New York Gov. Andrew M. Cuomo announced proposed Slumlord Prevention Guidelines (SPG) for bank lending to help protect tenants, strengthen communities, and promote sustainable, long-term investments in rental housing. The guidelines include new Community Reinvestment Act (CRA) regulations from the Department of Financial Services (DFS) that incentivize banks to lend to landlords who are committed to the long-term health of a community – instead of quick-buck artist slumlords who let buildings fall into disrepair.
“Safe and affordable rental housing is vital to the strength of local neighborhoods, and state government is doing its part to meet that need by supporting landlords who provide good housing options,” said Governor Cuomo. “These guidelines will help ensure that banks are making sound loans to individuals who have taken a vested interest in their community, instead of those who seek only to drain community resources.”
Benjamin M. Lawsky, Superintendent of Financial Services, said, “Banks are critical gatekeepers in deciding who becomes a landlord in local communities across our state. Our Slumlord Prevention Guidelines will provide a powerful incentive for banks to lend to responsible long-term buyers – rather than landlords who abuse their tenants in search of windfall profits.”
The Community Reinvestment Act (CRA) encourages banks to serve the credit needs of their communities, particularly low- and moderate-income communities. The Department of Financial Services, which reviews banks' performance in meeting their CRA obligations, is issuing new Slumlord Prevention Guidelines that make clear that loans that undermine safe, affordable rental housing conditions will not be eligible for CRA credit. That will provide a powerful incentive for banks to lend to responsible landlords.
The damage left by the financial crisis in many communities makes these Slumlord Prevention Guidelines especially important. In the real estate boom preceding the crisis some investors purchased rental properties using high amounts of debt financing in anticipation of increases in property values. When rental income did not cover the debt payments, some of those investors reduced building maintenance dramatically to cut costs, which often led to serious housing code violations. In other cases, investor-landlords searching for higher rental income displaced existing tenants.
When pricing is the primary, if not only, motivating factor in the bank’s selection process for a buyer and the physical conditions of the property are not sufficiently considered the sale can lead to a recurring cycle of default, deterioration, foreclosure, and repeat sale. This cycle has a ripple effect beyond the individual building and can contribute to neighborhood decline.
To help address these problems, Superintendent Lawsky today outlined the Cuomo Administration’s proposed Slumlord Protection Guidelines (SPG) in a letter to the banking industry.
Making clear that 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.
Helping to improve the way borrower violations are tracked so that media reports of housing code violations, tenant complaints and complaints by consumer groups or government agencies are captured.
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.