On October 13, 2006, the Financial Services Regulatory Relief Act of 2006 (Act) was enacted. The Act modified the authority of national banks under the Community Reinvestment Act (CRA) and the authority of state member banks under the Federal Reserve Act (FRA). The Act increased the maximum allowable public welfare investment by national banks and state member banks, but simultaneously narrowed the definition of qualifying public welfare investments. As a result, projects which are not either located in primarily low and moderate income (LMI) communities or primarily benefit low and moderate income persons may be further restricted.
The Act, by permitting banks to invest a greater percent of their unimpaired capital and surplus, encourages larger public welfare investments. The maximum allowable public welfare investment by a national or state member bank which may be permitted by regulators was increased from 10 percent to 15 percent of unimpaired capital and surplus. The Act authorizes a national or state member bank to invest up to 5 percent of its unimpaired capital and surplus without obtaining authorization from the Office of the Comptroller of the Currency (OCC) or the Federal Reserve Board (FRB). An additional 10 percent of unimpaired capital and surplus, for an aggregate of 15 percent, may be invested after the OCC or FRB determines that (1) the higher amount poses no significant risk to the affected deposit insurance fund and (2) the bank is adequately capitalized. The further modifications of the Act were less encouraging.
Investments made pursuant to the CRA or the FRA must be qualifying public welfare investments. The Act narrowed the definition of public welfare investments by requiring that all qualifying public welfare investments benefit "primarily low and moderate income communities or families." Previously, the definition of public welfare investments was broader and included (1) projects that primarily benefited areas targeted by the government and local communities for redevelopment or (2) any other investments qualifying under CRA (i.e., designated disaster areas) even if such projects did not primarily benefit LMI communities or families.
The Act has practical implications because the apparently narrower definition of public welfare investments may now exclude previously acceptable projects. Under their CRA authority, national banks have traditionally invested equity and capital in projects that are not located in LMI communities or targeted for low and moderate income persons, but are located in areas targeted by a local government or community for revitalization. For example, under their CRA authority, national banks have invested when a local government wanted to restore a vacant department store in a downtown area even if the project was not in a LMI community. Other common examples of CRA investments outside of LMI communities include investments in historic theaters and empty buildings in prime business areas. Because these projects may not always primarily benefit LMI communities or families they may no longer be permissible under a national bank's CRA authority.
Guidance to clarify the implications of the Act has not yet been issued by the OCC or FRB, but is forthcoming. The legislative record is devoid of any guidance as to Congress's intent. Low income housing tax credit projects should not be affected because investments in such projects primarily benefit LMI persons. New Markets Tax Credit (NMTC) investments should not be affected because NMTC projects must be located in a LMI census tract. With NMTC, however, it is not entirely clear. Furthermore, because the Act is prospective only, any public welfare investment or written commitment made prior to October 13, 2006 is not affected. Finally, the Act did not change a national bank's authority to make loans under the CRA.