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NONPROFIT FINANCE FUND
October 30, 2003
Mr. Robert E. Feldman, Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
comments@fdic.gov.
Attention. Comments, FDIC
Dear Mr. Feldman:
On behalf of the Nonprofit Finance Fund (NFF), a 23 year old
community development financial institution (CDFI), I am pleased to
provide comments in response to the Advanced Notice of Proposed
Rulemaking on the proposed Risk-Based Capital Rules, published on August
4, 2003.
Founded in 1980, NFF provides services to nonprofit organizations
that predominantly serve low-income communities. Our services include
loans, planning grants and asset-building programs. In addition, our
advisory services range from an extensive series of facility project
workshops to nonprofit business analysis and ongoing consultations about
finance, project management and strategic planning.
NFF advised and invested more than $78 million in direct investment
to nonprofits nationwide, leveraging more than $280 million in projects.
NFF has made $64 million in loans for over $260 million in projects;
provided $1.2 million in loan guarantees for projects totaling $8.3
million. NFF has advised funders on the disbursement of $32 million in
capital grants and loans, and assisted more than 8,000 nonprofit
organizations with advisory services coast-to-coast.
NFF applauds U.S. bank regulators and others who recognized the vital
role of Community Reinvestment Act (CRA) investments in the U.S., and
supports the special rule for "Legislated Program Equity Exposures."
This section wisely preserves the current capital charge on most equity
programs made under legislated programs that involve government
oversight. CRA-related investments are generally held harmless under the
proposed rule. Insured depository institutions investing in such
programs therefore would set aside, by and large, the same amount of
capital for CRA investments under the new rules as they do now-about
$8.00 for every $100 of capital invested.
Given that CRA investments in affordable housing, and community and
economic development, have a different risk/return profile than other
equity investments, that treatment is appropriate. Based on considerable
experience in the U.S. to date, CRA equity investments may sometimes
provide lower yields than other investments but they also have lower
default rates and volatility of returns than other equity investments.
NFF, however, is concerned about the potential consequence of the
proposed rules that could affect adversely the amount of equity capital
flowing into investments under the CRA. Specifically, the "materiality"
test of the proposed rules requires institutions that have, on average,
more than 10 percent of their capital in ALL equity investments, to set
aside much higher amounts of capital on their non-CRA investments, such
as venture funds, equities and some convertible debt instruments. As
drafted, this calculation includes even CRA investments that are
specifically excluded from the new capital charges.
Having to include CRA investments, with their very different
risk/reward profile, in the "materiality" bucket of more liquid,
higher-yielding, more volatile equity exposures could have an unintended
chilling effect on the flow of equity capital to communities in need.
CDFIs and their bank partners have invested substantially in affordable
housing and economic development (for example, through Low Income
Housing Tax Credits (LIHTC) or New Markets Tax Credits (NMTC)) that
currently approach, or even exceed, the 10 percent threshold just from
CRA-qualified investments alone. If the materiality test is adopted as
proposed, it could discourage banks from making CRA investments to avoid
triggering the higher capital charges on non-CRA investments. I
understand that these higher capital charges could be twice as much on
publicly-traded equities, and three times as much on non-publicly traded
ones.
Financial institutions' support for affordable housing and community
revitalization is well-established public policy in the United States.
Bank regulators and the Congress have encouraged and incentivized
investment in poor communities through such public policy initiatives as
the 1992 Public Welfare Investments (Part 24), the 1995 CRA revisions
that specifically encouraged equity investments, and both the LIHTC and
NMTC program incentives. Furthermore, in 2000, the Federal Reserve Board
released a study confirming that CRA-related investing is by-and-large
profitable and, more importantly, it pleases the double-bottom
line-social impact and financial reward, with little or no risk to
investors. These facts, combined with a remarkable performance record of
CRA-related investments and more than a $1 trillion invested to date,
provide a strong rationale to exclude CRA investments from the
materiality test calculation.
I respectfully submit these comments and am happy to provide any
assistance that may be useful in your deliberations on these proposed
rules. Thank you for your consideration.
Sincerely,
Clara Miller
Nonprofit Finance Fund
70 West 36th Street, 11th Floor
New York, NY 10018
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