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Community Developments Investments (May 2015)

A Look Inside...

This photograph shows a street front scene with three buildings: a four-story brick apartment building, a single-story brick building; and a six-story, multi-unit apartment building.Source: Thinkstock
This photograph shows a street front scene with three buildings: a four-story brick apartment building, a single-story brick building; and a six-story, multi-unit apartment building.

Barry Wides, Deputy Comptroller, Community Affairs, OCC

As the Bipartisan Policy Center’s Housing Commission recently observed, the next 10 years will most likely see a significant increase in the number of renters as the Echo Boom generation, the children of post-World War II baby boomers, form first-time households and the baby boom generation downsizes from its current homes. This pressure for additional rental units may soon push rents to unaffordable levels for those least able to afford them.

Small multifamily rental properties are one of the most important affordable housing resources that make up our nation’s existing housing stock. According to the U.S. Department of Housing and Urban Development, these small rental properties provide units for almost a third of the nation’s renters—more than 20 million households. Buildings with five to 49 units are common in our nation’s urban centers and rural areas. And the rents charged at these small properties are typically more affordable to low- and moderate-income families than those of larger properties.1 According to Harvard University’s Joint Center for Housing Studies, unsubsidized rental units account for three-quarters of all low-cost rental units. In fact, a study by John C. Weicher, Senior Fellow and Director of the Hudson Institute’s Center for Housing and Financial Markets, indicates that most affordable rental properties have no government subsidies.2

This edition of Community Developments Investments describes the small multifamily rental housing market, some of the challenges the market faces, and the ways that national banks and federal savings associations (collectively, banks) are active players in the market. This newsletter focuses on this topic because, as Elizabeth La Jeunesse from the Joint Center for Housing Studies points out, these small rental properties are less likely to obtain institutional financing because of the constriction of the secondary market and are more likely to be financed by community bank portfolio lenders. Further, Ms. La Jeunesse notes that loans to this market segment are more likely to be located in low-income communities.

According to the community bankers interviewed by the OCC’s William Reeves and Letty Shapiro for this edition of Community Developments Investments, these small loan lenders are actively engaged in the small multifamily rental space. These lenders have learned to carefully underwrite these rentals, and they prefer to keep these loans in their portfolios under the current interest rate environment. Because these properties are often affordable to low-income households and in low- and moderate-income areas, these loans can often be qualified as affordable housing under Community Reinvestment Act guidelines if properly documented. Vonda Eanes, an OCC District Community Affairs Officer, describes how this can be accomplished.

In addition, this edition of Community Developments Investments provides a look at many of the risk management issues related to commercial real estate lending and small multifamily property lending. The OCC recently issued an updated version of its “Commercial Real Estate Lending” booklet of the Comptroller's Handbook, so the time is right to look at many of the risk management issues related to small multifamily property lending.

This edition of Community Developments Investments also highlights some of the partnerships that banks have formed with community development financial institutions and other community partners to facilitate financing for these small properties and to reduce risks and costs by forming lending pools and consortiums. Finally, this newsletter looks at the rental financing programs of government-sponsored entities—namely, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks—and where the secondary market might be heading. Shekar Narasimhan, Managing Partner at Beekman Advisors and a well-known and highly respected practitioner in the affordable housing field, shares his thoughts with us in a Q&A.

For banks interested in learning more about financing smaller multifamily properties, this newsletter includes a resource guide with Web links to recent research on the topic and other helpful resources.

1 American Housing Survey, 2010.

2 Some articles in this newsletter refer to the universe of small multifamily properties as containing “five to 50 units” to describe the size of these buildings.

How Affordable Housing Qualifies for Community Reinvestment Act Consideration

Vonda Eanes, District Community Affairs Officer, OCC

Affordable housing is a core component of community development under the Community Reinvestment Act (CRA). National banks and federal savings associations (collectively, banks) may receive CRA consideration for loans, qualified investments, and community development services related to affordable housing (including multifamily housing) if the primary purpose is for community development.

Under the CRA, the OCC evaluates banks’ records of helping to meet credit needs in communities where the banks have deposit-taking facilities. This includes the number and dollar amount of bank loans used to purchase, develop, refinance, or improve multifamily residential properties. Unlike loans for other purposes, loans related to multifamily housing that primarily benefit low- or moderate-income individuals or families may be considered as retail loans under the Lending Test and as community development loans. For banks evaluated using large bank procedures, community development loans are considered under the Lending Test. For intermediate small banks, community development loans are considered under the Community Development Test.

Community development loans include loans that support affordable housing that primarily benefits low- or moderate-income persons. Community development loans also include those that help to revitalize or stabilize low- or moderate-income areas, designated disaster areas, or areas defined by the agencies as underserved or distressed nonmetropolitan middle-income areas.3 A bank may receive consideration for a community development loan if the loan benefits the bank’s assessment area or the broader statewide or regional area that includes the bank’s assessment area.

Interagency Questions and Answers on Community Reinvestment (Q&A), dated March 11, 2010, provides guidance on how to determine whether a project is affordable housing for low- or moderate-income individuals.4 The Q&A notes the concept of “affordable housing” for low- or moderate-income individuals hinges on whether low- or moderate-income individuals benefit, or are likely to benefit, from the housing. Giving CRA consideration to a project that exclusively or predominately houses families that are not low- or moderate-income simply because the rents or housing prices are set according to a particular formula would be inappropriate.

Examiners review demographic and economic factors as well as market data to determine the likelihood that the housing primarily accommodates low- or moderate-income individuals. Such a review is useful for projects that do not yet have occupants and for which the income of potential occupants cannot be determined in advance—or for projects involving unverifiable income for occupants. For example, examiners may look at median rents of an assessment area and a project; the median home value of the assessment area, low- or moderate-income geographies, or the project; the low- or moderate-income population in the area of the project; or the past performance record of the organization or organizations undertaking the project. Such a project could receive CRA consideration if its bona fide intent of community development is expressly stated, for example, in a prospectus, loan proposal, or community action plan.

Banks can partner with or invest in organizations that target low- and moderate-income populations. CRA guidance explicitly recognizes loans and investments in community development financial institutions (CDFI) as community development activities. For loans and investments in a CDFI to receive CRA consideration, the CDFI must primarily lend or facilitate lending to promote community development. Banks may receive CRA consideration based on the amount of an investment or a pro rata share of the loans made as a result of that investment. An institution may choose to receive partial consideration under both tests: a portion of the investment under the investment test, and a portion of its pro rata share of loans under the lending test.5

Technical assistance for CDFIs, including developing loan application and underwriting standards, lending employees, or serving on boards and committees of CDFIs, is eligible for CRA consideration. Other examples of community development services with CDFIs include developing secondary market vehicles or programs, assisting in marketing financial products, furnishing financial services training for staff, contributing accounting or bookkeeping services, and assisting in fund-raising. Loan referrals may receive CRA consideration if the bank reviews the borrower’s eligibility for bank financing and it is bank policy to refer “second chance” loans to the CDFI.

Loans and investments supporting an organization that covers an area larger than the bank’s assessment area(s) may also receive CRA consideration. The bank’s assessment area(s) need not receive immediate or direct benefit, provided that the purpose, function, or mandate of the organization includes serving geographies or individuals within the bank’s assessment area(s). Examiners may also consider activities in the broader statewide or regional area even if the activities do not serve the assessment area as long as the bank has been responsive to assessment area needs. In evaluating “responsiveness,” examiners consider all activities that serve the assessment area as well as opportunities available to the bank in their assessment area.6

Bankers should consult with their supervisory office if they have questions about specific projects, loans, investments, or services and types of documentation needed to demonstrate the benefit to low- or moderate-income individuals.

For more information, e-mail Vonda Eanes.

3 See 12 CFR 25.12(g) for national banks or 12 CFR 195.12(g) for federal savings associations.

4 See Q&A 12(g)(1)—1.

5Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment; Notice,” 75 Fed. Reg., 11659, Q&A section__.23(b)-1, March 11, 2010.

6Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment; Notice,” 78 Fed. Reg., 69678, Q&A section__.12(h)-6, November 20, 2013.

Small Multifamily Resource Guide

America’s Rental Housing: Evolving Markets and Needs, Joint Center for Housing Studies of Harvard University, December 9, 2013.

America’s Rental Housing: The Key to a Balanced National Policy, Joint Center for Housing Studies of Harvard University, April 30, 2008.

The Center for Community Lending  conducts and sponsors research about community lending, promotes the revitalization of distressed and underserved neighborhoods, works to eliminate discrimination in lending, and promotes the equality of opportunity for access to credit.

Commercial Real Estate Lending,” OCC Comptroller’s Handbook, August 2013, focuses on commercial real estate lending activities, including the analysis of project financing.

CRA: Community Development Loans, Investments, and Services,” Community Developments Fact Sheet, OCC.

Enhancing Access to Capital for Smaller Unsubsidized Multifamily Rental Properties, Joint Center for Housing Studies of Harvard University, William Apgar and Shekar Narasimhan, March 2007, RR07-8.

Fannie Mae and Freddie Mac are government-sponsored enterprises whose public mission is to support liquidity and stability in the secondary market, where existing mortgage-related assets are bought and sold, and to increase the affordable housing supply.

Fannie Mae’s Role in the Small Multifamily Loan Market, Fannie Mae, first quarter 2011.

Federal Home Loan Banks are 12 U.S. government-sponsored banks that provide low-cost funding to American financial institutions (not individuals) for home mortgage loans and small business, rural, agricultural, and economic development lending. Membership in the Federal Home Loan Bank system is available to insured depository institutions and certain other financial institutions.

Housing America’s Future: New Directions for National Policy, February 2013, Economic Policy Program, Housing Commission, Bipartisan Policy Center. This report provides a detailed blueprint for a reformed housing finance system that promotes the uninterrupted availability of affordable mortgage credit.

HUD Reports Continued Increase in “Worst Case Needs” in 2011, U.S. Department of Housing and Urban Development, February 22, 2013.

The Institute for Housing Studies is a research center based at DePaul University, Chicago, Ill., that provides analysis and data to inform affordable housing policy and practice.

The Joint Center for Housing Studies of Harvard University is a collaborative unit affiliated with the Harvard Graduate School of Design and the Harvard Kennedy School. The center produces reports, working papers, research notes, and other research publications.

A Long Look at Affordable Rental Housing, John C. Weicher, Hudson Institute, video: Realtor University Speaker Series: Affordable Rental Housing in the U.S.: Where does it come from and what happens to it? In this video, Dr. Weicher, Director, Center for Housing & Financial Markets at the Hudson Institute, takes a 20-year look at affordable rental housing. His analysis spans 1985-2005, and he discusses how that housing availability has changed and why.

Meeting Multifamily Housing Finance Needs During and After the Credit Crisis: A Policy Brief, Joint Center for Housing Studies of Harvard University, 2009.

Multifamily Rental Resource Directory, OCC.

Preserving Affordable Rental Housing: A Snapshot of Growing Need, Current Threats, and Innovative Solutions, U.S. Department of Housing and Urban Development, January 28, 2014.

Public Welfare Investments, Resource Directory, OCC. National banks and federal savings associations may make direct or indirect investments designed primarily to promote public welfare through community development activities, affordable housing, small business development, and other community needs. This directory provides information concerning these investment authorities.

Small Multifamily Building Risk-Share Initiative: Request for Comment, Notice by the U.S. Department of Housing and Urban Development, November 4, 2013, Notice for Public Comment.

Realities and Possibilities in Preserving Unsubsidized Affordable Rental Housing, Minnesota Preservation Plus Initiative and One Roof Global Consulting, April 2012.

U.S. Department of Agriculture, Section 538 Guaranteed Rural Rental Housing (‘538’) Loan Program.”

Addressing the Affordability Challenge: Rental Housing

Judy Kennedy, former member, Board of Directors, Center for Community Lending

The Center for Community Lending (CCL) conducts and sponsors research about community lending, promotes the revitalization of distressed and underserved neighborhoods, works to eliminate discrimination in lending, and promotes the equality of opportunity for access to credit.

Mission-driven, multifamily affordable rental housing lenders, serving areas as diverse as New York, Alabama, Massachusetts, California, and the Carolinas, have stepped up to help address the need for financing of small multifamily properties. In figure 1, states highlighted in blue illustrate where mission-driven lenders have financed community economic development, including affordable housing, schools, and community centers. These lenders provide financing for multifamily apartment complexes across the nation. These buildings are often developed by independent “ma and pa” developers who live in the communities where they build.

Figure 1: States With Center for Community Lender Member Organizations Financing Multifamily Affordable Housing

This figure shows a United States map that shows 35 states with mission-focused lenders in blue and the remaining 15 states without mission-focused lenders in white.

Many of the mission-driven lenders are 501(c)(3) nonprofit groups, and others are for-profit organizations. All have financed the construction or substantial rehabilitation of thousands of homes, with 97 percent of the units affordable to low- and moderate-income renters. These lenders are at the forefront of financing affordable and sustainable housing for low- and moderate-income individuals.

Mission-driven lenders have successful track records of pooling private capital to finance the expansion of affordable rental housing. These lenders make loans, which are the building blocks of community development. They often combine multiple federal subsidy programs, such as Low Income Housing Tax Credits, Community Development Block Grants, and the HOME Investment Partnerships Program.

For more information, refer to CCL’s list of mission-driven, nonprofit multifamily lenders, or contact Paul Haaland at (202) 293-9850.

Articles by non-OCC authors represent the authors’ own views and not necessarily the views of the OCC.