Correspondence Date: October 30, 1997

Dear [ ]:

This letter responds to your correspondence dated August 28, 1997, in which you requested that the four financial regulatory agencies ("the agencies") clarify the definition of "affordable housing" as it relates to the Community Reinvestment Act (the "CRA"). Specifically, you have asked whether the agencies would link the definition of affordable multi-family rental housing to rent levels, using a "percentage of income" formula to determine maximum housing expense that would enable the housing to qualify as affordable for purposes of the agencies’ CRA regulations.

The four financial institutions regulatory agencies issue interagency CRA interpretive letters for the purpose of providing consistent guidance to our examiners, financial institutions, and the public. The letters, such as this one, are intended to provide broadly applicable guidance and not to endorse any specific projects or products.

As you know, the agencies promulgated substantially similar CRA regulations on May 4, 1995.1 Staff from all four agencies have considered your inquiry and concur in the opinions expressed in this letter.

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You ask whether the determination of whether a housing project qualifies as "affordable housing for low- or moderate-income individuals" would turn on the actual incomes of the residents who live in the housing structure, regardless of the rent levels charged. As we understand your letter, you believe that such an interpretation of the phrase "affordable housing for low- or moderate-income individuals" in the definition of "community development" would be overly burdensome, ignore housing patterns and the benefits of economic diversity, and reduce the incentive for private development and investment. In particular, you are concerned that potential depository institution investors in such units will be reluctant to make an investment or loan, absent the assurance that the application of a formula such as the one you recommend would guarantee favorable consideration in their CRA evaluation.

You propose for this purpose that the term "affordable housing" should be defined to include (but not be limited to) rental properties in which:

annualized maximum rent is equal to or less than 30% of 80% of the median family income in an MSA (presumably if not in an MSA the statewide median family income would be used), which would mean that a low- or moderate-income family with an income at the high end of the category could rent housing for no more than 30% of their income; however, as we understand it those with incomes lower on the scale would possibly be paying more than 30% of their income;

rent corresponds to or is less than the "40th percentile of fair market rents" figures used by the U.S. Department of Housing and Urban Development (HUD) to determine Section 8 subsidy levels; or

rent corresponds to or is less than the maximum allowable gross rent (without utility allowance), by unit size, for Low Income Housing Tax Credit eligibility.

As we further understand your inquiry, you believe the agencies’ examiners should give favorable consideration to such a project even if the actual residents, or the likely residents, are not low- and moderate-income people or families.

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It is our view that the concept of "affordable housing" for low- or moderate-income individuals embodied in the CRA regulations does hinge on whether low- or moderate-income individuals benefit, or are likely to benefit, from the housing. We believe it would be inappropriate to give favorable consideration to a project that exclusively or predominately houses families that are not low- or moderate-income simply because the rents are set according to a particular formula. We understand your concern that the income of individuals or families who rent, or are likely to rent, in a multi-family complex may not be readily knowable, particularly in advance. However, we believe that one mathematical formula for every project, in every location of the United States will not work. Therefore, in reviewing such matters, demographic, economic and market data will become critical factors.

To illustrate our concern with a formulaic approach, the following example may be useful. It is our understanding that in one MSA the median income for 1997 is $53,100. In applying the first formula you suggested, the "affordable" monthly rent for that MSA would be $1,062. Therefore, using this formula any investment security or loan for multi-family development, in that MSA, that provided rents of $1,062 (excluding utilities), would meet this definition of "affordable housing". It is also our understanding that the 1990 average median rent for this same MSA, including utilities, was $525. Currently, new market-rate upscale properties in the downtown area of this MSA rent one bedroom apartments for $910, and two bedroom apartments for $1,310. With a median rent that is far below the formula’s "affordable" rent, we would be concerned about the extremely high probability that the beneficiaries of units renting for $1,062 would not be low- or moderate income individuals or families. Middle and upper income renters in this market may be the exclusive or preponderant occupants.

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It is also important to note that the regulation stipulates that affordable housing for low- or moderate-income individuals must be the "primary purpose" of the activity, but need not be the only purpose for a particular undertaking. This approach recognizes the benefits of economic diversity in residential areas mentioned in your letter. In determining whether an activity has affordable housing for low- or moderate-income individuals as its "primary purpose," examiners will review any loan documents, prospectus or other information concerning the project provided to them by the financial institutions. An examiner will consider an investment to have as its "primary purpose" community development, if a majority of the housing supported by the investment will be comprised of affordable housing for low- or moderate-income individuals. If it cannot be determined that a majority of the housing meets this criteria, the examiner’s evaluation will generally also consider the following factors:

whether the express, bona fide intent of the undertaking, as stated, for example, in the prospectus, is primarily to provide affordable housing for low- and moderate-income individuals and/or to revitalize or stabilize a low- or moderate-income area ("the community development purpose(s)");

whether an activity is specifically structured to achieve the expressed community development purpose(s); and

whether an activity is reasonably certain to accomplish the community development purposes. In making this judgment, examiners will take into consideration such matters as the record of the participants in the project (e.g., the developers, lenders, financial intermediaries) of producing housing that serves low- and moderate-income people and families.

I trust this letter has been responsive to your inquiry. If you have any additional questions, please feel free to contact me at (202) 452-3585 or Christina Nejezchleb, on my staff, at (202) 452-3946.


Michael Bylsma
Acting Director
Community and Consumer Law Division
Office of the Comptroller of the Currency


1 See 12 C.F.R. pts. 25, 228, 345, and 563e.