CRA Exam: Do You Have Enough Community Development Credit?

Banks have been waiting for clarity on the Community Reinvestment Act (CRA) for years. Just a few years ago, there was hope that the agencies would move forward together to modernize CRA. We’ve instead seen the Federal Reserve (FRB), Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) go their own way. Most recently, the OCC issued a bulletin reconsidering elements of its June 2020 final rule. 

Related: How to Build a Strong Fair Lending & Redlining Compliance Management System

While there are differences in the agency’s rules, there is one commonality: CRA’s core purpose to address inequities in credit access for low-to-moderate-income (LMI) communities. CRA programs should focus on ways to: 

1. Ensure LMI banking needs are being met. 
2. Promote financial inclusion. 

Identifying and submitting loans and activities for community development credit can be stressful. Regulatory guidance leaves a lot of room for interpretation, and regulators have discretion when evaluating for Community Development credit.   

Let us take a closer look at community development credit for CRA compliance, so you can better understand not only how to earn CRA credit, but also meet the needs of your community.  

The three key types of community development activities 

CRA compliance is about more than just loans. CRA activities include loans, community service, and qualified investment.

1. Community development loans 

The primary purpose of a community development loan is community development. As defined in the regulations, “community development” includes: 

• Affordable housing (including multifamily rental housing) for lower moderate-income individuals 
• Community services targeted to low- or moderate-income individuals 
• Activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration’s Development Company or Small Business Investment Company programs (13 CFR 121.301) or have gross annual revenues of $1 million or less or 
• Activities that revitalize or stabilize low- or moderate-income geographies   

In addition to having a community development purpose, a community development loan must also benefit the institution’s assessment area(s) or a broader statewide or regional area that includes the institution’s assessment area(s). 

Related: How to Tell if a Loan Qualifies as a CRA Small Business Loan

2. Service 

Community service can go a long way towards earning a bank community development credit. But not every type of community service qualifies for CRA community development credit.  

Examples of community services that benefit low- and moderate-income individuals and area include: 

• Providing technical assistance on financial matters to nonprofit, tribal, or government organizations serving low- and moderate-income housing or economic revitalization and development needs. 
• Providing technical assistance on financial matters to small businesses or community development organizations, including organizations and individuals who apply for loans or grants under the Federal Home Loan Banks’ (FHLB) Affordable Housing Program. 
• Allowing employees to provide financial services for organizations facilitating affordable housing construction and rehabilitation or development of affordable housing. 
• Providing credit counseling, homebuyer and home maintenance counseling, financial planning or other financial services education to promote community development and affordable housing, including credit counseling to assist low- or moderate-income borrowers in avoiding foreclosure on their homes. 
• Establishing school savings programs or developing or teaching financial education or literacy curricula for low- or moderate-income individuals. 
• Providing foreclosure prevention programs to low- or moderate-income homeowners who are facing foreclosure on their primary residence with the objective of providing affordable, sustainable, long-term loan modifications.  

Related: How Do I Get CRA Community Development Credit?  

Some financial institutions assume every community service activity will count. What they do not realize is that the service needs to be in their communities—and not every volunteer service counts.  

Here are some examples of service activities that do not count towards CRA community development credit: 

• Working with an attorney that does pro bono work for kids in foster care.  
• Working in the Court Appointed Special Advocates (CASA) program. 
• Working with programs such as Teach Children to Save when it’s not in your assessment area or LMI areas. 

When in doubt, ask your regulator.

3. Qualified Investment 

A qualified investment is “a lawful investment, deposit, membership share or grant that has as its primary purpose community development.” Bank regulators evaluate the investment performance of large institutions using the following criteria: 

1. The dollar amount of qualified investments. 
2. The innovativeness and complexity of the investments. 
3. The responsiveness to credit and community development needs.  
4. The degree to which qualified investments are not provided routinely by private investors. 

But what does this really mean? 

Historically, qualified investments under CRA ranged from highly complex government-sponsored programs to simple community donations given to nonprofit organizations.  To receive positive consideration during bank CRA examinations, FIs need qualifying financial investments which means FIs should look to activities that: 

• Are made to community development organizations and entities such as Community Development Financial Institutions (CDFIs), Community Development Entities (CDEs), Community Development Corporations (CDCs), minority- and women-owned financial institutions, and community loan funds and low-income or community-development credit unions to finance and support efforts to low- and moderate-income areas or individuals. 
• Provide tax credit investments to the Low-Income Housing Tax Credit programs or New Markets Tax Credit Programs. 
• Are made to organizations creating and supporting affordable housing. 
• Are made to organizations promoting economic development such as Small Business Investment Companies (SBICs) or Rural Business Investment Companies (RBICs). 
• Are made to nonprofit organizations or other community facilities supporting low- and moderate-income individuals or areas. 
• Are made to State and municipal bond programs that support affordable housing or community development. 

If in doubt about whether your activity qualifies, ask your regulatory agency if your activity would receive CRA consideration.  

CRA Takeaways    

Since 1977, when President Jimmy Carter signed the Community Reinvestment Act into law, FIs have needed to have a targeted purpose of ensuring that the communities in which they are charted to serve to receive equal access to credit and banking services in a manner consistent with safe and sound operational practices. Times have changed, however, and the communities a bank serves are no longer defined only by physical branches.  

Moving forward, banks will have to be more creative and diligent in defining the low- and moderate-income areas they serve and finding ways to assist these communities and those who live in them.