New York State's Slumlord Prevention Guidelines

No CRA credit for loans that result in tenant harassment or loss of affordable housing.

The NY State Department of Financial Services (DFS) has finalized its guidelines related to how multifamily lending is analyzed on CRA exams. Governor Andrew Cuomo and DFS Superintendent Benjamin Lawsky are raising the bar in enforcing community reinvestment – multifamily loans that undermine safe, affordable rental housing conditions will not be eligible for CRA credit. To preserve affordable housing, the new regulations specifically say:

“Where a concern around overleveraged or distressed lending is raised on a multifamily loan submitted for CRA credit, DFS will look at the following factors to determine whether the loan has a primary purpose of affordable housing:

• Whether the loan adds to or reduces the number of units affordable to families with incomes of less than 80% AMI;
• The quality of the housing provided; and
• Whether the loan was underwritten in a sound manner.”

The Community Reinvestment Act (CRA) states that banks have an affirmative obligation to help meet the credit needs of the low- and moderate-income communities in which they do business.  The CRA examination evaluates whether the banks are meeting this obligation.

Banks are examined on their lending, investments, and services to ensure they are equitably serving lower-income customers in the areas where they take deposits.  Banks that do a considerable amount of multifamily lending are evaluated on the distribution of these loans in low- and moderate-income (LMI) census tracts.  Banks can also get additional CRA credit for loans that serve primarily LMI households, typically if at least 50% of the units are affordable to LMI renters, or if the loan is determined to otherwise contribute to neighborhood revitalization.

ANHD has long asserted that regulators should look at the quality of the loan and its impact on the community.  Loans should be made with a Debt Service Coverage Ratio (DSCR) of at least 1.2, based on real rental income and maintenance expenses.  The DSCR is the calculation used to determine if a building owner brings in enough income in rents to meet expenses.  As we learned from the financial crisis, loans that were not made responsibly, often due to speculative underwriting or business dealings with bad-actor landlords, put many buildings at risk of financial and physical distress.  It often also led to the harassment and eviction of lower-rent paying tenants.  A low DSCR likely means the loan was made speculatively and based on false projections of higher rents or lower maintenance costs, indicating that the only way to pay off the loan would be to push out lower rent paying tenants and charge higher rents, or else reduce maintenance costs, leading to poor conditions.

Predatory lending practices led to the loss and deterioration of thousands of affordable housing units in NYC, prior to and following the financial crisis.  We are still dealing with the aftermath, such as was evidenced in ANHD’s 4/10/14 blog,Three Boro Pool.  Predatory equity landlords and other unscrupulous landlords also threaten the stock of quality, affordable housing when they fail to make repairs or to upkeep buildings where lower income tenants live. The practice of predatory equity declined following the financial crisis, but as the market recovers and prices rise, it is showing signs of returning.

After years of working with banks, regulators, and community organizations, Superintendent Lawsky shows how fully DFS understands this:

“Our Slumlord Prevention Guidelines will provide a powerful incentive for banks to lend to responsible landlords rather than those who ignore safety or housing codes, or try to reap windfall profits by exploiting tenants.”

In September, at the time the proposed guidelines were introduced, Superintendent Lawsky outlined the new guidelines in a letter to the banking industry.  Key provisions include:

• Loans that undermine affordable housing or neighborhood conditions, facilitate substandard living conditions, or are underwritten in an unsound manner will not be eligible for CRA credit.  For example, loans to borrowers with a high number of housing code violations or loans that are too highly leveraged (too much debt financing) will not receive CRA credit.
• Outlining actions where positive CRA consideration will be given, including working with local government housing departments, community groups, and qualified preservation-oriented developers and monitoring loan portfolios to determine whether multifamily buildings are properly maintained and do not have multiple and egregious building code violations.
• Allow for multiple ways to track violations, including media reports of housing code violations, tenant complaints and complaints by consumer groups or government agencies.
• Ensuring that lenders require that the individuals reviewing appraisals are independent of the transaction itself to prevent conflicts of interest.
• Encouraging lenders to create written community outreach strategies to build or enhance relationships within communities served by the banks.

ANHD sees the official implementation of these new guidelines as an effective way to encourage responsible lending and discourage predatory lending. We especially applaud the attention to overleveraging and the encouragement of close collaboration with community groups that are working directly with tenants to monitor and respond to issues in their buildings. 

This could – and should – be a model for state and federal exams nationwide.