We have a client refinancing a multi-family dwelling for imporvements. I know that HMDA has me reporting the entire amount of the loan, however, what about reporting it as a CDL. Do I report only the amount for the improvements or the whole refi? It has affordable rents and is located in a moderate-income census tract, it also is surrounded by other LMI tracts. Thanks.

At least 50% of the loan needs to be serving LMI audiences. If the improvements were more than half, your loan qualifies and you would take the full loan amount for CD credit. If the purpose of the majority of the loan did not meet the needs of LMI audiences (ie building a swimming pool on the slum lords personal winery) then you can't take credit for any of the loan proceeds at all.

Dawnie - that 50% test was scrapped awhile back because some projects do have a definate low/mod assistance but it may only be for 20% of the entire project. The old test was disingenuous to the spirit of CRA since it would simply encourage the building of "Low Income Projects", the same ones that had to dynamited 20 years after they were built. Economic integration presents a much more viable project for market reality.

Bankers and developers complained that this discouraged meaningful developments for integrated housing that included a portion for low/mod.

The Q&A was revised to reflect this reality of the marketplace.

§§ __.12(i) & 563e.12(h) – 7: What is meant by the term “primary purpose” as that term is used to define what constitutes a community development loan, a qualified investment or a community development service?

A7. A loan, investment or service has as its primary purpose community development when it is designed for the express purpose of revitalizing or stabilizing low- or moderate-income areas, providing affordable housing for, or community services targeted to, low- or moderate-income persons, or promoting economic development by financing small businesses and farms that meet the requirements set forth in §§ __.12(h) or 563e.12

(g). To determine whether an activity is designed for an express community development purpose, the agencies apply one of two approaches.
First, if a majority of the dollars or beneficiaries of the activity are identifiable to one or more of the enumerated community development purposes, then the activity will be considered to possess the requisite primary purpose.

Alternatively, where the measurable portion of any benefit bestowed or dollars applied to the community development purpose is less than a majority of the entire activity’s benefits or dollar value, then the activity may still be considered to possess the requisite primary purpose if (1) the express, bona fide intent of the activity, as stated, for example, in a prospectus, loan proposal, or community action plan, is primarily one or more of the enumerated community development purposes; (2) the activity is specifically structured (given any relevant market or legal constraints or performance context factors) to achieve the expressed community development purpose; and (3) the activity accomplishes, or is reasonably certain to accomplish, the community development purpose involved. The fact that an activity provides indirect or short-term benefits to low- or moderate-income persons does not make the activity community development, nor does the mere presence of such indirect or short-term benefits constitute a primary purpose of community development. Financial institutions that want examiners to consider certain activities under either approach should be prepared to demonstrate the activities’ qualifications.

I use the 50% example because it still leads towards a primary purpose test. Even given the language above, the bonaa fide intent of the activity has to be CD. It has to be "primarily CD". You still need to apply something to test that, and if 90% of the loan goes to the millionaires swimming pool, and 10% paints the apartments, I can't say I would submit it for CD purposes. The upgrade of the apartments is obviously not the express intent of the loan, but is an offshoot of a nifty pool being built. Througout that second option, I still see the word "Primary" being necessary for the intent of the CD activity.

I guess we can interpret that one way or another, but I use a pretty generous view when submitting CD loans and I wouldn't submit one that was not showing a majority of the loan, or the "primary" purpose of the loan to be of CD value.

I remember when the OCC would not accept a CommDev loan if less than 50% of the housing units were set aside for Low/Mod. A big deal was made about this at the CRA Conference that was held in Long Beach, California (either in 1996 or 1997....I'm getting too old and confusing the yers...) and many people at the conference were a bit stunned after working so hard on an integrated project where 20% of the units were set aside.

I remember speaking with someone from the Federal Reserve Board about this hard line stance. I stated flat out "Great, so we are encouraging a whole new cycle of "The Projects" that will have to be dynamited in another 20 years because they failed miserably. You DO realize that this kind of economic segregation is tantamount to racial segregation?"

Yes - I got a stare like I had just denounced Mom and Apple Pie. I went on to explain that, with the exception of some rural areas in the South, the majority of low and moderate income families tend to also be minorities. By creating segregated income housing projects, we were creating racially segregated housing.

I pointed out that a low/mod person would have a much better opportunity for improving their situation if they were able to informally network with middle and upper income residents. For instance, a low/mod teenager living in a income segregated housing project would probably have a slim chance of a summer job in a law firm. But a low/mod teenager who was neighbors with an upper income attorney might have that opportunity.

Okay...okay...so the entire world may not play true to that scenario, but the fact remains that if you are poor, opportunities are limited when everyone else around you is also poor!

I don't know whether I made an impression upon anyone or not, but I DO know that about a year or so later, the Q&A was changed to provide alternate definitions of "Primary" purpose.

I thought about this deal and just wanted to add a comment.

If the loan was a mixed income property, built on tax credits I'd look at it differently than if it was just an accidently affordable property. Then Bonnie, I can see that it would fit within your commentary. The difference would be that the primary reason to build was to provide affordable housing, but to make the deal cash flow, units also had to be provided that were market rate. Again though, see the difference....I can lean on a primary reason, no matter the number of units. On a refi to build a pool there's no way I'd take credit. So, it depends (as I mentioned) still on what the loan make up really is. What was the purpose of all of the funds and can you really say that this was primarily for LMI benefit?

There are different schools of thought on mixed income and mixed use housing lately. I would disagree with you that the issue is with the structure being all LMI being the problem. Architectural studies can show that a big problem with the "projects" was not the income restrictions, but the insensative way in which the properties were built, with no private space. Poor or Rich, if we don't have a seperation of our space from others, it's more likely to be run down in time than if you can provide that space. This is much more important than an income designation on a property. Drive through Houston and look at the ugly highrise condo's built for the rich in the 70's. They look similar to slums from the 50's in New York. The architect built them to be a future disaster because of poor planning, and lack of knowledge back then. The income of the owners had nothing to do with the success of the programs.

I did Computer tutoring in a Learning Lab at an Affordable Housing complex. The complex was beautful and very well managed. The complex had a lot of amenities, including the Learning Lab, Child Care, BBQ grills located next to park-like areas, a muti-function room for parties, and the like. But the residents were all still poor and many hand-to-mouth looking for the opportunities that would help them on their way up the ladder.

Contrast that to the first apartment where my husband and I lived. It had a 25% set aside for low/mod residents, and the rest was market rent, first come-first served. Since no one knew who was "subsidized", we were all equal to one another. There was opportunity for networking, job leads, and any number of other ways for people to help themselves.

I had a discussion with one "community leader" who expressed the viewpoint that it would be unfair to the children of low/mod income families if they lived too close to wealthy families because they would see all the wealthy kids with expensive stuff they (the poor kids) couldn't afford.

IMHO, that was one of the faultiest lines of reasoning I have ever heard. At one point, we all met people who are far wealthier than we are. The earlier you can learn to accept it and not be bitter, the better off you will be. I mean, it's not like these kids would never watch TV and see all this stuff they can't afford. It's not like they would never be in school and see kids who are wealthier. It's not like they would never see what else exists in the world.

I know this particular example is pretty small, but I'm sure it will come up with other loans in the future. The refinance amount is $180k on a 5-plex with $10k going coming out for improvements. All $10k is going back into the property for new windows in every unit and furnaces in a couple of units that need them. It is very likely that all five units are serving LMI persons (well below FMR for the area and in a moderate tract). So, do I report a CDL for $180k or for $10k? I'm thinking $180k, but I would like to be sure. Thanks again.

What was the purpose of the other $170M?