Consumer Compliance Outlook: First Quarter 2016

New and Revised Interagency Questions and Answers Regarding Community Reinvestment: Updates to Community Development Guidance

By Cathy Gates, Senior Project Manager, Federal Reserve Board

Introduction

The Community Reinvestment Act (CRA or act) requires the federal agencies that implement the act — the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency (agencies) — to assess the record of financial institutions in meeting the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations.1 The CRA’s implementing regulations provide different methods of evaluating performance, corresponding to differences in institutions’ asset sizes, structures, and operations.2

The agencies publish Interagency Questions and Answers Regarding Community Reinvestment (Interagency Q&As) to provide guidance on how the regulations are interpreted and applied. The agencies periodically update the Interagency Q&As based upon changes in the banking industry. This article describes the most recent update, which was published in the Federal Register on November 20, 2013.3

Background

The agencies regularly receive comments and questions from financial institutions, their trade groups, and community organizations regarding how community development activities are considered in CRA examinations. Periodically, the agencies also hold public hearings to gather information about the effectiveness of the regulations. The most recent public hearings were held in 2010. Comments received at those hearings covered a wide range of issues, including community development.4 The Interagency Q&As published in November 2013 address a number of concerns and questions raised by commenters about community development activities, which are discussed in more detail below.5

New and Revised Interagency Q&As

Community Development Activities Outside an Institution’s Assessment area(s)

Broader Statewide or Regional Area

The CRA regulations allow for consideration of community development activities that benefit an institution’s assessment area(s), or a broader statewide or regional area that includes its assessment area(s). The updated Interagency Q&As revise two Q&As addressing community development activities outside of financial institutions’ assessment areas. Some bankers and community organization representatives have misinterpreted the pre-November 2013 Q&As to limit consideration of such activities.

First, revised Q&A §__.12(h)—7 was shortened to clarify the meaning of “regional area.” The revised answer explains that a regional area may be an intrastate area or a multistate area that includes the institution’s assessment area(s) and that typically involves some geographic, demographic, and/or economic interdependencies within the regional area. The revised answer includes two examples and explains that regions “are often defined by the geographic scope and specific purpose of a community development organization or initiative.”

Second, revised Q&A §__.12(h)—6 clarifies that community development activities in a broader statewide or regional area that includes an institution’s assessment area will receive full CRA consideration under the quantitative criteria (i.e., the number and amount of such activities) — even if the institution’s assessment area(s) does not receive immediate or direct benefit — as long as the purpose, mandate, or function of the organization or activity includes serving geographies or individuals located within the institution’s assessment area(s). This revised Q&A further clarifies that even if the institution’s assessment area(s) will not benefit from the community development activities, they will still be considered as long as the activities benefit geographies or individuals located somewhere within a broader statewide or regional area that includes the institution’s assessment area(s) and the institution has been responsive to community development needs and opportunities within its assessment area(s).6 Accordingly, an institution that has been responsive has the flexibility to engage in, and receive consideration for, community development activities that benefit areas within the broader statewide or regional area, even if there is no benefit to its assessment area(s).

When an examiner considers an institution’s responsiveness to community development needs, he or she will review the volume and mix of the institution’s community development activities that benefit its assessment area(s) and broader statewide or regional areas that include its assessment area. The examiner will also review the qualitative aspects of those activities in light of the institution’s performance context, including the community development needs and opportunities in the assessment area(s) and the broader statewide or regional areas that include the assessment areas, the institution’s business strategy, capacity, and constraints.

Nationwide Funds

Nationwide funds are important sources of investments that can help to meet community development needs in low- and moderate-income and underserved areas throughout the country. These investments can be particularly efficient vehicles for certain institutions, especially those with a nationwide branch network. The agencies revised Q&A §__.23(a)—2 in response to concerns that the existing Q&A could be interpreted to require financial institutions to obtain side letters or written documentation from nationwide funds earmarking or allocating funds to a particular area, which deterred some institutions from making otherwise appropriate community development investments. The revised answer confirms that nationwide funds may be suitable community development investments, particularly for large institutions with a nationwide branch footprint. Further, it explains that a nationwide fund may be used by other institutions to meet community development needs, but that the other institutions should review the fund’s investment record to determine whether the fund’s activities are consistent with their own investment goals and geographic focus. The geographic focus refers to the institution’s assessment area or the broader statewide or regional area that includes the assessment area(s).

Examination Procedures

The agencies published revised large bank examination procedures on April 18, 2014, to incorporate the updates to the Interagency Q&As and to clarify how examiners consider community development activities related to regional and nationwide funds.7 The examination procedures clarify that activities are to be considered at the appropriate geographic level. Specifically:

If an activity benefits and is targeted to an institution’s assessment area(s) the activity will be considered first at the assessment area level.
If the activity benefits or is targeted to the broader statewide or multistate MSA area that includes the assessment area(s) and supports organizations or activities with a purpose, mandate, or function that includes serving the geographies or individuals located within the assessment area(s), the activity will be considered first at the state or multistate MSA level.
If the activity benefits or is targeted to a regional area of two or more states (which are not part of a multistate MSA) that includes the assessment area(s) and supports organizations or activities with a purpose, mandate, or function that includes serving the geographies or individuals located within the assessment area(s), the activity will be considered first at the institution level.

In addition, if an institution has been responsive to community development needs and opportunities in its assessment area(s), the examination procedures also require consideration of community development activities in the broader statewide or regional area that includes the assessment area(s), even if the organizations or activities do not have a purpose, mandate, or function that includes serving geographies or individuals located within the institution’s assessment area(s). In other words, as long as an institution is responsive to the community development needs in its assessment area, community development activities outside its assessment area, but in the broader statewide or regional area, will be considered. All of these community development activities will be considered when rating an institution, but they will not be artificially attributed to assessment areas or states where benefits cannot be measured. Similarly, the public performance evaluation will discuss community development activities at the assessment area, state, or institution level as appropriate, based on the benefits received at the various levels and their performance context.

Community Services Targeted to Low- or Moderate-Income Individuals

The updated Interagency Q&As expanded Q&A §__.12(g)(2) to include new examples of ways to determine that services are community services targeted to low- or moderate-income individuals. The revised Q&A clarifies that detailed income information is not required when recipients of community services are (1) students or their families from a school at which the majority of students qualify for free or reduced-price meals, (2) individuals who receive or are eligible to receive Medicaid, or (3) recipients of government assistance programs that have income qualifications equivalent to, or stricter than, the definitions of low- and moderate-income defined by the CRA regulations.

Community Development Services

The updated Interagency Q&As provide guidance about whether activities conducted by an institution’s employees will be considered community development services. Q&A §__.12(i)—3 explains that providing services to a community development organization reflecting a financial institution’s employees’ areas of expertise at the institution, such as human resources, information technology, and legal services, constitutes a technical assistance activity that is a community development service. Additionally, the revised answer indicates that service on the board of directors of a community development organization is an example of a community development service.

Consideration of Investments Using Alternative Funding Structure

New Q&A §__.12(t)—9 was added to address a funding structure used by a limited number of community development organizations. If loans or investments are made to organizations that invest in security instruments that do not have a community development purpose, and only the income from the investments is used to support the organization’s community development purpose, then only the amount of the investment income used to benefit the organization or activity that has a community development purpose will be considered. The new Q&A makes clear that in such situations, quantitative consideration of a qualified investment should be consistent with the amount supporting a community development purpose rather than the full amount provided to the organization. Alternatively, consideration is to be given to the dollar amount of qualified investments provided to community development organizations when the funds are placed in instruments without a community development purpose solely as a means of securing capital for leveraging purposes, securing additional financing, or of generating a return with minimal risk until funds can be deployed toward the originally intended community development activity.

Community Development Lending Under the Large Bank Lending Test

New Q&A §__.22(b)(4)—2 addresses concerns that community development lending activities were undervalued and not given sufficient weight in a large bank’s lending test component. The new Q&A clarifies that community development lending performance is always considered in an institution’s lending test rating. An institution’s community development lending record may have a positive, neutral, or negative impact on the lending test rating depending on the level of the institution’s performance and the performance context.

For more information on the CRA, including these Interagency Q&As and the agencies’ CRA regulations, visit the Federal Financial Institutions Examination Council website (www.ffiec.gov/cra ). Specific issues and questions should be raised with your primary regulator.

¹ 12 U.S.C. §§2901(b), 2906(a)(1) .
² In addition to the small bank, intermediate small bank, and large bank CRA examination procedures (which are based on asset size), institutions may be examined pursuant to the wholesale and limited-purpose bank methodology or under a strategic plan. See 12 C.F.R. §§228.25, 228.27.
³ Interagency Questions and Answers Regarding Community Reinvestment, 78 Fed. Reg. 69671 (Nov. 20, 2013).
⁴ See www.federalreserve.gov/communitydev/cra_hearings.htm for information about the hearings.
⁵ The Interagency Q&As also redesignated one question and answer about activities undertaken by majority-owned institutions in cooperation with minority- or women-owned financial institutions and low-income credit unions (MWLIs). It explains that activities undertaken with MWLIs, such as making a deposit or capital investment, purchasing a participation in a loan, or providing technical expertise to assist an MWLI, will be considered in a financial institution’s CRA evaluation. The activities do not need to benefit the majority-owned financial institution’s assessment area(s); however, they must help meet the credit needs of the local communities in which the MWLI is chartered. The redesignation reflects a regulatory change made in 2010 that clarified that these types of activities are considered for all types and sizes of financial institutions regardless of the CRA performance test and examination method used to evaluate performance.
⁶ Q&A §__.26(c)(4)—1, which explains responsiveness in terms of the intermediate small bank community development test, provides additional insight regarding responsiveness. This citation refers to the March 11, 2010, version of the Interagency Q&As, not the recent change .
⁷ See CA Letter 14-2, “Revised Interagency Large Institution CRA Examination Procedures and Consolidation of Interagency CRA Examination Procedures and Supporting Materials,” April 18, 2014.