Community Reinvestment Act:
Challenges in Quantifying Its Effect on Low-Income Housing Tax Credit Investment
GAO-12-869R: Published: Aug 28, 2012. Publicly Released: Sep 27, 2012.
What GAO Found
While CRA should increase investor demand for LIHTCs, quantifying the extent of any effect of CRA on LIHTC equity contributions is difficult given data and methodological challenges. In part because of the qualitative nature of the CRA investment test, regulatory ratings cannot be systematically linked to banks' LIHTC investments. Although a bank's overall rating and the associated narrative of its CRA examination are publicly available, the performance evaluation report does not individually list qualified investments and how they were considered for that examination. Furthermore, quantifying potential bank demand for LIHTCs in specific geographic areas is complicated because not every bank assessment area is considered to the same degree in a CRA examination. Although one way to assess demand for LIHTCs is by examining how much equity investors are willing to contribute, the common LIHTC price measure--the ratio of investors' equity contribution to the total amount of LIHTCs in nominal dollars--is subject to misinterpretation. Specifically, an investor's equity contribution reflects the value of not just the LIHTCs, but also any other tax and regulatory benefits--such as higher CRA ratings--plus project risks. Such other tax benefits include deductions for depreciation and interest expenses. Furthermore, complete and reliable data on LIHTC investor equity contributions are not readily available, creating a challenge to analyzing the determinants of pricing. Although no empirical analyses of the effect of CRA on LIHTCs are available, CRA is widely cited by academic researchers, federal officials, and LIHTC market participants, and HFAs surveyed as one factor that increases bank demand for LIHTC investments particularly in urban areas. LIHTC market participants interviewed and HFAs surveyed indicated other factors that influence investors' decisions to invest in LIHTCs, such as the strength of housing markets in urban areas and developer experience with LIHTC projects.
Why GAO Did This Study
The Low-Income Housing Tax Credit (LIHTC), which is estimated to cost $6.5 billion in forgone revenue in fiscal year 2012, is the largest federal program for financing affordable rental housing. This program is jointly administered by the Internal Revenue Service (IRS), within the Department of the Treasury, and state housing finance agencies (HFA). HFAs competitively award LIHTCs to owners of qualified rental housing projects that reserve all or a portion of their units for low-income tenants. Developers typically attempt to obtain funding for their projects by attracting third-party investors that are willing to contribute equity to the projects, and the project investors can then claim the LIHTCs. This process of providing LIHTCs in exchange for equity is generally referred to as "selling" the tax credits. Banks invest in LIHTC projects in part to meet regulatory tests under the Community Reinvestment Act (CRA), which encourages depository institutions to meet the credit needs of communities where they operate, consistent with safe and sound banking operations. Housing and banking industry experts cite concerns about the impact of CRA on bank investors' demand for LIHTCs in urban areas compared to rural areas. Based on congressional request, our objective was to determine, to the extent data allow, how CRA and other factors influence the market for LIHTCs, including investors' equity contributions.
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