Click Here to Print

Security Types that may Provide Banks with CRA Credit

by David Farris


The Community Reinvestment Act (CRA) was enacted in 1977.  Congress found that banks, in an environment of urban decay and a lack of investment in communities, have a continuing and affirmative obligation to help meet the credit needs of their local communities.  This includes low and moderate-income (LMI) neighborhoods where they are chartered.  It requires the federal banking agencies, the Federal Reserve, OCC and FDIC to direct financial institutions to meet the credit needs of the communities in which they serve, and to eliminate bank “redlining” of poor neighborhoods.  

The CRA requires banks to demonstrate they are actively providing access to financial services in all segments of the community, particularly in the LMI areas. This includes providing loans and services to individuals and businesses in these communities, with the goal of promoting economic development and revitalization. 

In addition to community services and lending, banks can also satisfy CRA requirements by purchasing securities that qualify.  These typically include 1) Agency Mortgage-backed Securities, 2) Fannie Mae DUS and Freddie PC Commercial MBS 3) Municipal Bonds and 4) Low Income or CDFI brokered CDs  

To satisfy CRA requirements using Agency MBS, banks can custom build MBS pools.  Typically, pools are built using 30yr loans since those are the most readily available.  CRA MBS pools can be any of the 3 government agencies, GNMA, FNMA or FHLMC.  The loans in the pool need to be made to borrowers who make 80% or less of the area median income (AMI) to qualify for CRA.

For lower population areas, attempt to avoid tract level granularity and discuss with regulators the possibility of targeting state level vs. county level loans because it will be more difficult to locate loans in counties with populations less than 150k to 200k.

On average, it takes 1 to 3 months to build a pool from start to finish as long as loans are available.  The housing season, March through September, is the best time to build CRA pools due to a higher supply of new mortgage loans to select from.  Loans are more difficult to collect in a higher interest rate environment such as today where refinancing activity is lower.  If a bank knows it needs a CRA pool by year-end, it is best to begin building these sooner rather than later before the end of the year closes in.

Banks building the pools can kick any loan they do not approve of prior to pooling. However, Agency pools have a $1mm minimum pool size which is a requirement from the Agencies.  

Agency Commercial MBS or CMBS (Fannie DUS and Freddie PC) is another type of security that can count for CRA credit.  The collateral for these deals is generally a single multi-family property.  CRA credit can be obtained when the units to be rented in the property are reserved for tenants with 80% or less of the Area Median Income (AMI).  Exhibit 1 is an example of a Fannie Mae DUS that shows that 71% of the units are reserved for 80% or less of AMI.  This 71% is broken down into 51% between 60%-80% and 20% between 50%-60%. Properties that have less than 100% but more than 50% reserved for 80% AMI borrowers generally qualify for CRA but banks should always get the sign off from their CRA regulators to make sure they know how this will be interpreted.  In the case of this bond, 100% of the loans are actually to borrowers with 80% or less of the AMI according to the rent roll even though only 71% are reserved for it. Sometimes the amount of investment that counts towards CRA is the percentage reserved for 80% or less of AMI, 71% in this case, but sometimes it can still be 100% since 100% of the borrowers are actually 80% or less of AMI.  Always get this preapproved with your CRA regulator.  


Bloomberg also provides the percentages of the number of units restricted in the description (DES) page.  It usually doesn’t show the rent roll information.  This is shown in Exhibit 2 below for the same bond.


Municipal bonds can also provide opportunities for CRA credit.  Exhibit 3 is a table from the preliminary official statement for a school bond that shows 62% of students in this school district are on Free and Reduced Lunch.  That is calculated by taking 265 students on the program divided by the total students of 428 which equals the 62%.  Again, preapproval from the CRA regulator is always recommended but this is likely a CRA opportunity for banks who do business in the county this bond was issued.