New bank rule aims to stabilize neighborhoods

WASHINGTON (Reuters) - Financial regulators on Thursday proposed a rule change to encourage banks to make loans and other investments to stabilize neighborhoods hit by high levels of home foreclosures and abandoned properties.

The change would allow financial institutions’ activities under the Neighborhood Stabilization Program, created by housing rescue legislation in 2008, count toward their compliance with the Community Reinvestment Act (CRA).

The agencies proposing the rule include the Federal Reserve Board, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

The agencies said under their proposed definition of “community development,” a financial institution would receive favorable consideration for donating foreclosed properties to non-profit housing agencies in targeted, hard-hit areas.

“In addition, institutions would receive favorable CRA consideration if they provide financing for the purchase and rehabilitation of foreclosed, abandoned, or vacant properties,” the regulators said. “Other examples of activities that would receive favorable CRA consideration under the proposal include loans, investments, and services that support the redevelopment of demolished or vacant properties in such areas.”

The Neighborhood Stabilization Program, administered by the Department of Housing and Urban Development, first provided $4 billion in funds in 2008 to redevelop abandoned and foreclosed properties, later supplemented with another $2 billion in the Obama administration’s stimulus measures in 2009.

Under the Community Reinvestment Act, financial institutions must achieve a certain amount of “community development” loans, investment and services.

By including Neighborhood Stabilization Program-eligible activities in that “community development” definition, the agencies said government grant funding would be supplemented by more bank lending and investments.

The duration of the rule would last only as long as the Neighborhood Stabilization Program remains in place, the agencies said, noting that it has no specific expiration date.

The regulators said they would seek public comment on the proposed rule change for a 30-day period.

Reporting by David Lawder; Editing by Leslie Adler