[Federal Register: July 12, 2001 (Volume 66, Number 134)]
[Notices]
[Page 36619-36653]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12jy01-96]
[[Page 36619]]
-----------------------------------------------------------------------
Part II
Federal Financial Institutions Examination Council
-----------------------------------------------------------------------
Community Reinvestment Act; Interagency Questions and Answers Regarding
Community Reinvestments; Notice
[[Page 36620]]
-----------------------------------------------------------------------
FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL
Community Reinvestment Act; Interagency Questions and Answers
Regarding Community Reinvestment
AGENCY: Federal Financial Institutions Examination Council.
ACTION: Notice.
-----------------------------------------------------------------------
SUMMARY: The Consumer Compliance Task Force (we) of the Federal
Financial Institutions Examination Council (FFIEC) is supplementing,
amending, and republishing its Interagency Questions and Answers
Regarding Community Reinvestment. The Interagency Questions and Answers
have been prepared by staff of the Office of the Comptroller of the
Currency (OCC), the Board of Governors of the Federal Reserve System
(Board), the Federal Deposit Insurance Corporation (FDIC), and the
Office of Thrift Supervision (OTS) (collectively, the agencies) to
answer frequently asked questions about community reinvestment. These
Interagency Questions and Answers contain informal staff guidance for
agency personnel, financial institutions, and the public.
DATES: Effective Date of Amended Interagency Questions and Answers on
Community Reinvestment: July 11, 2001.
FOR FURTHER INFORMATION CONTACT: OCC: Karen Tucker, National Bank
Examiner, Community and Consumer Policy Division, (202) 874-4446; or
Margaret Hesse, Special Counsel, Community and Consumer Law Division,
(202) 874-5750, Office of the Comptroller of the Currency, 250 E
Street, SW., Washington, DC 20219.
Board: Catherine M.J. Gates, Senior Review Examiner, (202) 452-
3946; or Kathleen C. Ryan, Senior Attorney, (202) 452-3667, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, NW., Washington, DC 20551.
FDIC: Robert W. Mooney, Assistant Director, Division of Compliance
and Consumer Affairs, (202) 942-3378; Stephanie Caputo, Senior Fair
Lending Specialist, Division of Compliance and Consumer Affairs, (202)
942-3413; or A. Ann Johnson, Counsel, Legal Division, (202) 898-3573,
Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
OTS: Theresa A. Stark, Project Manager, Compliance Policy, (202)
906-7054; or Richard R. Riese, Director, Compliance Policy, (202) 906-
6134, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC
20552.
SUPPLEMENTARY INFORMATION:
Background
In 1995, the agencies revised the Community Reinvestment Act (CRA)
regulations by issuing a joint final rule, which was published on May
4, 1995 (60 FR 22156). See 12 CFR parts 25, 228, 345 and 563e,
implementing 12 U.S.C. 2901 et seq. The agencies published related
clarifying documents on December 20, 1995 (60 FR 66048) and May 10,
1996 (61 FR 21362).
The revised regulations are interpreted primarily through
``Interagency Questions and Answers Regarding Community Reinvestment,''
which provide informal staff guidance for use by agency personnel,
financial institutions, and the public, and which are supplemented
periodically. We published our most recent guidance on April 28, 2000
(2000 Interagency Questions and Answers). 65 FR 25088. In addition to
issuing the 2000 Interagency Questions and Answers, we re-proposed
revisions to one question and answer, as well as a conforming amendment
to another question and answer, in the accompanying supplementary
information. The proposed revised question and answer addressed whether
there must be a direct benefit from community development loans and
services and qualified investments to an institution's assessment area.
We specifically requested comment addressing the proposed revised
question and answer, as well as general comments and questions
regarding the CRA regulations. 65 FR at 25090-92.
We received 17 letters in response to our request for comments in
the 2000 Interagency Questions and Answers. Comments came from
financial institutions or financial institution holding companies (7),
community organizations (2), financial institution trade associations
(4), one state agency, and others (3). This document supplements,
revises, and republishes the 2000 Interagency Questions and Answers
based, in part, on questions and comments received from examiners,
financial institutions, and other interested parties, and on comments
received in response to our request for comments.
As discussed below, this document adopts the revisions to the
question and answer about whether there must be a direct benefit to an
institution's assessment area for an activity to benefit the assessment
area that we proposed in April 2000, along with conforming changes to
another existing question and answer, which addresses what is meant by
a ``regional area.'' We are also making slight clarifying revisions to
eight existing questions and answers and adopting six new questions and
answers.
The Interagency Questions and Answers has an index to aid readers
in locating specific information in the document. The index contains
keywords, listed alphabetically, along with numerical indicators of
questions and answers that relate to that keyword. The list of
questions and answers addressing each keyword in the index is not
intended to be exhaustive. We welcome suggestions for additional
entries to the index. Further, when this new version of the Interagency
Questions and Answers is made available on the agencies' and the
FFIEC's World Wide Web sites, the index question and answer numbers
will be linked by hypertext to the questions and answers in the
document to facilitate quick reference to relevant information.
Questions and answers are grouped by the provision of the CRA
regulations that they discuss and are presented in the same order as
the regulatory provisions. The Interagency Questions and Answers employ
an abbreviated method to cite to the regulations. Because the
regulations of the four agencies are substantially identical,
corresponding sections of the different regulations usually bear the
same suffix. Therefore, the Interagency Questions and Answers typically
cite only to the suffix. For example, the small bank performance
standards for national banks appear at 12 CFR 25.26; for Federal
Reserve System member banks supervised by the Board, they appear at 12
CFR 228.26; for nonmember state banks, at 12 CFR 345.26; and for
thrifts, at 12 CFR 563e.26. Accordingly, the citation in this document
would be to Sec. ____.26. In the few instances in which the suffix in
one of the regulations is different, the specific citation for that
regulation is provided. The question numbering system consists of the
regulatory citation (as described above) and a number, connected by a
dash. For example, the first question addressing Sec. ____.21(a) would
be identified as Sec. ____.21(a)-1.
Adopting Question and Answer Re-Proposed in April 2000 and
Conforming Revisions to One Question and Answer
We are adopting the revisions that we re-proposed in April 2000 to
the question and answer about whether there must be a direct benefit to
an institution's assessment area for an activity to benefit the
assessment area. We are also adopting conforming revisions to another
existing question
[[Page 36621]]
and answer to provide consistency with the amended question and answer.
Must There Be Some Immediate or Direct Benefit to the Institution's
Assessment Area(s) To Satisfy the Regulations' Requirement That
Qualified Investments and Community Development Loans or Services
Benefit an Institution's Assessment Area(s) or a Broader Statewide or
Regional Area That Includes the Assessment Area(s)?
The fifth question and answer addressing Secs. ____.12(i) and
563e.12(h) (Secs. ____.12(i) & 563e.12(h)-5) addresses whether there
must be an immediate or direct benefit to an institution's assessment
area(s) to satisfy the regulations' requirement that qualified
investments and community development loans or services benefit an
institution's assessment area(s) or a broader statewide or regional
area that includes the assessment area(s). This question and answer
currently states that an institution's assessment area(s) need not
receive an immediate or direct benefit from the institution's specific
participation in the broader statewide or regional organization or
activity, provided the purpose, mandate, or function of the
organization or activity includes serving geographies or individuals
located in the assessment area(s).
In May 1999, we first proposed revising this question and answer to
permit consideration of support for community development organizations
or activities serving individuals or geographies located somewhere in
the broader statewide or regional area that includes the institution's
assessment area. This consideration would be given even if the
organization or activity did not have the purpose, mandate or function
of serving geographies or individuals within the institution's
assessment area(s). Most commenters responding to the 1999 proposal
appeared to favor the original proposed revision, as it would provide
increased flexibility in engaging in community development activities.
However, it appeared that a number of those commenters did not
recognize the revised answer as an expansion of existing options for
institutions to engage in community development activities outside
their assessment area(s). Therefore, we re-proposed for public comment
a slightly revised question and answer to ensure that the public
understood that the revised question and answer expands the current
guidance.
The question and answer, as it was re-proposed in April 2000,
contained two approaches to determine whether qualified investments and
community development loans or services benefit an institution's
assessment area(s) or a broader statewide or regional area that
includes the institution's assessment area(s). First, as the agencies
have always maintained, if an activity supports an organization or
program that benefits the institution's assessment area or a broader
statewide or regional area that is larger than, but includes, the
assessment area(s), the activity will be considered if the purpose,
mandate, or function of the organization or activity includes serving
the assessment area(s). Second, if, in light of its performance
context, an institution has adequately addressed the community
development needs of its assessment area(s), examiners will consider
community development activities that benefit low-and moderate-income
individuals or geographies somewhere in the broader statewide or
regional area that includes the assessment area(s), even if those
activities do not have a purpose, mandate, or function of benefiting
the institution's assessment area(s).
The following example explained the two approaches. An institution
is located in Chicago. Its assessment area is the Chicago metropolitan
area. Its community development activities include loans, investments,
and services in organizations and projects located in and benefiting
Chicago, its assessment area. These activities would be considered
under the first approach. The institution's community development
activities also include loans and investments in several projects that
benefit the entire state of Illinois, including Chicago. These
activities also are considered under the first approach. In addition,
the institution participated in a community development activity that
benefits the entire Great Lakes region, including the Chicago
metropolitan area. This activity would also be considered under the
first approach. Assume that, after considering its performance context,
examiners have determined that the institution has adequately addressed
the community development needs of its assessment area through loans,
investments or services considered under the first approach. Examiners
then would also consider the institution's investment in a community
development organization located in Decatur, IL, that will serve only
the Decatur area--with no potential that it will ever benefit Chicago,
the institution's assessment area. Decatur, of course, is in the
statewide area (Illinois) that includes the institution's assessment
area. The institution would receive consideration for this activity
under the second approach.
The agencies received 14 letters commenting on the proposed
question and answer. All of the commenters were generally in favor of
the proposed question and answer. As one financial institution
commenter stated, ``We believe that community development organizations
and programs that operate on a local, statewide, or even multi-state
basis ultimately provide benefit to all surrounding areas. Such
initiatives help stabilize these markets and provide a ripple effect on
neighboring geographies. As the capacity of one area grows, it is
possible to leverage that effort to build community development
momentum.''
The agencies are adopting the amended question and answer,
Secs. ____.12(i) & 563e.12(h)-5, as it was proposed in April 2000.
What Is Meant by the Term ``Regional Area''?
In addition, the agencies are also adopting the conforming
amendment to question and answer, Secs. ____.12(i) & 563e.12(h)-6,
which was also proposed in April 2000. This revised question and answer
is necessary so that, in cases where an institution has already
adequately addressed the community development needs of its assessment
area(s), examiner discretion does not unduly impede the broader choice
and judgment permitted to institutions for performing community
development activities in the relevant statewide or regional area. This
conforming amendment clarifies that, if an institution has adequately
addressed the community development needs of its assessment area(s),
examiners will consider its community development activities that
benefit geographies or individuals located somewhere within the broader
statewide or regional area that includes the institution's assessment
area(s), even if those activities do not benefit its assessment
area(s).
New Questions and Answers
The agencies are adopting six new questions and answers, which are
discussed below.
Revitalize and Stabilize Low- and Moderate-Income Areas
Financial institutions and examiners have asked us about the types
of activities that are considered to revitalize and/or stabilize low-
and moderate-income areas. In response, the agencies are adopting a new
question and answer, Secs. ____.12(h)(4) & 563e.12(g)(4)-1, which
provides
[[Page 36622]]
guidance about such activities. It states that activities that
revitalize or stabilize a low- or moderate-income geography are
activities that help to attract and retain businesses and residents.
Examiners will presume that an activity revitalizes or stabilizes a
low- or moderate-income geography if the activity has been approved by
the governing board of an Enterprise Community or Empowerment Zone
(designated pursuant to 26 U.S.C. 1391) and is consistent with the
board's strategic plan. They will make the same presumption if the
activity has received similar official designation as consistent with a
federal, state, local, or tribal government plan for the revitalization
or stabilization of the low- or moderate-income geography. To determine
whether other activities revitalize or stabilize a low- or moderate-
income geography, examiners will evaluate the activity's actual impact
on the geography, if information about this is available. If not,
examiners will determine whether the activity is consistent with the
community's formal or informal plans for the revitalization and
stabilization of the low- or moderate-income geography.
Types of Lending Activities That May Warrant Favorable Consideration as
Activities Responsive to the Credit Needs of an Institution's Community
Credit needs vary from community to community. However, there are
some lending activities that are likely to be responsive in helping to
meet the credit needs of many communities. The agencies are adopting a
new question and answer, Sec. ____.22(a)-1, which identifies the
following activities as being responsive to the needs of an
institution's assessment area:
Providing loan programs that include a financial education
component about how to avoid lending activities that may be abusive or
otherwise unsuitable;
Establishing loan programs that provide small, unsecured
consumer loans in a safe and sound manner (i.e., based on the
borrower's ability to repay) and with reasonable terms;
Offering lending programs, which feature reporting to
consumer reporting agencies, that transition borrowers from loans with
higher interest rates and fees (based on credit risk) to lower-cost
loans, consistent with safe and sound lending practices. Reporting to
consumer reporting agencies allows borrowers accessing these programs
the opportunity to improve their credit histories and thereby improve
their access to competitive credit products. Examiners may consider
favorably such lending activities, which have features augmenting the
success and effectiveness of the institution's lending programs.
Indirect Community Development Services
The agencies are adopting a new question and answer,
Sec. ____.24(e)-1, that addresses the conditions under which an
institution may receive consideration for community development
services offered by affiliates or third parties. The guidance states
that, at an institution's option, the agencies will consider services
performed by an affiliate or by a third party on the institution's
behalf under the service test if the services provided enable the
institution to help meet the credit needs of its community. Indirect
services that enhance an institution's ability to deliver credit
products or deposit services within its community and that can be
quantified may be considered under the service test if those services
have not been considered already under the lending or investment test.
For example, an institution that contracts with a community
organization to provide home ownership counseling to low- and moderate-
income home buyers as part of the institution's mortgage program may
receive consideration for that indirect service under the service test.
In contrast, donations to a community organization that offers
financial services to low- or moderate-income individuals may be
considered under the investment test, but would not also be eligible
for consideration under the service test. Services performed by an
affiliate will be treated the same as affiliate loans and investments
made in the institution's assessment area and may be considered if the
service is not claimed by any other institution.
Credit Card Banks' Activities
The agencies are adopting a new question and answer,
Sec. ____.25(a)-1, that applies only to credit card banks that are
exempt from the definition of ``bank'' in the Bank Holding Company Act
(BHCA), as amended by the Competitive Equality Banking Act of 1987
(CEBA credit card banks). This new guidance explains how a CEBA credit
card bank (if designated as a limited-purpose institution) can meet its
community's credit needs without losing its exemption from the
definition of ``bank.'' This guidance memorializes a letter issued in
1996 by staff at the Board of Governors of the Federal Reserve System
to the president of the Association of Financial Services Holding
Companies. The guidance clarifies that, although the BHCA restricts
CEBA credit card banks to credit card operations, a CEBA credit card
bank can engage in community development activities without losing its
exemption under the BHCA. A CEBA credit card bank could provide
community development services and investments without engaging in
operations other than credit card operations. For example, the bank
could provide credit card counseling, or the financial expertise of its
executives, free of charge, to community development organizations. In
addition, a CEBA credit card bank could make qualified investments, as
long as the investments meet the guidelines for passive and
noncontrolling investments provided in the BHCA and the Board's
Regulation Y. Finally, although a CEBA credit card bank cannot make any
loans other than credit card loans, under Sec. ____.25(d)(2) (community
development test-- indirect activities), the bank could elect to have
part of its qualified passive and noncontrolling investments in a
third-party lending consortium considered as community development
lending, provided that the consortium's loans otherwise meet the
requirements for community development lending. When assessing a CEBA
credit card bank's CRA performance under the community development
test, examiners will take into account the bank's performance context.
In particular, examiners will consider the legal constraints imposed by
the BHCA on the bank's activities as part of the bank's performance
context in Sec. ____.21(b)(4).
Effect of Evidence of Other Illegal Credit Practices
Section ____.28(c) of our regulations states that evidence of
discriminatory or other illegal credit practices adversely affects the
evaluation of an institution's performance. The agencies are adopting a
new question and answer addressing this provision. The new question and
answer, Sec. ____.28(c)-1, discusses what is meant by ``discriminatory
or other illegal credit practices.'' It explains that an institution
engages in discriminatory credit practices if it discourages or
discriminates against credit applicants or borrowers on a prohibited
basis, in violation, for example, of the Fair Housing Act or the Equal
Credit Opportunity Act (as implemented by Regulation B). Examples of
other illegal credit practices inconsistent with helping to meet
community credit needs include violations of:
The Truth in Lending Act regarding rescission of certain
mortgage transactions and regarding disclosures and certain loan term
restrictions in
[[Page 36623]]
connection with credit transactions that are subject to the Home
Ownership and Equity Protection Act;
The Real Estate Settlement Procedures Act regarding the
giving and accepting of referral fees, unearned fees or kickbacks in
connection with certain mortgage transactions; and
The Federal Trade Commission Act regarding unfair or
deceptive acts or practices.
Examiners will determine the effect of evidence of illegal credit
practices as set forth in examination procedures and Sec. ____.28(c) of
the regulations.
Violations of other provisions of the consumer protection laws
generally will not adversely affect an institution's CRA rating, but
may warrant the inclusion of comments in an institution's performance
evaluation. These comments may address the institution's policies,
procedures, training programs, and internal assessment efforts.
Electronic Public Files
Some financial institutions have inquired whether it is acceptable
to maintain the required public file information electronically on an
intranet or the Internet. The agencies believe that an institution may
keep all or part of its public file on an intranet or the Internet,
provided that the institution maintains all of the information, either
in paper or electronic form, that is required in Sec. ____.43 of the
regulations. An institution that opts to keep part or all of its public
file on an intranet or the Internet must follow the rules in
Sec. ____.43(c)(1) and (2) as to what information is required to be
kept at a main office and at a branch. The institution must also ensure
that the information required to be maintained at a main office and
branch, if kept electronically, can be readily downloaded and printed
for any member of the public who requests a hard copy of the
information.
The agencies are adopting a new question and answer,
Sec. ____.43(c)-2, which addresses maintaining public files on an
intranet or the Internet.
Revised Questions and Answers
The agencies are revising eight existing questions and answers,
which are discussed below.
New Markets Venture Capital Companies
The Consolidated Appropriations Act of 2001 (Pub. L. 106-554),
enacted December 21, 2000, included the New Markets Venture Capital
Program Act of 2000. The New Markets Venture Capital Program, which is
administered by the Small Business Administration (SBA), allows the SBA
to designate New Market Venture Capital companies (NMVCCs). NMVCCs are
investment funds that will promote economic development and create
wealth and job opportunities in low-income geographies and among
individuals living in such areas through equity-type investments in
smaller enterprises located in those low-income geographical areas.
Based on the statutory mandate for NMVCCs, the agencies will
presume that any loan to or lawful investment in NMVCCs will promote
economic development. Therefore, we are revising Sec. ____.12(h)(3)-1
to reflect this presumption.
Reporting Loans With a Business Purpose That Are Secured by Residential
Real Estate
The agencies are adopting revisions to two existing questions and
answers to accommodate the difference in treatment between the Call
Report and Thrift Financial Report (TFR) instructions concerning loans
secured by residential real estate that have a business purpose. Under
the Call Report instructions, loans secured by nonfarm residential real
estate that are used to finance small businesses must be reported as
``loans secured by real estate'' unless the security interest in the
nonfarm residential real estate is taken only as an abundance of
caution. The TFR instructions, however, allow an institution to
classify a loan that meets the definition of a mortgage loan, but that
is used to finance small businesses, as a mortgage loan or as a
nonmortgage loan according to the purpose of the loan, at the option of
the reporting institution. As a result, institutions that file Call
Reports and those that file TFRs may treat loans secured by nonfarm
residential real estate, but that are for the purpose of financing a
small business, in different ways.
The agencies are revising Secs. ____.12(u) & 563e.12(t)-3 and
Sec. ____.42(c)(2)-1 to be consistent with guidance provided in the
Call Report and TFR instructions. The agencies are bifurcating the
answer to Secs. ____.12(u) & 563e.12(t)-3 to account for the different
treatment in the Call Report and TFR instructions. The guidance states
that, for banks filing Call Reports, loans secured by nonfarm
residential real estate to finance small businesses will typically not
be included as ``loans to small businesses'' for Call Report purposes,
unless the security interest in the property is taken only as an
abundance of caution. The agencies recognize that many small businesses
are financed by loans that would not have been made or would have been
made on less favorable terms had they not been secured by residential
real estate. If these loans have a primary purpose of community
development, as defined in the regulations, they may be reported as
community development loans. Otherwise, at an institution's option, the
institution may collect and maintain data separately concerning these
loans and request that the data be considered in its CRA evaluation as
``Other Secured Lines/Loans for Purposes of Small Business.''
For institutions that file TFRs, depending on how a loan is
classified, it is possible that a loan secured by nonfarm residential
real estate that finances a small business will be reported as a
``small business loan.'' Loans secured by nonfarm residential real
estate to finance small businesses may be reported as small business
loans if they are reported on the TFR as nonmortgage, commercial loans.
Otherwise, loans that meet the definition of mortgage loans, for TFR
reporting purposes, may be classified as mortgage loans. These loans
may be reported as community development loans, if appropriate, or
collected as ``Other Secured Lines/Loans for Purposes of Small
Business.''
The guidance provided in Sec. ____.42(c)(2)-1 is being revised to
be applicable only to banks that file Call Reports. This question and
answer is inapplicable to thrifts that file TFRs. The question and
answer reiterates that banks that make loans to finance small
businesses, which are secured by nonfarm, residential real estate, and
for which the security interest was not taken only as an abundance of
caution, may either report the loans as community development loans, if
appropriate, or may collect and maintain loan information as ``Other
Secured Lines/Loans for Purposes of Small Business.''
Clarification of Sec. ____.21(b)(5)-1 Addressing Assigned Ratings Being
Adversely Affected by Poor Past Performance
The agencies are clarifying the wording of the answer to this
question. We intend no substantive change.
Home Mortgage Loan Modification, Extension, and Consolidation
Agreements (MECAs)
In several states, financial institutions use MECAs as an
alternative to refinancings for their customers. Existing guidance
Sec. ____.22(a)(2)-3 states that an institution may receive
[[Page 36624]]
consideration under CRA as ``other loan data'' for MECAs, in which it
obtains loans from other institutions without actually purchasing or
refinancing the loans. The agencies are clarifying this guidance to
indicate that it applies only to home mortgage loans.
Reporting Lines of Credit
The agencies have received inquiries from examiners and our
institutions about how institutions should report increases to small
business or small farm lines of credit once the total line exceeds the
$1 million or $500,000 limit for reporting a loan to a small business
or a loan to a small farm, respectively, as described in the Call
Report or TFR instructions. Because the Call Report and TFR no longer
consider lines of credit that have exceeded the $1 million or $500,000
thresholds as loans to small businesses or loans to small farms,
respectively, such lines would also no longer be considered small
business or small farm loans for CRA purposes.
The agencies are revising existing question and answer
Sec. ____.42-3 to clarify this view.
Clarification of Sec. ____.42(a)-5 Addressing Reporting Data on
Refinancings and Renewals of Small Business and Small Farm Loans
In the 2000 Interagency Questions and Answers, the agencies adopted
a revised version of Sec. ____.42(a)-5, which discusses collection and
reporting of data on small business and farm loans that are refinanced
or renewed. The 2000 guidance suggests that if a renewal of $15,000 and
new money of $5,000 are provided in connection with the same loan to
the same borrower, the two amounts should be reported separately as two
separate originations. In response to several communications from
institutions indicating that their data systems may not allow such a
transaction to be reported as two originations, the agencies are
clarifying that institutions may report the two originations (the
renewal and the increase in the line) together as a single origination.
In the example above, an institution may report one origination of
$20,000.
We have also deleted from the answer to this question information
that was relevant to data collected in the year 2000 and reported in
2001. Because this data should have been reported by March 1, 2001,
this portion of the answer is no longer pertinent. The remaining answer
is applicable beginning with data on small business and small farm
collected in 2000 and reported in 2001.
Updating Sec. ____.42-4
Consistent with the deletion of the out-dated portion of the answer
to Sec. ____.42(a)-5, we are also deleting the part of the answer to
Sec. ____.42 `` - that was relevant only to data that was collected in
2000 and reported in 2001. The remaining answer is applicable beginning
with data about renewals of lines of credit collected in 2000 that will
be reported in 2001.
Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA)
The SBREFA requires an agency, for each rule for which it prepares
a final regulatory flexibility analysis, to publish one or more
compliance guides to help small entities understand how to comply with
the rule.
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
agencies certified that their proposed CRA rule would not have a
significant economic impact on a substantial number of small entities
and invited public comments on that determination. See 58 FR 67478
(Dec. 21, 1993); 59 FR 51250 (Oct. 7, 1994). In response to public
comment, the agencies voluntarily prepared a final regulatory
flexibility analysis for the joint final rule, although the analysis
was not required because it supported the agencies' earlier
certification regarding the proposed rule. Because a regulatory
flexibility analysis was not required, section 212 of the SBREFA does
not apply to the final CRA rule. However, in their continuing efforts
to provide clear, understandable regulations and to comply with the
spirit of the SBREFA, the agencies have compiled the Interagency
Questions and Answers. The Interagency Questions and Answers serve the
same purpose as the compliance guide described in the SBREFA by
providing guidance on a variety of issues of particular concern to
small banks and thrifts.
The text of the Interagency Questions and Answers follows:
Interagency Questions and Answers Regarding Community Reinvestment
Sec. ____.11--Authority, Purposes, and Scope
Sec. ____.11(c) Scope
Secs. ____.11(c)(3) & 563e.11(c)(2) Certain Special Purpose
Institutions
Secs. ____.11(c)(3) & 563e.11(c)(2)-1: Is the list of special
purpose institutions exclusive?
A1. No, there may be other examples of special purpose
institutions. These institutions engage in specialized activities that
do not involve granting credit to the public in the ordinary course of
business. Special purpose institutions typically serve as correspondent
banks, trust companies, or clearing agents or engage only in
specialized services, such as cash management controlled disbursement
services. A financial institution, however, does not become a special
purpose institution merely by ceasing to make loans and, instead,
making investments and providing other retail banking services.
Sec. ____.11(c)(3) & 563e.11(c)(2)-2: To be a special purpose
institution, must an institution limit its activities in its charter?
A2. No. A special purpose institution may, but is not required to,
limit the scope of its activities in its charter, articles of
association or other corporate organizational documents. An institution
that does not have legal limitations on its activities, but has
voluntarily limited its activities, however, would no longer be exempt
from Community Reinvestment Act (CRA) requirements if it subsequently
engaged in activities that involve granting credit to the public in the
ordinary course of business. An institution that believes it is exempt
from CRA as a special purpose institution should seek confirmation of
this status from its supervisory agency.
Sec. ____.12--Definitions
Sec. ____.12(a) Affiliate
Sec. ____.12(a)-1: Does the definition of ``affiliate'' include
subsidiaries of an institution?
A1. Yes, ``affiliate'' includes any company that controls, is
controlled by, or is under common control with another company. An
institution's subsidiary is controlled by the institution and is,
therefore, an affiliate.
Secs. ____.12(f) & 563e.12(e) Branch
Secs. ____.12(f)-563e.12(e) & 1: Do the definitions of ``branch,''
``automated teller machine (ATM),'' and ``remote service facility
(RSF)'' include mobile branches, ATMs, and RSFs?
A1. Yes. Staffed mobile offices that are authorized as branches are
considered ``branches'' and mobile ATMs and RSFs are considered
``ATMs'' and ``RSFs.''
Secs. ____.12(f) & 563e.12(e)-2: Are loan production offices (LPOs)
branches for purposes of the CRA?
A2. LPOs and other offices are not ``branches'' unless they are
authorized as branches of the institution through the regulatory
approval process of the institution's supervisory agency.
[[Page 36625]]
Secs. ____.12(h)-563e.12(g) Community Development
Secs. ____.12(h) & 563e.12(g)-1: Are community development
activities limited to those that promote economic development?
A1. No. Although the definition of ``community development''
includes activities that promote economic development by financing
small businesses or farms, the rule does not limit community
development loans and services and qualified investments to those
activities. Community development also includes community- or tribal-
based child care, educational, health, or social services targeted to
low- or moderate-income persons, affordable housing for low- or
moderate-income individuals, and activities that revitalize or
stabilize low- or moderate-income areas.
Secs. ____.12(h) & 563e.12(g)-2: Must a community development
activity occur inside a low- or moderate-income area in order for an
institution to receive CRA consideration for the activity?
A2. No. Community development includes activities outside of low-
and moderate-income areas that provide affordable housing for, or
community services targeted to, low- or moderate-income individuals and
activities that promote economic development by financing small
businesses and farms. Activities that stabilize or revitalize
particular low- or moderate-income areas (including by creating,
retaining, or improving jobs for low- or moderate-income persons) also
qualify as community development, even if the activities are not
located in these low- or moderate-income areas. One example is
financing a supermarket that serves as an anchor store in a small strip
mall located at the edge of a middle-income area, if the mall
stabilizes the adjacent low-income community by providing needed
shopping services that are not otherwise available in the low-income
community.
Secs. ____.12(h) & 563e.12(g)-3: Does the regulation provide
flexibility in considering performance in high-cost areas?
A3. Yes, the flexibility of the performance standards allows
examiners to account in their evaluations for conditions in high-cost
areas. Examiners consider lending and services to individuals and
geographies of all income levels and businesses of all sizes and
revenues. In addition, the flexibility in the requirement that
community development loans, community development services, and
qualified investments have as their ``primary'' purpose community
development allows examiners to account for conditions in high-cost
areas. For example, examiners could take into account the fact that
activities address a credit shortage among middle-income people or
areas caused by the disproportionately high cost of building,
maintaining or acquiring a house when determining whether an
institution's loan to or investment in an organization that funds
affordable housing for middle-income people or areas, as well as low-
and moderate-income people or areas, has as its primary purpose
community development.
Secs. ____.12(h)(1) & 563e.12(g)(1) Affordable Housing (Including
Multifamily Rental Housing) for Low- or Moderate-Income Individuals
Secs. ____.12(h)(1) & 563e.12(g)(1)-1: When determining whether a
project is ``affordable housing for low- or moderate-income
individuals,'' thereby meeting the definition of ``community
development,'' will it be sufficient to use a formula that relates the
cost of ownership, rental or borrowing to the income levels in the area
as the only factor, regardless of whether the users, likely users, or
beneficiaries of that affordable housing are low- or moderate-income
individuals?
A1. The concept of ``affordable housing'' for low- or moderate-
income individuals does hinge on whether low- or moderate-income
individuals benefit, or are likely to benefit, from the housing. It
would be inappropriate to give consideration to a project that
exclusively or predominately houses families that are not low- or
moderate-income simply because the rents or housing prices are set
according to a particular formula.
For projects that do not yet have occupants, and for which the
income of the potential occupants cannot be determined in advance, or
in other projects where the income of occupants cannot be verified,
examiners will review factors such as demographic, economic and market
data to determine the likelihood that the housing will ``primarily''
accommodate low- or moderate-income individuals. For example, examiners
may look at median rents of the assessment area and the project; the
median home value of either the assessment area, low- or moderate-
income geographies or the project; the low- or moderate-income
population in the area of the project; or the past performance record
of the organization(s) undertaking the project. Further, such a project
could receive consideration if its express, bona fide intent, as
stated, for example, in a prospectus, loan proposal or community action
plan, is community development.
Secs. ____.12(h)(3) & 563e.12(g)(3) Activities That Promote Economic
Development by Financing Businesses or Farms That Meet Certain Size
Eligibility Standards
Sec. ____.12(h)(3) & 563e.12(g)(3)-1: ``Community development''
includes activities that promote economic development by financing
businesses or farms that meet certain size eligibility standards. Are
all activities that finance businesses and farms that meet these size
eligibility standards considered to be community development?
A1. No. To be considered as ``community development'' under
Secs. ____.12(h)(3) and 563e.12(g)(3), a loan, investment or service,
whether made directly or through an intermediary, must meet both a size
test and a purpose test. An activity meets the size requirement if it
finances entities that either meet the size eligibility standards of
the Small Business Administration's Development Company (SBDC) or Small
Business Investment Company (SBIC) programs, or have gross annual
revenues of $1 million or less. To meet the purpose test, the activity
must promote economic development. An activity is considered to promote
economic development if it supports permanent job creation, retention,
and/or improvement for persons who are currently low- or moderate-
income, or supports permanent job creation, retention, and/or
improvement either in low- or moderate-income geographies or in areas
targeted for redevelopment by Federal, state, local or tribal
governments. The agencies will presume that any loan to or investment
in a SBDC, SBIC, or New Markets Venture Capital Company promotes
economic development.
In addition to their quantitative assessment of the amount of a
financial institution's community development activities, examiners
must make qualitative assessments of an institution's leadership in
community development matters and the complexity, responsiveness, and
impact of the community development activities of the institution. In
reaching a conclusion about the impact of an institution's community
development activities, examiners may, for example, determine that a
loan to a small business in a low- or moderate-income geography that
provides needed jobs and services in that area may have a greater
impact and be more responsive to the community credit needs than does a
loan to a small business in the
[[Page 36626]]
same geography that does not directly provide additional jobs or
services to the community.
Secs. ____.12(h)(4) & 563e.12(g)(4) Activities That Revitalize or
Stabilize Low- or Moderate-Income Geographies
Sec. ____.12(h)(4) & 563e.12(g)(4)-1: What are activities that
revitalize or stabilize a low- or moderate-income geography?
A1. Activities that revitalize or stabilize a low- or moderate-
income geography are activities that help to attract and retain
businesses and residents. Examiners will presume that an activity
revitalizes or stabilizes a low- or moderate-income geography if the
activity has been approved by the governing board of an Enterprise
Community or Empowerment Zone (designated pursuant to 26 U.S.C. 1391)
and is consistent with the board's strategic plan. They will make the
same presumption if the activity has received similar official
designation as consistent with a federal, state, local or tribal
government plan for the revitalization or stabilization of the
geography. To determine whether other activities revitalize or
stabilize a low- or moderate-income geography, examiners will evaluate
the activity's actual impact on the geography, if information about
this is available. If not, examiners will determine whether the
activity is consistent with the community's formal or informal plans
for the revitalization and stabilization of the low- or moderate-income
geography. For more information on what activities revitalize or
stabilize a low- or moderate-income geography, see Secs. ____.12(h) &
563e.12(g)-2 and Secs. ____.12(i) & 563e.12(h)-4.
Secs. ____.12(i) & 563e.12(h) Community Development Loan
Secs. ____.12(i) & 563e.12(h)-1: What are examples of community
development loans?
A1. Examples of community development loans include, but are not
limited to, loans to:
Borrowers for affordable housing rehabilitation and
construction, including construction and permanent financing of
multifamily rental property serving low- and moderate-income persons;
Not-for-profit organizations serving primarily low- and
moderate-income housing or other community development needs;
Borrowers to construct or rehabilitate community
facilities that are located in low- and moderate-income areas or that
serve primarily low- and moderate-income individuals;
Financial intermediaries including Community Development
Financial Institutions (CDFIs), Community Development Corporations
(CDCs), minority- and women-owned financial institutions, community
loan funds or pools, and low-income or community development credit
unions that primarily lend or facilitate lending to promote community
development.
Local, state, and tribal governments for community
development activities; and
Borrowers to finance environmental clean-up or
redevelopment of an industrial site as part of an effort to revitalize
the low- or moderate-income community in which the property is located.
The rehabilitation and construction of affordable housing or
community facilities, referred to above, may include the abatement or
remediation of, or other actions to correct, environmental hazards,
such as lead-based paint, that are present in the housing, facilities,
or site.
Secs. ____.12(i) & 563e.12(h)-2: If a retail institution that is
not required to report under the Home Mortgage Disclosure Act (HMDA)
makes affordable home mortgage loans that would be HMDA-reportable home
mortgage loans if it were a reporting institution, or if a small
institution that is not required to collect and report loan data under
CRA makes small business and small farm loans and consumer loans that
would be collected and/or reported if the institution were a large
institution, may the institution have these loans considered as
community development loans?
A2. No. Although small institutions are not required to report or
collect information on small business and small farm loans and consumer
loans, and some institutions are not required to report information
about their home mortgage loans under HMDA, if these institutions are
retail institutions, the agencies will consider in their CRA
evaluations the institutions' originations and purchases of loans that
would have been collected or reported as small business, small farm,
consumer or home mortgage loans, had the institution been a collecting
and reporting institution under the CRA or the HMDA. Therefore, these
loans will not be considered as community development loans.
Multifamily dwelling loans, however, may be considered as community
development loans as well as home mortgage loans. See also
Sec. ____.42(b)(2)-2.
Secs. ____.12(i) & 563e.12(h)-3: Do secured credit cards or other
credit card programs targeted to low- or moderate-income individuals
qualify as community development loans?
A3. No. Credit cards issued to low- or moderate-income individuals
for household, family, or other personal expenditures, whether as part
of a program targeted to such individuals or otherwise, do not qualify
as community development loans because they do not have as their
primary purpose any of the activities included in the definition of
``community development.''
Secs. ____.12(i) & 563e.12(h)-4: The regulation indicates that
community development includes ``activities that revitalize or
stabilize low- or moderate-income geographies.'' Do all loans in a low-
to moderate-income geography have a stabilizing effect?
A4. No. Some loans may provide only indirect or short-term benefits
to low- or moderate-income individuals in a low- or moderate-income
geography. These loans are not considered to have a community
development purpose. For example, a loan for upper-income housing in a
distressed area is not considered to have a community development
purpose simply because of the indirect benefit to low- or moderate-
income persons from construction jobs or the increase in the local tax
base that supports enhanced services to low- and moderate-income area
residents. On the other hand, a loan for an anchor business in a
distressed area (or a nearby area), that employs or serves residents of
the area, and thus stabilizes the area, may be considered to have a
community development purpose. For example, in an underserved,
distressed area, a loan for a pharmacy that employs, and provides
supplies to, residents of the area promotes community development.
Secs. ____.12(i) & 563e.12(h)-5: Must there be some immediate or
direct benefit to the institution's assessment area(s) to satisfy the
regulations' requirement that qualified investments and community
development loans or services benefit an institution's assessment
area(s) or a broader statewide or regional area that includes the
institution's assessment area(s)?
A5. No. The regulations recognize that community development
organizations and programs are efficient and effective ways for
institutions to promote community development. These organizations and
programs often operate on a statewide or even multi-state basis.
Therefore, an institution's activity is considered a community
development loan or service or a qualified investment if it supports an
organization or activity that covers an area that is larger than, but
includes, the institution's assessment area(s). The
[[Page 36627]]
institution's assessment area(s) need not receive an immediate or
direct benefit from the institution's specific participation in the
broader organization or activity, provided that the purpose, mandate,
or function of the organization or activity includes serving
geographies or individuals located within the institution's assessment
area(s).
In addition, a retail institution that, considering its performance
context, has adequately addressed the community development needs of
its assessment area(s) will receive consideration for certain other
community development activities. These community development
activities must benefit geographies or individuals located somewhere
within a broader statewide or regional area that includes the
institution's assessment area(s). Examiners will consider these
activities even if they will not benefit the institution's assessment
area(s).
Secs. ____.12(i) & 563e.12(h)-6: What is meant by the term
``regional area''?
A6. A ``regional area'' may be as small as a city or county or as
large as a multistate area. For example, the ``mid-Atlantic states''
may comprise a regional area.
Community development loans and services and qualified investments
to statewide or regional organizations that have a bona fide purpose,
mandate, or function that includes serving the geographies or
individuals within the institution's assessment area(s) will be
considered as addressing assessment area needs. When examiners evaluate
community development loans and services and qualified investments that
benefit a regional area that includes the institution's assessment
area(s), they will consider the institution's performance context as
well as the size of the regional area and the actual or potential
benefit to the institution's assessment area(s). With larger regional
areas, benefit to the institution's assessment area(s) may be diffused
and, thus less responsive to assessment area needs.
In addition, as long as an institution has adequately addressed the
community development needs of its assessment area(s), it will also
receive consideration for community development activities that benefit
geographies or individuals located somewhere within the broader
statewide or regional area that includes the institution's assessment
area(s), even if those activities do not benefit its assessment
area(s).
Secs. ____.12(i) & 563e.12(h)-7: What is meant by the term
``primary purpose'' as that term is used to define what constitutes a
community development loan, a qualified investment or a community
development service?
A7. A loan, investment or service has as its primary purpose
community development when it is designed for the express purpose of
revitalizing or stabilizing low-or moderate-income areas, providing
affordable housing for, or community services targeted to, low-or
moderate-income persons, or promoting economic development by financing
small businesses and farms that meet the requirements set forth in
Secs. ____.12(h) or 563e.12(g). To determine whether an activity is
designed for an express community development purpose, the agencies
apply one of two approaches. First, if a majority of the dollars or
beneficiaries of the activity are identifiable to one or more of the
enumerated community development purposes, then the activity will be
considered to possess the requisite primary purpose. Alternatively,
where the measurable portion of any benefit bestowed or dollars applied
to the community development purpose is less than a majority of the
entire activity's benefits or dollar value, then the activity may still
be considered to possess the requisite primary purpose if (1) the
express, bona fide intent of the activity, as stated, for example, in a
prospectus, loan proposal, or community action plan, is primarily one
or more of the enumerated community development purposes; (2) the
activity is specifically structured (given any relevant market or legal
constraints or performance context factors) to achieve the expressed
community development purpose; and (3) the activity accomplishes, or is
reasonably certain to accomplish, the community development purpose
involved. The fact that an activity provides indirect or short-term
benefits to low-or moderate-income persons does not make the activity
community development, nor does the mere presence of such indirect or
short-term benefits constitute a primary purpose of community
development. Financial institutions that want examiners to consider
certain activities under either approach should be prepared to
demonstrate the activities' qualifications.
Secs. ____.12(j) & 563e.12(i) Community Development Service
Secs. ____.12(j) & 563e.12(i)-1: In addition to meeting the
definition of ``community development'' in the regulation, community
development services must also be related to the provision of financial
services. What is meant by ``provision of financial services''?
A1. Providing financial services means providing services of the
type generally provided by the financial services industry. Providing
financial services often involves informing community members about how
to get or use credit or otherwise providing credit services or
information to the community. For example, service on the board of
directors of an organization that promotes credit availability or
finances affordable housing is related to the provision of financial
services. Providing technical assistance about financial services to
community-based groups, local or tribal government agencies, or
intermediaries that help to meet the credit needs of low-and moderate-
income individuals or small businesses and farms is also providing
financial services. By contrast, activities that do not take advantage
of the employees' financial expertise, such as neighborhood cleanups,
do not involve the provision of financial services.
Secs. ____.12(j) & 563e.12(i)-2: Are personal charitable activities
provided by an institution's employees or directors outside the
ordinary course of their employment considered community development
services?
A2. No. Services must be provided as a representative of the
institution. For example, if a financial institution's director, on her
own time and not as a representative of the institution, volunteers one
evening a week at a local community development corporation's financial
counseling program, the institution may not consider this activity a
community development service.
Secs. ____.12(j) & 563e.12(i)-3: What are examples of community
development services?
A3. Examples of community development services include, but are not
limited to, the following:
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' Affordable Housing Program;
Lending employees to provide financial services for
organizations facilitating affordable housing construction and
rehabilitation or development of affordable housing;
Providing credit counseling, home-buyer and home-
maintenance counseling, financial planning or other
[[Page 36628]]
financial services education to promote community development and
affordable housing;
Establishing school savings programs and developing or
teaching financial education curricula for low-or moderate-income
individuals;
Providing electronic benefits transfer and point of sale
terminal systems to improve access to financial services, such as by
decreasing costs, for low- or moderate-income individuals; and
Providing other financial services with the primary
purpose of community development, such as low-cost bank accounts,
including ``Electronic Transfer Accounts'' provided pursuant to the
Debt Collection Improvement Act of 1996, or free government check
cashing that increases access to financial services for low- or
moderate-income individuals.
Examples of technical assistance activities that might be provided
to community development organizations include:
Serving on a loan review committee;
Developing loan application and underwriting standards;
Developing loan processing systems;
Developing secondary market vehicles or programs;
Assisting in marketing financial services, including
development of advertising and promotions, publications, workshops and
conferences;
Furnishing financial services training for staff and
management;
Contributing accounting/bookkeeping services; and
Assisting in fund raising, including soliciting or
arranging investments.
Secs. ____.12(k) & 563e.12(j) Consumer Loan
Secs. ____.12(k) & 563e.12(j)-1: Are home equity loans considered
``consumer loans''?
A1. Home equity loans made for purposes other than home purchase,
home improvement or refinancing home purchase or home improvement loans
are consumer loans if they are extended to one or more individuals for
household, family, or other personal expenditures.
Secs. ____.12(k) & 563e.12(j)-2: May a home equity line of credit
be considered a ``consumer loan'' even if part of the line is for home
improvement purposes?
A2. If the predominant purpose of the line is home improvement, the
line may only be reported under HMDA and may not be considered a
consumer loan. However, the full amount of the line may be considered a
``consumer loan'' if its predominant purpose is for household, family,
or other personal expenditures, and to a lesser extent home
improvement, and the full amount of the line has not been reported
under HMDA. This is the case even though there may be ``double
counting'' because part of the line may also have been reported under
HMDA.
Secs. ____.12(k) & 563e.12(j)-3: How should an institution collect
or report information on loans the proceeds of which will be used for
multiple purposes?
A3. If an institution makes a single loan or provides a line of
credit to a customer to be used for both consumer and small business
purposes, consistent with the Call Report and TFR instructions, the
institution should determine the major (predominant) component of the
loan or the credit line and collect or report the entire loan or credit
line in accordance with the regulation's specifications for that loan
type.
Secs. ____.12(m) & 563e.12(l) Home Mortgage Loan
Secs. ____.12(m) & 563e.12(l)-1: Does the term ``home mortgage
loan'' include loans other than ``home purchase loans''?
A1. Yes. ``Home mortgage loan'' includes a ``home improvement
loan'' as well as a ``home purchase loan,'' as both terms are defined
in the HMDA regulation, Regulation C, 12 CFR part 203. This definition
also includes multifamily (five-or-more families) dwelling loans, loans
for the purchase of manufactured homes, and refinancings of home
improvement and home purchase loans.
Secs. ____.12(m) & 563e.12(l)-2: Some financial institutions broker
home mortgage loans. They typically take the borrower's application and
perform other settlement activities; however, they do not make the
credit decision. The broker institutions may also initially fund these
mortgage loans, then immediately assign them to another lender. Because
the broker institution does not make the credit decision, under
Regulation C (HMDA), they do not record the loans on their HMDA-LARs,
even if they fund the loans. May an institution receive any
consideration under CRA for its home mortgage loan brokerage
activities?
A2. Yes. A financial institution that funds home mortgage loans but
immediately assigns the loans to the lender that made the credit
decisions may present information about these loans to examiners for
consideration under the lending test as ``other loan data.'' Under
Regulation C, the broker institution does not record the loans on its
HMDA-LAR because it does not make the credit decisions, even if it
funds the loans. An institution electing to have these home mortgage
loans considered must maintain information about all of the home
mortgage loans that it has funded in this way. Examiners will consider
this other loan data using the same criteria by which home mortgage
loans originated or purchased by an institution are evaluated.
Institutions that do not provide funding but merely take
applications and provide settlement services for another lender that
makes the credit decisions will receive consideration for this service
as a retail banking service. Examiners will consider an institution's
mortgage brokerage services when evaluating the range of services
provided to low-, moderate-, middle-and upper-income geographies and
the degree to which the services are tailored to meet the needs of
those geographies. Alternatively, an institution's mortgage brokerage
service may be considered a community development service if the
primary purpose of the service is community development. An institution
wishing to have its mortgage brokerage service considered as a
community development service must provide sufficient information to
substantiate that its primary purpose is community development and to
establish the extent of the services provided.
Secs. ____.12(n) & 563e.12(m) Income Level
Secs. ____.12(n) & 563e.12(m)-1: Where do institutions find income
level data for geographies and individuals?
A1. The income levels for geographies, i.e., census tracts and
block numbering areas, are derived from Census Bureau information and
are updated every ten years. Institutions may contact their regional
Census Bureau office or the Census Bureau's Income Statistics Office at
(301) 763-8576 to obtain income levels for geographies. See Appendix A
of these Interagency Questions and Answers for a list of the regional
Census Bureau offices. The income levels for individuals are derived
from information calculated by the Department of Housing and Urban
Development (HUD) and updated annually. Institutions may contact HUD at
(800) 245-2691 to request a copy of ``FY [year number, e.g., 1996]
Median Family Incomes for States and their Metropolitan and
Nonmetropolitan Portions.''
[[Page 36629]]
Alternatively, institutions may obtain a list of the 1990 Census
Bureau-calculated and the annually updated HUD median family incomes
for metropolitan statistical areas (MSAs) and statewide nonmetropolitan
areas by calling the Federal Financial Institution Examination
Council's (FFIEC's) HMDA Help Line at (202) 452-2016. A free copy will
be faxed to the caller through the ``fax-back'' system. Institutions
may also call this number to have ``faxed-back'' an order form, from
which they may order a list providing the median family income level,
as a percentage of the appropriate MSA or nonmetropolitan median family
income, of every census tract and block numbering area (BNA). This list
costs $50. Institutions may also obtain the list of MSA and statewide
nonmetropolitan area median family incomes or an order form through the
FFIEC's home page on the Internet at http://www.ffiec.gov>.
Secs. ____.12(o) & 563e.12(n) Limited Purpose Institution
Secs. ____.12(o) & 563e.12(n)-1: What Constitutes a ``Narrow
Product Line'' in the Definition of ``Limited Purpose Institution''?
A1. An institution offers a narrow product line by limiting its
lending activities to a product line other than a traditional retail
product line required to be evaluated under the lending test (i.e.,
home mortgage, small business, and small farm loans). Thus, an
institution engaged only in making credit card or motor vehicle loans
offers a narrow product line, while an institution limiting its lending
activities to home mortgages is not offering a narrow product line.
Secs. ____.12(o) & 563e.12(n)-2: What factors will the agencies
consider to determine whether an institution that, if limited purpose,
makes loans outside a narrow product line, or, if wholesale, engages in
retail lending, will lose its limited purpose or wholesale designation
because of too much other lending?
A2. Wholesale institutions may engage in some retail lending
without losing their designation if this activity is incidental and
done on an accommodation basis. Similarly, limited purpose institutions
continue to meet the narrow product line requirement if they provide
other types of loans on an infrequent basis. In reviewing other lending
activities by these institutions, the agencies will consider the
following factors:
Is the other lending provided as an incident to the
institution's wholesale lending?
Are the loans provided as an accommodation to the
institution's wholesale customers?
Are the loans made only infrequently to the limited
purpose institution's customers?
Does only an insignificant portion of the institution's
total assets and income result from the other lending?
How significant a role does the institution play in
providing that type(s) of loan(s) in the institution's assessment
area(s)?
Does the institution hold itself out as offering that
type(s) of loan(s)?
Does the lending test or the community development test
present a more accurate picture of the institution's CRA performance?
Secs. ____.12(o) & 563e.12(n)-3: Do ``niche institutions'' qualify
as limited purpose (or wholesale) institutions?
A3. Generally, no. Institutions that are in the business of lending
to the public, but specialize in certain types of retail loans (for
example, home mortgage or small business loans) to certain types of
borrowers (for example, to high-end income level customers or to
corporations or partnerships of licensed professional practitioners)
(``niche institutions'') generally would not qualify as limited purpose
(or wholesale) institutions.
Secs. ____.12(s) & 563e.12(r) Qualified Investment
Secs. ____.12(s) & 563e.12(r)-1: Does the CRA regulation provide
authority for institutions to make investments?
A1. No. The CRA regulation does not provide authority for
institutions to make investments that are not otherwise allowed by
Federal law.
Secs. ____.12(s) & 563e.12(r)-2: Are mortgage-backed securities or
municipal bonds ``qualified investments''?
A2. As a general rule, mortgage-backed securities and municipal
bonds are not qualified investments because they do not have as their
primary purpose community development, as defined in the CRA
regulations. Nonetheless, mortgage-backed securities or municipal bonds
designed primarily to finance community development generally are
qualified investments. Municipal bonds or other securities with a
primary purpose of community development need not be housing-related.
For example, a bond to fund a community facility or park or to provide
sewage services as part of a plan to redevelop a low-income
neighborhood is a qualified investment. Housing-related bonds or
securities must primarily address affordable housing (including
multifamily rental housing) needs in order to qualify. See also
Sec. ____.23(b)-2.
Secs. ____.12(s) & 563e.12(r)-3: Are Federal Home Loan Bank stocks
and membership reserves with the Federal Reserve Banks ``qualified
investments''?
A3. No. Federal Home Loan Bank (FHLB) stock and membership reserves
with the Federal Reserve Banks do not have a sufficient connection to
community development to be qualified investments. However, FHLB member
institutions may receive CRA consideration for technical assistance
they provide on behalf of applicants and recipients of funding from the
FHLB's Affordable Housing Program. See Secs. ____.12(j) & 563e.12(i)-3.
Secs. ____.12(s) & 563e.12(r)-4: What are examples of qualified
investments?
A4. Examples of qualified investments include, but are not limited
to, investments, grants, deposits or shares in or to:
Financial intermediaries (including, Community Development
Financial Institutions (CDFIs), Community Development Corporations
(CDCs), minority- and women-owned financial institutions, community
loan funds, and low-income or community development credit unions) that
primarily lend or facilitate lending in low- and moderate-income areas
or to low- and moderate-income individuals in order to promote
community development, such as a CDFI that promotes economic
development on an Indian reservation;
Organizations engaged in affordable housing rehabilitation
and construction, including multifamily rental housing;
Organizations, including, for example, Small Business
Investment Companies (SBICs) and specialized SBICs, that promote
economic development by financing small businesses;
Facilities that promote community development in low- and
moderate-income areas for low- and moderate-income individuals, such as
youth programs, homeless centers, soup kitchens, health care
facilities, battered women's centers, and alcohol and drug recovery
centers;
Projects eligible for low-income housing tax credits;
State and municipal obligations, such as revenue bonds,
that specifically support affordable housing or other community
development;
Not-for-profit organizations serving low- and moderate-
income housing or other community development needs, such as counseling
for credit, home-ownership, home maintenance, and other financial
services education; and
Organizations supporting activities essential to the
capacity of low- and
[[Page 36630]]
moderate-income individuals or geographies to utilize credit or to
sustain economic development, such as, for example, day care operations
and job training programs that enable people to work.
Secs. ____.12(s) & 563e.12(r)-5: Will an institution receive
consideration for charitable contributions as ``qualified
investments''?
A5. Yes, provided they have as their primary purpose community
development as defined in the regulations. A charitable contribution,
whether in cash or an in-kind contribution of property, is included in
the term ``grant.'' A qualified investment is not disqualified because
an institution receives favorable treatment for it (for example, as a
tax deduction or credit) under the Internal Revenue Code.
Secs. ____.12(s) & 563e.12(r)-6: An institution makes or
participates in a community development loan. The institution provided
the loan at below-market interest rates or ``bought down'' the interest
rate to the borrower. Is the lost income resulting from the lower
interest rate or buy-down a qualified investment?
A6. No. The agencies will, however, consider the innovativeness and
complexity of the community development loan within the bounds of safe
and sound banking practices.
Secs. ____.12(s) & 563e.12(r)-7: Will the agencies consider as a
qualified investment the wages or other compensation of an employee or
director who provides assistance to a community development
organization on behalf of the institution?
A7. No. However, the agencies will consider donated labor of
employees or directors of a financial institution in the service test
if the activity is a community development service.
Secs. ____.12(t) & 563e.12(s) Small Institution
Secs. ____.12(t) & 563e.12(s)-1: How are the ``total bank and
thrift assets'' of a holding company determined?
A1. ``Total banking and thrift assets'' of a holding company are
determined by combining the total assets of all banks and/or thrifts
that are majority-owned by the holding company. An institution is
majority-owned if the holding company directly or indirectly owns more
than 50 percent of its outstanding voting stock.
Secs. ____.12(t) & 563e.12(s)-2: How are Federal and State branch
assets of a foreign bank calculated for purposes of the CRA?
A2. A Federal or State branch of a foreign bank is considered a
small institution if the Federal or State branch has less than $250
million in assets and the total assets of the foreign bank's or its
holding company's U.S. bank and thrift subsidiaries that are subject to
the CRA are less than $1 billion. This calculation includes not only
FDIC-insured bank and thrift subsidiaries, but also the assets of any
FDIC-insured branch of the foreign bank and the assets of any uninsured
Federal or State branch (other than a limited branch or a Federal
agency) of the foreign bank that results from an acquisition described
in section 5(a)(8) of the International Banking Act of 1978 (12 U.S.C.
Sec. 3103(a)(8)).
Secs. ____.12(u) & 563e.12(t) Small Business Loan
Secs. ____.12(u) & 563e.12(t)-1: Are loans to nonprofit
organizations considered small business loans or are they considered
community development loans?
A1. To be considered a small business loan, a loan must meet the
definition of ``loan to small business'' in the instructions in the
``Consolidated Reports of Conditions and Income'' (Call Report) and
``Thrift Financial Reports'' (TFR). In general, a loan to a nonprofit
organization, for business or farm purposes, where the loan is secured
by nonfarm nonresidential property and the original amount of the loan
is $1 million or less, if a business loan, or $500,000 or less, if a
farm loan, would be reported in the Call Report and TFR as a small
business or small farm loan. If a loan to a nonprofit organization is
reportable as a small business or small farm loan, it cannot also be
considered as a community development loan, except by a wholesale or
limited purpose institution. Loans to nonprofit organizations that are
not small business or small farm loans for Call Report and TFR purposes
may be considered as community development loans if they meet the
regulatory definition.
Secs. ____.12(u) & 563e.12(t)-2: Are loans secured by commercial
real estate considered small business loans?
A2. Yes, depending on their principal amount. Small business loans
include loans secured by ``nonfarm nonresidential properties,'' as
defined in the Call Report and TFR, in amounts less than $1 million.
Secs. ____.12(u) & 563e.12(t)-3: Are loans secured by nonfarm
residential real estate to finance small businesses ``small business
loans''?
A3. Applicable to banks filing Call Reports: Typically not. Loans
secured by nonfarm residential real estate that are used to finance
small businesses are not included as ``small business'' loans for Call
Report purposes unless the security interest in the nonfarm residential
real estate is taken only as an abundance of caution. (See Call Report
Glossary definition of ``Loan Secured by Real Estate.'') The agencies
recognize that many small businesses are financed by loans that would
not have been made or would have been made on less favorable terms had
they not been secured by residential real estate. If these loans
promote community development, as defined in the regulation, they may
be considered as community development loans. Otherwise, at an
institution's option, the institution may collect and maintain data
separately concerning these loans and request that the data be
considered in its CRA evaluation as ``Other Secured Lines/Loans for
Purposes of Small Business.''
Applicable to institutions that file TFRs: Possibly, depending how
the loan is classified for TFR purposes. Loans secured by nonfarm
residential real estate to finance small businesses may be included as
small business loans only if they are reported on the TFR as
nonmortgage, commercial loans. (See TFR Q&A No. 62.) Otherwise, loans
that meet the definition of mortgage loans, for TFR reporting purposes,
may be classified as mortgage loans.
Secs. ____.12(u) & 563e.12(t)-4: Are credit cards issued to small
businesses considered ``small business loans''?
A4. Credit cards issued to a small business or to individuals to be
used, with the institution's knowledge, as business accounts are small
business loans if they meet the definitional requirements in the Call
Report or TFR instructions.
Secs. ____.12(w) & 563e.12(v) Wholesale Institution
Secs. ____.12(w) & 563e.12(v)-1: What factors will the agencies
consider in determining whether an institution is in the business of
extending home mortgage, small business, small farm, or consumer loans
to retail customers?
A1. The agencies will consider whether:
The institution holds itself out to the retail public as
providing such loans; and
The institution's revenues from extending such loans are
significant when compared to its overall operations.
A wholesale institution may make some retail loans without losing
its wholesale designation as described above in Secs. ____.12(o) &
563e.12(n)-2.
[[Page 36631]]
Sec. ____.21--Performance Tests, Standards, and Ratings, in General
Sec. ____.21(a) Performance Tests and Standards
Sec. ____.21(a)-1: Are all community development activities
weighted equally by examiners?
A1. No. Examiners will consider the responsiveness to credit and
community development needs, as well as the innovativeness and
complexity of an institution's community development lending, qualified
investments, and community development services. These criteria include
consideration of the degree to which they serve as a catalyst for other
community development activities. The criteria are designed to add a
qualitative element to the evaluation of an institution's performance.
Sec. ____.21(b) Performance context
Sec. ____.21(b)-1: Is the performance context essentially the same
as the former regulation's needs assessment?
A1. No. The performance context is a broad range of economic,
demographic, and institution-and community-specific information that an
examiner reviews to understand the context in which an institution's
record of performance should be evaluated. The agencies will provide
examiners with much of this information prior to the examination. The
performance context is not a formal or written assessment of community
credit needs.
Sec. ____.21(b)(2) Information Maintained by the Institution or
Obtained From Community Contacts
Sec. ____.21(b)(2)-1: Will examiners consider performance context
information provided by institutions?
A1. Yes. An institution may provide examiners with any information
it deems relevant, including information on the lending, investment,
and service opportunities in its assessment area(s). This information
may include data on the business opportunities addressed by lenders not
subject to the CRA. Institutions are not required, however, to prepare
a needs assessment. If an institution provides information to
examiners, the agencies will not expect information other than what the
institution normally would develop to prepare a business plan or to
identify potential markets and customers, including low-and moderate-
income persons and geographies in its assessment area(s). The agencies
will not evaluate an institution's efforts to ascertain community
credit needs or rate an institution on the quality of any information
it provides.
Sec. ____.21(b)(2)-2: Will examiners conduct community contact
interviews as part of the examination process?
A2. Yes. Examiners will consider information obtained from
interviews with local community, civic, and government leaders. These
interviews provide examiners with knowledge regarding the local
community, its economic base, and community development initiatives. To
ensure that information from local leaders is considered--particularly
in areas where the number of potential contacts may be limited--
examiners may use information obtained through an interview with a
single community contact for examinations of more than one institution
in a given market. In addition, the agencies will consider information
obtained from interviews conducted by other agency staff and by the
other agencies. In order to augment contacts previously used by the
agencies and foster a wider array of contacts, the agencies will share
community contact information.
Sec. ____.21(b)(4) Institutional Capacity and Constraints
Sec. ____.21(b)(4)-1: Will examiners consider factors outside of an
institution's control that prevent it from engaging in certain
activities?
A1. Yes. Examiners will take into account statutory and supervisory
limitations on an institution's ability to engage in any lending,
investment, and service activities. For example, a savings association
that has made few or no qualified investments due to its limited
investment authority may still receive a low satisfactory rating under
the investment test if it has a strong lending record.
Sec. ____.21(b)(5) Institution's Past Performance and the Performance
of Similarly Situated Lenders
Sec. ____.21(b)(5)-1: Can an institution's assigned rating be
adversely affected by poor past performance?
A1. Yes. The agencies will consider an institution's past
performance in its overall evaluation. For example, an institution that
received a rating of ``needs to improve'' in the past may receive a
rating of ``substantial noncompliance'' if its performance has not
improved.
Sec. ____.21(b)(5)-2: How will examiners consider the performance
of similarly situated lenders?
A2. The performance context section of the regulation permits the
performance of similarly situated lenders to be considered, for
example, as one of a number of considerations in evaluating the
geographic distribution of an institution's loans to low-, moderate-,
middle-, and upper-income geographies. This analysis, as well as other
analyses, may be used, for example, where groups of contiguous
geographies within an institution's assessment area(s) exhibit
abnormally low penetration. In this regard, the performance of
similarly situated lenders may be analyzed if such an analysis would
provide accurate insight into the institution's lack of performance in
those areas. The regulation does not require the use of a specific type
of analysis under these circumstances. Moreover, no ratio developed
from any type of analysis is linked to any lending test rating.
Sec. ____.22--Lending Test
Sec. ____.22(a) Scope of Test
Sec. ____.22(a)-1: Are there any types of lending activities that
help meet the credit needs of an institution's assessment area(s) and
that may warrant favorable consideration as activities that are
responsive to the needs of the institution's assessment area(s)?
A1. Credit needs vary from community to community. However, there
are some lending activities that are likely to be responsive in helping
to meet the credit needs of many communities. These activities include:
Providing loan programs that include a financial education
component about how to avoid lending activities that may be abusive or
otherwise unsuitable;
Establishing loan programs that provide small, unsecured
consumer loans in a safe and sound manner (i.e., based on the
borrower's ability to repay) and with reasonable terms;
Offering lending programs, which feature reporting to
consumer reporting agencies, that transition borrowers from loans with
higher interest rates and fees (based on credit risk) to lower-cost
loans, consistent with safe and sound lending practices. Reporting to
consumer reporting agencies allows borrowers accessing these programs
the opportunity to improve their credit histories and thereby improve
their access to competitive credit products.
Examiners may consider favorably such lending activities, which
have features augmenting the success and effectiveness of the
institution's lending programs.
Sec. ____.22(a)(1) Types of Loans Considered
Sec. ____.22(a)(1)-1: If a large retail institution is not required
to collect and report home mortgage data under the
[[Page 36632]]
HMDA, will the agencies still evaluate the institution's home mortgage
lending performance?
A1. Yes. The agencies will sample the institution's home mortgage
loan files in order to assess its performance under the lending test
criteria.
Sec. ____.22(a)(1)-2: When will examiners consider consumer loans
as part of an institution's CRA evaluation?
A2. Consumer loans will be evaluated if the institution so elects;
and an institution that elects not to have its consumer loans evaluated
will not be viewed less favorably by examiners than one that does.
However, if consumer loans constitute a substantial majority of the
institution's business, the agencies will evaluate them even if the
institution does not so elect. The agencies interpret ``substantial
majority'' to be so significant a portion of the institution's lending
activity by number or dollar volume of loans that the lending test
evaluation would not meaningfully reflect its lending performance if
consumer loans were excluded.
Sec. ____.22(a)(2) Loan Originations and Purchases/Other Loan Data
Sec. ____.22(a)(2)-1: How are lending commitments (such as letters
of credit) evaluated under the regulation?
A1. The agencies consider lending commitments (such as letters of
credit) only at the option of the institution. Commitments must be
legally binding between an institution and a borrower in order to be
considered. Information about lending commitments will be used by
examiners to enhance their understanding of an institution's
performance.
Sec. ____.22(a)(2)-2: Will examiners review application data as
part of the lending test?
A2. Application activity is not a performance criterion of the
lending test. However, examiners may consider this information in the
performance context analysis because this information may give
examiners insight on, for example, the demand for loans.
Sec. ____.22(a)(2)-3: May a financial institution receive
consideration under CRA for home mortgage loan modification, extension,
and consolidation agreements (MECAs), in which it obtains home mortgage
loans from other institutions without actually purchasing or
refinancing the home mortgage loans, as those terms have been
interpreted under CRA and HMDA, as implemented by 12 CFR pt. 203?
A3. Yes. In some states, MECAs, which are not considered loan
refinancings because the existing loan obligations are not satisfied
and replaced, are common. Although these transactions are not
considered to be purchases or refinancings, as those terms have been
interpreted under CRA, they do achieve the same results. An institution
may present information about its MECA activities with respect to home
mortgages to examiners for consideration under the lending test as
``other loan data.''
Sec. ____.22(a)(2)-4: Do institutions receive consideration for
originating or purchasing loans that are fully guaranteed?
A4. Yes. The lending test evaluates an institution's record of
helping to meet the credit needs of its assessment area(s) through the
origination or purchase of specified types of loans. The test does not
take into account whether or not such loans are guaranteed.
Sec. ____.22(b) Performance Criteria
Sec. ____.22(b)-1: How will examiners apply the performance
criteria in the lending test?
A1. Examiners will apply the performance criteria reasonably and
fairly, in accord with the regulations, the examination procedures, and
this Guidance. In doing so, examiners will disregard efforts by an
institution to manipulate business operations or present information in
an artificial light that does not accurately reflect an institution's
overall record of lending performance.
Sec. ____.22(b)(1) Lending Activity
Sec. ____.22(b)(1)-1: How will the agencies apply the lending
activity criterion to discourage an institution from originating loans
that are viewed favorably under CRA in the institution itself and
referring other loans, which are not viewed as favorably, for
origination by an affiliate?
A1. Examiners will review closely institutions with (1) a small
number and amount of home mortgage loans with an unusually good
distribution among low-and moderate-income areas and low- and moderate-
income borrowers and (2) a policy of referring most, but not all, of
their home mortgage loans to affiliated institutions. If an institution
is making loans mostly to low- and moderate-income individuals and
areas and referring the rest of the loan applicants to an affiliate for
the purpose of receiving a favorable CRA rating, examiners may conclude
that the institution's lending activity is not satisfactory because it
has inappropriately attempted to influence the rating. In evaluating an
institution's lending, examiners will consider legitimate business
reasons for the allocation of the lending activity.
Sec. ____.22(b)(2) & (3) Geographic Distribution and Borrower
Characteristics
Sec. ____.22(b)(2) & (3)-1: How do the geographic distribution of
loans and the distribution of lending by borrower characteristics
interact in the lending test?
A1. Examiners generally will consider both the distribution of an
institution's loans among geographies of different income levels and
among borrowers of different income levels and businesses of different
sizes. The importance of the borrower distribution criterion,
particularly in relation to the geographic distribution criterion, will
depend on the performance context. For example, distribution among
borrowers with different income levels may be more important in areas
without identifiable geographies of different income categories. On the
other hand, geographic distribution may be more important in areas with
the full range of geographies of different income categories.
Sec. ____.22(b)(2) & (3)-2: Must an institution lend to all
portions of its assessment area?
A2. The term ``assessment area'' describes the geographic area
within which the agencies assess how well an institution has met the
specific performance tests and standards in the rule. The agencies do
not expect that simply because a census tract or block numbering area
is within an institution's assessment area(s) the institution must lend
to that census tract or block numbering area. Rather the agencies will
be concerned with conspicuous gaps in loan distribution that are not
explained by the performance context. Similarly, if an institution
delineated the entire county in which it is located as its assessment
area, but could have delineated its assessment area as only a portion
of the county, it will not be penalized for lending only in that
portion of the county, so long as that portion does not reflect illegal
discrimination or arbitrarily exclude low- or moderate-income
geographies. The capacity and constraints of an institution, its
business decisions about how it can best help to meet the needs of its
assessment area(s), including those of low- and moderate-income
neighborhoods, and other aspects of the performance context, are all
relevant to explain why the institution is serving or not serving
portions of its assessment area(s).
Sec. ____.22(b)(2) & (3)-3: Will examiners take into account loans
made by affiliates when evaluating the
[[Page 36633]]
proportion of an institution's lending in its assessment area(s)?
A3. Examiners will not take into account loans made by affiliates
when determining the proportion of an institution's lending in its
assessment area(s), even if the institution elects to have its
affiliate lending considered in the remainder of the lending test
evaluation. However, examiners may consider an institution's business
strategy of conducting lending through an affiliate in order to
determine whether a low proportion of lending in the assessment area(s)
should adversely affect the institution's lending test rating.
Sec. ____.22(b)(2) & (3)-4: When will examiners consider loans
(other than community development loans) made outside an institution's
assessment area(s)?
A4. Consideration will be given for loans to low- and moderate-
income persons and small business and farm loans outside of an
institution's assessment area(s), provided the institution has
adequately addressed the needs of borrowers within its assessment
area(s). The agencies will apply this consideration not only to loans
made by large retail institutions being evaluated under the lending
test, but also to loans made by small institutions being evaluated
under the small institution performance standards. Loans to low- and
moderate-income persons and small businesses and farms outside of an
institution's assessment area(s), however, will not compensate for poor
lending performance within the institution's assessment area(s).
Sec. ____.22(b)(2) & (3)-5: Under the lending test, how will
examiners evaluate home mortgage loans to middle- or upper-income
individuals in a low- or moderate-income geography?
A5. Examiners will consider these home mortgage loans under the
performance criteria of the lending test, i.e., by number and amount of
home mortgage loans, whether they are inside or outside the financial
institution's assessment area(s), their geographic distribution, and
the income levels of the borrowers. Examiners will use information
regarding the financial institution's performance context to determine
how to evaluate the loans under these performance criteria. Depending
on the performance context, examiners could view home mortgage loans to
middle-income individuals in a low-income geography very differently.
For example, if the loans are for homes or multifamily housing located
in an area for which the local, state, tribal, or Federal government or
a community-based development organization has developed a
revitalization or stabilization plan (such as a Federal enterprise
community or empowerment zone) that includes attracting mixed-income
residents to establish a stabilized, economically diverse neighborhood,
examiners may give more consideration to such loans, which may be
viewed as serving the low- or moderate-income community's needs as well
as serving those of the middle- or upper-income borrowers. If, on the
other hand, no such plan exists and there is no other evidence of
governmental support for a revitalization or stabilization project in
the area and the loans to middle- or upper-income borrowers
significantly disadvantage or primarily have the effect of displacing
low- or moderate-income residents, examiners may view these loans
simply as home mortgage loans to middle- or upper-income borrowers who
happen to reside in a low- or moderate-income geography and weigh them
accordingly in their evaluation of the institution.
Sec. ____.22(b)(4); Community Development Lending
Sec. ____.22(b)(4)-1: When evaluating an institution's record of
community development lending, may an examiner distinguish among
community development loans on the basis of the actual amount of the
loan that advances the community development purpose?
A1. Yes. When evaluating the institution's record of community
development lending under Sec. ____.22(b)(4), it is appropriate to give
greater weight to the amount of the loan that is targeted to the
intended community development purpose. For example, consider two $10
million projects (with a total of 100 units each) that have as their
express primary purpose affordable housing and are located in the same
community. One of these projects sets aside 40 percent of its units for
low-income residents and the other project allocates 65 percent of its
units for low-income residents. An institution would report both loans
as $10 million community development loans under the Sec. ____.42(b)(2)
aggregate reporting obligation. However, transaction complexity,
innovation and all other relevant considerations being equal, an
examiner should also take into account that the 65 percent project
provides more affordable housing for more people per dollar expended.
Under Sec. ____.22(b)(4), the extent of CRA consideration an
institution receives for its community development loans should bear a
direct relation to the benefits received by the community and the
innovation or complexity of the loans required to accomplish the
activity, not simply to the dollar amount expended on a particular
transaction. By applying all lending test performance criteria, a
community development loan of a lower dollar amount could meet the
credit needs of the institution's community to a greater extent than a
community development loan with a higher dollar amount, but with less
innovation, complexity, or impact on the community.
Sec. ____.22(b)(5) Innovative or Flexible Lending Practices
Sec. ____.22(b)(5)-1: What is the range of practices that examiners
may consider in evaluating the innovativeness or flexibility of an
institution's lending?
A1. In evaluating the innovativeness or flexibility of an
institution's lending practices (and the complexity and innovativeness
of its community development lending), examiners will not be limited to
reviewing the overall variety and specific terms and conditions of the
credit products themselves. In connection with the evaluation of an
institution's lending, examiners also may give consideration to related
innovations when they augment the success and effectiveness of the
institution's lending under its community development loan programs or,
more generally, its lending under its loan programs that address the
credit needs of low- and moderate-income geographies or individuals.
For example:
In connection with a community development loan program, a
bank may establish a technical assistance program under which the bank,
directly or through third parties, provides affordable housing
developers and other loan recipients with financial consulting
services. Such a technical assistance program may, by itself,
constitute a community development service eligible for consideration
under the service test of the CRA regulations. In addition, the
technical assistance may be favorably considered as an innovation that
augments the success and effectiveness of the related community
development loan program.
In connection with a small business lending program in a
low- or moderate-income area and consistent with safe and sound lending
practices, a bank may implement a program under which, in addition to
providing financing, the bank also contracts with the small business
borrowers. Such a contracting arrangement would not, standing alone,
qualify for CRA consideration. However, it may be favorably considered
as an innovation that augments the loan program's success and
effectiveness, and improves the program's ability to
[[Page 36634]]
serve community development purposes by helping to promote economic
development through support of small business activities and
revitalization or stabilization of low- or moderate-income geographies.
Sec. ____.22(c) Affiliate Lending
Sec. ____.22(c)(1) In General
Sec. ____.22(c)(1)-1: If an institution elects to have loans by its
affiliate(s) considered, may it elect to have only certain categories
of loans considered?
A1. Yes. An institution may elect to have only a particular
category of its affiliate's lending considered. The basic categories of
loans are home mortgage loans, small business loans, small farm loans,
community development loans, and the five categories of consumer loans
(motor vehicle loans, credit card loans, home equity loans, other
secured loans, and other unsecured loans).
Sec. ____.22(c)(2) Constraints on Affiliate Lending
Sec. ____.22(c)(2)(i) No Affiliate May Claim a Loan Origination or Loan
Purchase if Another Institution Claims the Same Loan Origination or
Purchase
Sec. ____.22(c)(2)(i)-1: How is this constraint on affiliate
lending applied?
A1. This constraint prohibits one affiliate from claiming a loan
origination or purchase claimed by another affiliate. However, an
institution can count as a purchase a loan originated by an affiliate
that the institution subsequently purchases, or count as an origination
a loan later sold to an affiliate, provided the same loans are not sold
several times to inflate their value for CRA purposes.
Sec. ____.22(c)(2)(ii) If an Institution Elects To Have Its
Supervisory Agency Consider Loans Within a Particular Lending Category
Made by One or More of the Institution's Affiliates in a Particular
Assessment Area, the Institution Shall Elect To Have the Agency
Consider All Loans Within That Lending Category in That Particular
Assessment Area Made by All of the Institution's Affiliates
Sec. ____.22(c)(2)(ii)-1: How is this constraint on affiliate
lending applied?
A1. This constraint prohibits ``cherry-picking'' affiliate loans
within any one category of loans. The constraint requires an
institution that elects to have a particular category of affiliate
lending in a particular assessment area considered to include all loans
of that type made by all of its affiliates in that particular
assessment area. For example, assume that an institution has one or
more affiliates, such as a mortgage bank that makes loans in the
institution's assessment area. If the institution elects to include the
mortgage bank's home mortgage loans, it must include all of mortgage
bank's home mortgage loans made in its assessment area. The institution
cannot elect to include only those low- and moderate-income home
mortgage loans made by the mortgage bank affiliate and not home
mortgage loans to middle- and upper-income individuals or areas.
Sec. ____.22(c)(2)(ii)-2: How is this constraint applied if an
institution's affiliates are also insured depository institutions
subject to the CRA?
A2. Strict application of this constraint against ``cherry-
picking'' to loans of an affiliate that is also an insured depository
institution covered by the CRA would produce the anomalous result that
the other institution would, without its consent, not be able to count
its own loans. Because the agencies did not intend to deprive an
institution subject to the CRA of receiving consideration for its own
lending, the agencies read this constraint slightly differently in
cases involving a group of affiliated institutions, some of which are
subject to the CRA and share the same assessment area(s). In those
circumstances, an institution that elects to include all of its
mortgage affiliate's home mortgage loans in its assessment area would
not automatically be required to include all home mortgage loans in its
assessment area of another affiliate institution subject to the CRA.
However, all loans of a particular type made by any affiliate in the
institution's assessment area(s) must either be counted by the lending
institution or by another affiliate institution that is subject to the
CRA. This reading reflects the fact that a holding company may, for
business reasons, choose to transact different aspects of its business
in different subsidiary institutions. However, the method by which
loans are allocated among the institutions for CRA purposes must
reflect actual business decisions about the allocation of banking
activities among the institutions and should not be designed solely to
enhance their CRA evaluations.
Sec. ____.22(d) Lending by a Consortium or a Third Party
Sec. ____.22(d)-1: Will equity and equity-type investments in a
third party receive consideration under the lending test?
A1. If an institution has made an equity or equity-type investment
in a third party, community development loans made by the third party
may be considered under the lending test. On the other hand, asset-
backed and debt securities that do not represent an equity-type
interest in a third party will not be considered under the lending test
unless the securities are booked by the purchasing institution as a
loan. For example, if an institution purchases stock in a community
development corporation (``CDC'') that primarily lends in low- and
moderate-income areas or to low-and moderate-income individuals in
order to promote community development, the institution may claim a pro
rata share of the CDC's loans as community development loans. The
institution's pro rata share is based on its percentage of equity
ownership in the CDC. Sec. ____.23(b)-1 provides information concerning
consideration of an equity or equity-type investment under the
investment test and both the lending and investment tests.
Sec. ____.22(d)-2: How will examiners evaluate loans made by
consortia or third parties under the lending test?
A2. Loans originated or purchased by consortia in which an
institution participates or by third parties in which an institution
invests will only be considered if they qualify as community
development loans and will only be considered under the community
development criterion of the lending test. However, loans originated
directly on the books of an institution or purchased by the institution
are considered to have been made or purchased directly by the
institution, even if the institution originated or purchased the loans
as a result of its participation in a loan consortium. These loans
would be considered under all the lending test criteria appropriate to
them depending on the type of loan.
Sec. ____.22(d)-3: In some circumstances, an institution may invest
in a third party, such as a community development bank, that is also an
insured depository institution and is thus subject to CRA requirements.
If the investing institution requests its supervisory agency to
consider its pro rata share of community development loans made by the
third party, as allowed under 12 CFR____.22(d), may the third party
also receive consideration for these loans?
A3. Yes, as long as the financial institution and the third party
are not affiliates. The regulations state, at 12 CFR____.22(c)(2)(i),
that two affiliates may not both claim the same loan origination or
loan purchase. However, if the financial institution and the third
party are not affiliates, the third party may receive consideration for
the community development loans it originates, and the financial
institution that invested in the third party may also receive
consideration for its pro rata
[[Page 36635]]
share of the same community development loans under 12 CFR____.22(d).
Sec. ____.23--Investment Test
Sec. ____.23(a) Scope of Test
Sec. ____.23(a)-1: May an institution receive consideration under
the CRA regulations if it invests indirectly through a fund, the
purpose of which is community development, as that is defined in the
CRA regulations?
A1: Yes, the direct or indirect nature of the qualified investment
does not affect whether an institution will receive consideration under
the CRA regulations because the regulations do not distinguish between
``direct'' and ``indirect'' investments. Thus, an institution's
investment in an equity fund that, in turn, invests in projects that,
for example, provide affordable housing to low- and moderate-income
individuals, would receive consideration as a qualified investment
under the CRA regulations, provided the investment benefits one or more
of the institution's assessment area(s) or a broader statewide or
regional area(s) that includes one or more of the institution's
assessment area(s). Similarly, an institution may receive consideration
for a direct qualified investment in a nonprofit organization that, for
example, supports affordable housing for low- and moderate-income
individuals in the institution's assessment area(s) or a broader
statewide or regional area(s) that includes the institution's
assessment area(s).
Sec. ____.23(b) Exclusion
Sec. ____.23(b)-1: Even though the regulations state that an
activity that is considered under the lending or service tests cannot
also be considered under the investment test, may parts of an activity
be considered under one test and other parts be considered under
another test?
A1. Yes, in some instances the nature of an activity may make it
eligible for consideration under more than one of the performance
tests. For example, certain investments and related support provided by
a large retail institution to a CDC may be evaluated under the lending,
investment, and service tests. Under the service test, the institution
may receive consideration for any community development services that
it provides to the CDC, such as service by an executive of the
institution on the CDC's board of directors. If the institution makes
an investment in the CDC that the CDC uses to make community
development loans, the institution may receive consideration under the
lending test for its pro-rata share of community development loans made
by the CDC. Alternatively, the institution's investment may be
considered under the investment test, assuming it is a qualified
investment. In addition, an institution may elect to have a part of its
investment considered under the lending test and the remaining part
considered under the investment test. If the investing institution opts
to have a portion of its investment evaluated under the lending test by
claiming a share of the CDC's community development loans, the amount
of investment considered under the investment test will be offset by
that portion. Thus, the institution would only receive consideration
under the investment test for the amount of its investment multiplied
by the percentage of the CDC's assets that meet the definition of a
qualified investment.
Sec. ____.23(b)-2: If home mortgage loans to low- and moderate-
income borrowers have been considered under an institution's lending
test, may the institution that originated or purchased them also
receive consideration under the investment test if it subsequently
purchases mortgage-backed securities that are primarily or exclusively
backed by such loans?
A2. No. Because the institution received lending test consideration
for the loans that underlie the securities, the institution may not
also receive consideration under the investment test for its purchase
of the securities. Of course, an institution may receive investment
test consideration for purchases of mortgage-backed securities that are
backed by loans to low- and moderate-income individuals as long as the
securities are not backed primarily or exclusively by loans that the
same institution originated or purchased.
Sec. ____.23(e) Performance Criteria
Sec. ____.23(e)-1: When applying the performance criteria of
Sec. ____.23(e), may an examiner distinguish among qualified
investments based on how much of the investment actually supports the
underlying community development purpose?
A1. Yes. Although Sec. ____.23(e)(1) speaks in terms of the dollar
amount of qualified investments, the criterion permits an examiner to
weight certain investments differently or to make other appropriate
distinctions when evaluating an institution's record of making
qualified investments. For instance, an examiner should take into
account that a targeted mortgage-backed security that qualifies as an
affordable housing issue that has only 60 percent of its face value
supported by loans to low -or moderate-income borrowers would not
provide as much affordable housing for low- and moderate-income
individuals as a targeted mortgage-backed security with 100 percent of
its face value supported by affordable housing loans to low- and
moderate-income borrowers. The examiner should describe any
differential weighting (or other adjustment), and its basis in the
Public Evaluation. However, no matter how a qualified investment is
handled for purposes of Sec. ____.23(e)(1), it will also be evaluated
with respect to the qualitative performance criteria set forth in
Sec. ____.23(e)(2), (3) and (4) . By applying all criteria, a qualified
investment of a lower dollar amount may be weighed more heavily under
the Investment Test than a qualified investment with a higher dollar
amount, but with fewer qualitative enhancements.
Sec. ____.23(e)-2: How do examiners evaluate an institution's
qualified investment in a fund, the primary purpose of which is
community development, as that is defined in the CRA regulations?
A2. When evaluating qualified investments that benefit an
institution's assessment area(s) or a broader statewide or regional
area that includes its assessment area(s), examiners will look at the
following four performance criteria:
(1) The dollar amount of qualified investments;
(2) The innovativeness or complexity of qualified investments;
(3) The responsiveness of qualified investments to credit and
community development needs; and
(4) The degree to which the qualified investments are not routinely
provided by private investors.
With respect to the first criterion, examiners will determine the
dollar amount of qualified investments by relying on the figures
recorded by the institution according to generally accepted accounting
principles (GAAP). Although institutions may exercise a range of
investment strategies, including short-term investments, long-term
investments, investments that are immediately funded, and investments
with a binding, up-front commitment that are funded over a period of
time, institutions making the same dollar amount of investments over
the same number of years, all other performance criteria being equal,
would receive the same level of consideration. Examiners will include
both new and outstanding investments in this determination. The dollar
amount of qualified investments also will include the dollar amount of
[[Page 36636]]
legally binding commitments recorded by the institution according to
GAAP.
The extent to which qualified investments receive consideration,
however, depends on how examiners evaluate the investments under the
remaining three performance criteria--innovativeness and complexity,
responsiveness, and degree to which the investment is no |
