Pub. 6 2016 Issue 3

authorities. But comfort with the structure does not necessar- ily exempt institutions from documenting that each housing bond issuance benefited low-to-moderate income individuals. New, innovative structures, including Tax Exempt Municipal Securities (TEMS), provide increased transparency and can more easily be applied to and documented for an institution’s CRA investment test than traditional public housing debt. TEMS finance the acquisition or origination of underlying mortgages that conform to Internal Revenue Code Section 143 requirements, including the stipulation that, generally, all owner-financing provided under the issue 17 “ …is provided for mortgagors whose family income is 115 percent or less of the applicable median family income.” Moreover, because each TEMS issue is backed by a single 30 year Ginnie Mae, Fannie Mae, or Freddie Mac MBS, rather than a pool of loans or securities, underlying loan level details are available to investors. Purpose: Providing affordable housing to low-to-moderate income individuals is perhaps the most obvious example of a com- munity development purpose and is mentioned specifically in CRA regulations. Moreover, all state public housing authori- ties are purposefully designed to meet the housing needs of residents that are not met in the private market. In almost all cases, the mission statements, charters, or governing statutes surround a housing agency specifically targets low income individuals. For example, Utah Housing Corp was chartered to 18 “…help provide affordable housing for low and moderate income persons.” Military Housing Bond Another potential source of CRA credit for the investment test can come in the form of military housing bonds. The military housing debt market is an illiquid (approximately $24 billion), largely long duration, secondary market that originated from the creation of the Military Housing Priva- tization Initiative in 1996. The debt for the military housing projects is secured by the rent from military tenants that is deposited into a lockbox (equal to their respective Basic Housing Allowance – BAH) and conveyed property and improvements. Similar to municipal bonds, certain military housing bonds can fall into the bucket of a qualified investment that responds to community development need. Specifically, the projects securing the military housing debt are often afford- able housing for low-or-moderate-income individuals. As stated by the Department of Defense, the Military Housing Privatization Initiative (MHPI) is primarily targeted towards “junior enlisted personnel who cannot afford quality private housing within a reasonable commuting distance.” 19 Further- more, the Federal Reserve Board of San Francisco published an article on CRA investments in 2003 that further made the case for military housing bonds as potential CRA invest- ments: The San Diego Family Housing, LLC issued military hous- ing revenue obligations to help provide housing for lower-pay grade enlisted personnel. Pursuant to a lease by the United States Navy, the notes finance a portion of the acquisition, construction, and renovation of housing units at 20 different properties in San Diego amounting to a total of approximate- ly 3,200 units. Both existing and proposed housing units are targeted at personnel earning below 80 percent of median family income (for San Diego County, the 2003 HUD me- dian family income is $59,900). 20 Given the dispersion of military housing projects across the country, the determination as to whether a project serves low-to-moderate income individuals should be made by locat- ing the tract in which each housing project within the military housing deal is located and determining if the tract is desig- nated as a low or moderate income tract. A facility serving military personnel does not intrinsically mean that the facility and associated debt are CRA qualified. As such, banks with military housing projects in their assessment area will need to analyze each independently and determine if the project falls within the low-to-moderate income threshold. CDs Issued by Minority and Women-Owned Banks As of year-end 2015, there were 158 minority and women- owned banks located across the country. 21 The certificates of deposits issued by these institutions can provide another source of eligible investments to help meet the CRA invest- ment test. These instruments are specifically referenced in the Interagency CRA FAQ: 22 Examples of qualified investments include, but are not limited to, investments, grants, deposits, or shares in or to: Fi- nancial intermediaries (including Community Development Financial Institutions (CDFIs), New Markets Tax Credit- eligible Community Development Entities, Community Development Corporations (CDCs), minority- and women- owned financial institutions, community loan funds, and low-income or community development credit unions) that primarily lend or facilitate lending in low- and moderate- income areas or to low- and moderate-income individuals in order to promote community development, such as a CDFI that promotes economic development on an Indian reserva- tion. While CRA activities are typically only counted if they benefit the institution’s assessment area(s) or a broader statewide or regional area that includes the institution’s as- sessment area(s), any CRA activity that benefits a minority- or 17 ISSUE 3. 2016 CRA w Continued on page 18