A provision tucked in the housing rescue law lets banks invest in public welfare projects without regard to a community's income levels, removing a limit set by a 2006 law.
Housing advocates, large banking companies, and Comptroller of the Currency John C. Dugan lobbied for the change, arguing that communities beyond low-income areas needed assistance from banks.
"It's just not so easy to do things that are specifically targeted to lower-income areas," Mr. Dugan said in an interview Tuesday. "Often you are in a situation where … investments intended to have an impact on lower-income communities" also help others, "and those are important."
"The existing restriction limited our flexibility," Greg Baer, deputy general counsel deputy for Bank of America, said Tuesday. "The new legislation helpfully expands the number of communities that we can serve."
The authority to invest in public welfare projects dates back to 1963, when the OCC let national banks to invest in community developments efforts like affordable housing. Congress codified that authority in 1992 but capped it at 10% of a bank's capital and surplus.
As banks neared that threshold in 2006, Congress increased it to 15% but narrowed the scope of investments, requiring them to be made in low- or moderate-income areas.
Bankers objected, saying the change hampered funding for mixed-income places and disaster areas, such as towns hit by Hurricane Katrina.
Anne Canfield, executive director of the Consumer Mortgage Coalition, applauded removing the income limit.
"It's very much needed, very timely, and it will allow a number of deals to get financed because we had a number of deals that were put on hold," said Ms. Canfield, who formed the Public Welfare Investment Coalition to lobby for the most recent change.
Detroit announced a plan last year to revitalize six neighborhoods. But two of the neighborhoods, which were chosen to keep middle-income individuals from leaving the city, had higher-income census tracts, so banks were blocked from investing there.
In the past 15 years, the OCC said, public welfare investments by national banks have topped $25 billion.
"It's really the predominant way housing gets built for low-income use, and banks have traditionally been the major investors," said Buzz Roberts, senior vice president for policy and program development at the Local Initiatives Support Corp. His nonprofit has participated in 1,500 housing development programs over the last 20 years with the help of banks using the public welfare authority.
The vast majority of investments were still able to be made after the 2006 change, Mr. Roberts said, but plenty hit snags. "It just didn't seem like it was in the public interest to hold those up."
Judy Kennedy, the chief executive officer of the National Association of Affordable Housing Lenders, also agreed the low-income requirement should be removed.
"By restoring the prior standard, banks can once again invest in things like mixed-income housing, redevelopment areas, and disaster areas," she said. "It will be significant."
Mr. Dugan was a main lobbyist for changing the authority. In the past year he met with House and Senate staff members, sent letters to legislators, and gave speeches calling for the change.
In a February 2007 letter to House Financial Services Committee Chairman Barney Frank, Mr. Dugan said restoring the authority to middle-income areas could generate as much as $30 billion of national bank investments in local communities.
Later in a letter to Senate Banking Committee Chairman Chris Dodd and Rep. Richard Shelby, the committee's ranking Republican, Mr. Dugan said the 2006 change blocked banks from responding to needs in more than 4,000 census tracts. The public welfare authority is one of the few equity investment authorities banks have. It also provides credit under the Community Reinvestment Act and tax breaks in some cases.
Mr. Dugan said that with institutions abandoning subprime mortgage lending, the expanded public welfare authority will give them another avenue to meet CRA requirements.
"Now particularly we are in a world where it's not as easy to get the types of CRA credit you could once before with subprime loans, and banks are looking for other ways to get CRA credit, and public welfare investments is a good way to do that," he said.
The authority applies only to national and state banks, but not thrifts. The House passed a measure in February last year that would have included thrifts, but it never received action in the Senate.
To implement the new law, the OCC issued an interim final rule Tuesday giving national banks guidance on how to use the expanded authority. The agency will approve projects on a case-by-case basis and publish them on its Web site.
