority- and womenowned financial institutions and low-income credit unions) Q&A.12(g) 4 (adopted prior to 2010 revisions) is redesignated as Q&A.21(f) 2 to correlate to 2010 revisions 42

43 Future Examinations Regional and Statewide Activities May be Treated Flexibly Though clarity of new language is questionable, the Agencies clearly perceive it as more flexible and intend it to broaden the scope of bank activities to a broader region Guidance suggests that as long as the bank does not wholly ignore the needs of its AA, broader activities are encouraged as a matter of policy and examiners will look favorably on such activities What it means for banks they can probably carry on activities in broader regional and statewide areas with more confidence 43

44 Future Examinations Investments in Nationwide Funds to Receive More Treatment Most of the hard questions about investments in nationwide funds are left to examination procedures. Double counting issue: Few commenters had suggestions on avoiding it; Q&As did not address the issue and left it to examiner guidance Removal of Earmarking language clarifies that earmarking is not required, but permitted What this means for banks: Might earmarking potentially be treated in future examinations as a safe harbor against double counting restrictions? 44

45 Effect of the Volcker Rule on CRA Limitations on Covered Funds Volcker Rule prohibits banks from acquiring or retaining any ownership interest in or sponsoring a covered fund. Covered funds do not include: Small Business Investment Companies (as defined in Small Business Act) Funds whose investments are designed to promote public welfare (as defined in 12 U.S.C. 24) 45

46 Effect of the Volcker Rule on CRA Public Welfare Investments Public Welfare Investments (12 CFR 24.3) Primarily benefit LMI individuals and areas targeted by governmental entity for redevelopment; or Would receive consideration under 12 CFR of CRA as a qualified investment Examples: Affordable Housing activities Economic development and job creation investments Investments in CEDEs Other public welfare investments, including Technical assistance for non-profit community organizations and LMI individuals and areas Investments in minority- and women-owned depository institutions that serve primarily LMI individuals or LMI areas or targeted redevelopment areas 46

47 Effect of Basel III Risk Weights 100% risk weight on community development equity exposures (i.e. community development investments, as defined in 12 U.S.C. 24) CRA credit-eligible investments subject to 100% risk weight 47

48 What is Forthcoming for CRA? March 27, 2014 FDIC Notice and Request for Comment Relates to Collection of Information intends to submit renewal to OMB and invites additional comments to be submitted within 30 days Only one comment received, commending FDIC on its efforts to assess how the credit needs of communities are being served, but urging FDIC to go further and make racial lending performance a factor in CRA examinations. The agencies will provide additional guidance through: Examination guidance Webinars and training Additional changes to CRA? 48

49 Additional Changes to CRA? I want to emphasize that the changes that we made last fall to our CRA guidance were only a first step. The agencies are continuing to evaluate other CRA-related concerns and we are considering additional improvements. Thomas J. Curry, Comptroller of the Currency, speaking before the National Community Reinvestment Coalition on March 12,

50 50 Questions & Answers

51 51 Contact Brian Dolan at for CLE Information

Thank You! Timothy R. McTaggart 202.220.1210 mctaggartt@pepperlaw.

52 Thank You! Timothy R. McTaggart Barbara R. VanScoy (980)

53 53

Interagency Questions and Answers Regarding Community Reinvestment. Interagency Questions and Answers Regarding Community Reinvestment.

Outlook Live Webinar July 17, 2014 Interagency Questions and Answers Regarding Community Reinvestment Presented by the FRB, FDIC, and OCC Visit us at www.consumercomplianceoutlook.org Interagency Questions