[Federal Register: May 3, 1999 (Volume 64, Number 84)]
[Notices]
[Page 23618-23648]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03my99-52]

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FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL

Community Reinvestment Act; Interagency Questions and Answers
Regarding Community Reinvestment

AGENCY: Federal Financial Institutions Examination Council.

ACTION: Notice and request for comment.

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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, as well as proposing for comment
three new or revised questions and answers. 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. We seek public comment on the proposed questions and
answers. In addition, we invite public comment on any of the new and
revised questions and answers, as well as other community reinvestment
issues that are not addressed in these Interagency Questions and
Answers.

DATES: Effective date of amended Interagency Questions and Answers on
Community Reinvestment: May 3, 1999. We request that comments on the
proposed questions and answers be submitted on or before: July 2, 1999.

ADDRESSES: Questions and comments may be sent to Keith J. Todd,
Executive Secretary, Federal Financial Institutions Examination
Council, 2000 K Street, NW, Suite 310, Washington, DC 20006, or by
facsimile transmission to (202) 872-7501.

FOR FURTHER INFORMATION CONTACT:
OCC: Malloy Harris, National Bank Examiner, Community and Consumer
Policy Division, (202) 874-4446; or Margaret Hesse, Senior Attorney,
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; James H. Mann, Attorney, (202) 452-2412; or Kathleen C. Ryan,
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, Senior Fair Lending Specialist, Division of
Compliance and Consumer Affairs, (202) 942-3090; 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, Project Manager, 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 October 7, 1997
(1997 Interagency Questions and Answers). See 62 FR 52105. In addition
to issuing the 1997 Interagency Questions and Answers, we proposed
several questions and answers in the accompanying supplementary
information. These questions and answers were proposed to clarify what

[[Page 23619]]

is meant by ``primary purpose of community development.'' We
specifically requested comment addressing the proposed questions and
answers, as well as general comments and questions regarding the CRA
regulations. See 62 FR at 52108-09.
We received 44 letters in response to our request for comments in
the 1997 Interagency Questions and Answers. Comments came from
financial institutions (16), community groups (14), trade associations
(6), federal entities (6), and state/local agencies (2). This document
supplements, revises, and republishes the 1997 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.
This document adopts the four questions and answers proposed in
1997 and thirteen new questions and answers, revises seven other
questions and answers, and proposes three new or revised questions and
answers for comment. A discussion of these questions and answers
follows.
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.

Adopting Questions and Answers Proposed in 1997

We are adopting the four questions and answers addressing ``primary
purpose'' of community development activities that were proposed in
1997. The definitions of ``community development loan,'' ``community
development service,'' and ``qualified investment'' all require a
``primary purpose of community development.'' See 12 CFR 25.12 (i)(1),
(j)(1), and (s); 228.12 (i)(1), (j)(1), and (s); 345.12 (i)(1), (j)(1),
and (s); and 563e.12 (h)(1), (i)(1), and (r). In response to inquiries
about whether certain activities have the necessary ``primary purpose''
of community development to qualify as a community development loan,
qualified investment or community development service, we proposed four
questions and answers (Q&As) to explain what is meant by ``primary
purpose.'' With one clarifying change, which is discussed below, we are
adopting the previously proposed Q&A7 addressing Secs. ____.12(i) and
563e.12(h), Q&A1 addressing Sec. ____.22(b)(4), Q&A1 addressing
Sec. ____.23(e), and Q&A3 addressing Sec. ____.42(b)(2).
Twenty commenters addressed topics related to the proposed Q&As.
The commenters were generally in favor of the proposed Q&As. Seven
commenters supported greater flexibility for examiners when considering
whether to give CRA consideration to certain loans. (These seven
commenters also raised issues regarding the definition of ``community
development'' in the regulations, which is discussed below.) Three
commenters, however, felt that examiners rely too heavily on
mathematical formulas in making this determination, such as the amount
of the low- or moderate-income set-aside, the number of units
constructed, or the number of jobs for low-income persons actually
created. Six commenters supported giving CRA consideration to community
development loans, even if 50% or less of the proceeds are used for
community development purposes. One commenter suggested, however, that
an institution should receive CRA consideration only for that portion
of a loan or investment expressly devoted to the community development
purpose.
The agencies have generally stated that a ``primary purpose'' of
community development exists when the loan, investment or service is
divisible and measurable in terms of the number of dollars spent,
housing units built, or individuals benefited, and when an identifiable
majority of the dollars expended, units built or individuals benefited
is clearly attributable to one of the community development purposes
enumerated in the regulations. However, this answer does not address
other activities that are subject to certain legal or market
restraints, such that they do not reach this threshold, even though
they have community development as their purpose and result in real,
long-term community development benefits. Many of these projects are
``designed for the express purpose'' of achieving a qualifying
community development purpose, even though less than half the dollars
involved in the entire project are concentrated on that purpose. For
example, federal tax-incentive affordable housing projects, where less
than half the units or half the dollars go into the portion of the
project that represents affordable housing for low- or moderate-income
persons, fall into this category. Accordingly, we are adopting without
change the proposed guidance that emphasizes the quantitative and
qualitative distinctions to be made when evaluating eligible community
development loans, qualified investments, or community development
services.
Q&A 7 addressing Secs. ____.12(i) and 563e.12(h) is based on the
preamble to the final rule set forth at 60 FR 22,156, 22,159 (May 4,
1995), which states that activities not designed for the express
purpose of community development (as defined in the regulations) are
not eligible for consideration as community development loans or
services or qualified investments. The preamble further states that
providing indirect or short-term benefits to low- or moderate-income
persons does not make an activity community development. In addition to
incorporating this guidance into these Interagency Questions and
Answers, the answer identifies the kind of information used to
determine whether an activity was designed for the express purpose of
community development. The answer adopts a simplified threshold rule
(i.e., majority) and an alternative approach for finding sufficient
bases to conclude that an activity possesses the requisite primary
purpose.
We are also adopting Q&A1 addressing Sec. ____.22(b)(4) and Q&A1
addressing Sec. ____.23(e), which provide guidance on the evaluation of
activities that have a primary purpose of community development, as
well as the reporting of community development loans. This additional
guidance emphasizes that once loans or investments are found to possess
a primary purpose of community development, examiners may differentiate
among community development loans or qualified investments under the
relevant performance criteria. This differentiation may be based not
only on the differing dollar amounts attributable to the underlying
community development purpose, but also on a loan's innovation or
complexity under Sec. ____.22(b)(4) or an investment's innovation,
complexity, responsiveness or non-routine characteristics under
Sec. ____.23(e).
Finally, we are adopting Q&A3 addressing Sec. ____.42(b)(2), which

[[Page 23620]]

explains that a loan may be reported as a community development loan if
its express primary purpose is to finance an affordable housing project
for low- or moderate-income individuals, although, for example, only
40% of the project's units will actually be occupied by individuals or
families with low or moderate incomes. Although an institution would
report the entire amount of the loan, we are expanding upon the answer
proposed in 1997 to clarify that examiners may make qualitative
distinctions among community development loans on the basis of how well
each loan advances its community development purpose.

New Questions and Answers

What is ``affordable'' housing? Institutions and others have asked
how to determine whether a housing development will provide
``affordable'' housing for low- and moderate-income individuals,
particularly in a new project where the units are not yet leased or
sold, or in other projects where the income of renters cannot be
verified. It has been suggested that a simple formula might be
appropriate, such as if the mortgage payments or rental expenses amount
to less than 30% of the income of individuals or families who are low-
or moderate-income (i.e., have an income that is less than 80% of the
area median income). We believe, however, that the critical
consideration is the extent to which a project is or likely will be
utilized by low- or moderate-income individuals. A formula based solely
on rents as a percentage of median family income may determine this
accurately in some circumstances, but may fail to do so in others. For
example, in an area with relatively low-cost housing, such a formula
may result in a calculation above even the median housing cost for the
area. Therefore, we believe that it is appropriate to look at several
factors, such as median rents of the assessment area and the project,
the median home value of either the assessment area, low- and moderate-
income geographies or the project, the low- and moderate-income
population in the area of the project, or the past performance record
of the organization(s) undertaking the project in determining whether a
housing development does or likely will benefit low- and moderate-
income individuals.
To clarify this position, we are adopting Q&A1 addressing
Secs. ____.12(h)(1) and 563e.12(g)(1), which discusses the types of
factors that examiners consider when determining whether housing is
``affordable'' to low- and moderate-income individuals.
Do institutions receive consideration for originating or purchasing
loans that are fully guaranteed? We are adopting a new Q&A, designated
as Q&A4 addressing Sec. ____.22(a)(2), to stress that the lending test
evaluates an institution's record of helping to meet the credit needs
of its assessment area(s) through the origination and purchase of
specified types of loans, but that the test criteria do not take into
account whether or not the loans are guaranteed.
What is the range of practices that examiners may consider in
evaluating the innovativeness, complexity, or flexibility of an
institution's lending? We have been asked whether contracting programs,
under which institutions may commit to contracting with small business
borrowers, may receive consideration under the CRA regulations. To
date, examiners generally have not been considering such programs in
reviewing an institution's CRA performance. New Q&A1 addressing
Sec. ____.22(b)(5) discusses the range of factors that examiners may
consider in evaluating the innovativeness and flexibility of an
institution's lending practices (and the complexity and innovativeness
of its community development lending). It makes clear that, even though
contracting programs are not, standing alone, considered in connection
with a CRA evaluation, such programs may enhance the success and
effectiveness of a related lending program. Therefore, certain
contracting programs may warrant consideration as examiners review the
innovativeness, complexity, and flexibility of an institution's lending
practices. The Q&A also provides another example of when examiners may
consider related program activities in connection with an evaluation of
an institution's lending performance.
May an institution receive consideration for a qualified investment
if it invests indirectly through a fund with a community development
purpose, as that is defined in the CRA regulations? We are adopting a
new Q&A, designated as Q&A1 addressing Sec. ____.23(a), that
incorporates guidance previously provided in interagency staff
interpretive letters. See, e.g., Interagency Staff CRA Interpretive
Letter, published as OCC Interpretive Letter No. 800, (1997 Transfer
Binder) Fed. Banking L. Rep. (CCH), para. 81-227 (Sept. 11, 1997). In
those letters, staff stated that the direct or indirect nature of a
qualified investment does not affect whether an institution will
receive consideration for the investment during its CRA evaluation. As
long as the primary purpose of the investment is community development,
as defined in the CRA regulations, an institution's investment in a
fund, which in turn invests in a community development project (e.g.,
affordable housing for low- and moderate-income individuals that
benefits the institution's assessment area(s) or a broader statewide or
regional area that includes one or more of the institution's assessment
area(s)), is a qualified investment.
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? Many financial institutions have
made qualified investments in community development funds that operate
regionally or nationally. Examiners, institutions, and the funds have
asked for guidance on how to evaluate these investments. We are
adopting a new Q&A, designated as Q&A2 addressing Sec. ____.23(e),
reiterating guidance previously provided in an interagency staff CRA
interpretive letter. See Interagency Staff CRA Interpretive Letter,
published as OCC Interpretive Letter No. 800, supra.
The new Q&A explains that examiners evaluate investments that
benefit an institution's assessment area(s) or a broader statewide or
regional area that includes its assessment area(s) using the investment
test's four performance criteria. When determining the dollar amount of
the investment (the first criterion), examiners rely on the figures the
institution records according to generally accepted accounting
principles. Even though different institutions may employ different
investment strategies, 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.
The remaining three performance criteria--the ``qualitative''
criteria of innovativeness and complexity, responsiveness, and the
degree to which the investment is not routinely provided by private
investors--will provide the basis for examiner differentiation among
investments. Examiners also will consider factors relevant to the
institution's CRA performance context, such as the effect of
outstanding long-term qualified investments, the pay-in schedule, and
the amount of any cash call, on the capacity of the institution to make
new investments.
How do examiners evaluate an institution's activities in connection
with ``Individual Development Accounts''? Individual Development
Accounts (IDAs) generally are matched savings accounts designed to help
low-

[[Page 23621]]

and moderate-income families accumulate savings for education or job
training, down-payment and closing costs on a new home, or start-up
capital for a small business. Once IDA participants have successfully
funded an IDA, their personal IDA savings are matched by a public or
private entity, such as a state or local government, church,
foundation, or financial institution. Participating depositors often
receive training in the basics of money management, including
budgeting, saving, and credit repair. In addition, an entity, such as a
community organization, typically monitors participants' withdrawals
from their IDAs.
Financial institutions may participate in IDA programs in a number
of ways, including: offering accounts, which may be structured as
traditional savings accounts; enhancing accounts by offering special
account benefits, including higher interest rates, ATM services, or
waived minimum balance requirements; providing funding in the form of
matching funds for participants or operating support for community
organizations running the IDA program; helping to design and implement
IDA programs, including developing and teaching financial literacy
courses; and making loans to participants once they have achieved their
savings goals.
The extent of each financial institution's involvement in IDAs and
the products and services offered in connection with the accounts will
vary. Therefore, examiners will evaluate the actual services and
products provided by each institution in connection with the IDA
programs as one or more of the following: community development
services, retail banking services, qualified investments, home mortgage
loans, small business loans, consumer loans, or community development
loans. We are adopting a Q&A, designated as Q&A2 addressing
Sec. ____.24(d), which articulates this opinion.
How do examiners evaluate a wholesale or limited purpose
institution's qualified investment in a fund that invests in projects
nationwide, the purpose of which is community development, as that term
is defined in the CRA regulations? We are adopting a new Q&A,
designated as Q&A1 addressing Sec. ____.25(e), memorializing guidance
previously provided in interagency staff interpretive letters, which
clarifies how examiners evaluate qualified investments made by
wholesale or limited purpose institutions in a community development
fund that invests in projects nationwide. See, e.g., Interagency Staff
CRA Interpretive Letter, published as OCC Interpretive Letter No. 801,
(1997 Transfer Binder) Fed. Banking L. Rep. (CCH), para. 81-228 (Sept.
11, 1997). Examiners first determine whether the institution has
adequately addressed the needs of its assessment area(s). In doing so,
examiners also consider qualified investments that benefit a broader
statewide or regional area that includes the institution's assessment
area(s). If examiners find that the institution has adequately
addressed the needs of its assessment area(s), they will give
consideration to nationwide qualified investments, community
development loans, and community development services.
Are innovative loan products, innovative or complex qualified
investments, and innovative community development services necessary
for a ``satisfactory'' or ``outstanding'' CRA rating? Two commenters
expressed concern that examiners might discount community development
loans if they are not considered to be ``innovative.'' As one commenter
stated, innovation is only one of the four criteria considered when
examiners evaluate an institution's responsiveness to community
development needs.
We are adopting a new Q&A1, addressing Sec. ____.28, to clarify
that innovative practices are not required for an ``outstanding'' or
``satisfactory'' rating. Innovative loan products, innovative or
complex qualified investments, and innovative community development
services may augment consideration of an institution's performance
under the quantitative criteria of the performance tests, resulting in
a higher level of performance and rating. The Q&A also makes clear that
the lack of innovative or complex investments, loans, or services alone
will not result in a ``needs to improve'' rating.
How is performance under the quantitative and qualitative
performance criteria weighed when examiners assign a CRA rating? The
lending, investment, and service tests each contain a number of
performance criteria designed to measure whether an institution is
effectively helping to meet the credit needs of its entire community,
including low- and moderate-income neighborhoods, in a safe and sound
manner. Some of these criteria are quantitative (number and amount),
while others are qualitative (innovativeness, complexity,
responsiveness, or flexibility). The qualitative performance criteria
recognize that certain loans, qualified investments, and community
development services sometimes require special expertise and effort on
the part of the institution and provide a direct benefit to the
community that would not otherwise be possible.
We are adopting a new Q&A, designated as Q&A2 addressing
Sec. ____.28, which explains that the agencies consider the qualitative
aspects of an institution's activities when measuring the benefits
received by the community. These qualitative aspects of an
institution's performance may augment the consideration given to an
institution's performance under the quantitative criteria of the
regulations, resulting in a higher level of performance and rating.
When collecting and reporting, if applicable, the gross annual
revenue or income of small business or farm or consumer borrowers, do
institutions use the gross annual or the adjusted gross annual revenue
or income? In response to questions from financial institutions, we are
adopting two new Q&As clarifying that institutions should collect and
report gross annual revenue (for small businesses and small farms) and
gross annual income (for consumers) rather than adjusted gross annual
revenue or income. The new Q&As are designated as Q&A4 addressing
Sec. ____.42(a)(4) and Q&A3 addressing Sec. ____.42(c)(1)(iv).
The purpose of collecting and reporting gross annual revenue data
for small businesses and small farms is to enable examiners and the
public to judge whether an institution is lending to small businesses
and farms, or whether it is only making small loans to larger
businesses and farms. Similarly, gross annual income information is
collected from consumer borrowers to help examiners determine the
distribution of the institution's consumer loans based on borrower
characteristics, including the number and amount of consumer loans to
low-,
moderate-, middle-, and upper-income borrowers.
May an institution keep the compact disc that contains its CRA
Disclosure Statement, which is distributed by the FFIEC, in its public
file, rather than a paper copy of the information? Several institutions
asked whether they may retain the compact disc that contains the CRA
Disclosure Statement provided by the FFIEC in its public file rather
than a paper copy. We are adopting a new Q&A2 addressing
Sec. ____.43(b)(1), which clarifies that an institution may keep the
compact disc (or a duplicate of the compact disc) in its public file at
its main office and the designated branch in each state as long as the
institution

[[Page 23622]]

can readily print the information upon request.
Must an institution's performance fit each aspect of a particular
rating profile in order to receive that rating? We are adopting a new
Q&A1 addressing Appendix A to Part ____--Ratings to clarify that
exceptionally strong performance by an institution in some aspects of a
particular rating profile may compensate for weak performance in
others, thus permitting the institution to earn that rating. The Q&A
describes retail institutions that use non-branch delivery systems to
obtain deposits and to deliver loans, as an example. Almost all of the
loans originated by such an institution may be outside of its
assessment area(s). The Q&A assumes, for purposes of illustration, that
examiners may find, after considering the institution's performance
context and other regulatory considerations, that such an institution
shows weak performance under the lending test criteria applicable to
lending activity, geographic distribution, and borrower characteristics
within the assessment area. It clarifies that the institution may
compensate for such weak performance by exceptionally strong
performance in community development lending in its assessment area or
a broader statewide or regional area that includes its assessment area.

Revised Questions and Answers

What does ``promote economic development'' mean? The CRA
regulations define the term ``community development'' to include
``activities that promote economic development by financing businesses
or farms that meet the size eligibility standards of the Small Business
Administration's Development Company (SBDC) or Small Business
Investment Company (SBIC) programs (13 CFR 121.301) or have gross
annual revenues of $1 million or less.'' 12 CFR 25.12(h)(3),
228.12(h)(3), 345.12(h)(3) and 563e.12(g)(3).
The 1996 Interagency Questions and Answers included a Q&A, Q&A1
addressing Secs. ____.12(h)(3) and 563e.12(g)(3), concerning whether
all activities that finance small businesses or farms promote economic
development. The 1997 Interagency Questions and Answers revised that
Q&A in response to public comments. Since publication of the 1997
Interagency Questions and Answers, we have received 11 comments about
this revised Q&A.
One commenter asserted that the description of the purpose test,
i.e., that the activity must promote economic development, was too
restrictive. Specifically, the commenter believed that limiting the
purpose test to activities that, for example, provide jobs in low- and
moderate-income areas targeted for redevelopment by the government
would exclude financing to open a facility in a low- or moderate-income
area that is not targeted by the government for redevelopment.
We determined that the explanation of the purpose test in the 1997
Interagency Questions and Answers was incomplete. We are revising the
answer to be less restrictive by stating that an activity promotes
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.''
Examiners will continue to presume that any loan or investment in
or to a SBDC or SBIC promotes economic development. Funding provided in
connection with other SBA programs, as well as similar state and local
programs, may also promote economic development; however, examiners
will make their determinations based on business types, funding
purposes, and other relevant information.
Consistent with Q&A2 addressing Sec. ____.28, Q&A1 addressing
Secs. ____.12(h)(3) and 563e.12(g)(3) also clarifies that examiners
will make qualitative assessments in connection with an institution's
community development activities in addition to the quantitative
assessment of its activities.
Does ``rehabilitation of affordable housing or community
facilities'' include the abatement of environmental hazards, such as
lead-based paint, that are present in the housing or facilities? Three
commenters asked us to state that loans for the removal of
environmental hazards (particularly lead-based paint) may be community
development loans. We believe the abatement of environmental hazards
could be a part of rehabilitating affordable housing or community
facilities targeted to low- and moderate-income individuals;
rehabilitation of these facilities has already been identified as an
example of a community development purpose. To clarify this position,
we are adding a sentence to Q&A1 addressing Secs. ____.12(i) and
563e.12(h).
Are an institution's activities in connection with the Federal Home
Loan Banks' Affordable Housing Program (AHP) considered when the
institution's CRA performance is evaluated? We have consistently stated
that the mere purchase of stock in the Federal Home Loan Banks (FHLBs)
does not have a sufficient connection to community development to be
considered as a qualified investment.
Institutions, however, have asked us about how their activities in
connection with certain specific AHP projects are considered during
their CRA evaluations. Institutions that are members of a FHLB
typically provide a high level of technical assistance to prospective
borrowers in preparing the application for AHP funds and ensuring that
the borrower meets the eligibility criteria. Although an institution
does not necessarily provide a loan in connection with an AHP project,
it does disburse the funds for the FHLB and monitor the continued
qualified use of the funds. We believe these activities to be community
development services and are revising the second bullet in Q&A 3
addressing Secs. ____.12(j) and 563e.12(i) to so state.
If an institution's employees develop or teach financial education
curricula for low- or moderate-income students, are such activities
community development services? We are revising the fifth bullet of
Q&A3 addressing Secs. ____.12(j) and 563e.12(i) to incorporate guidance
previously provided in interagency staff interpretive letters. See,
e.g., Interagency Staff CRA Interpretive Letter, published as OCC
Interpretive Letter No. 802, (1997 Transfer Binder) Fed. Banking L.
Rep. (CCH), para. 81-229 (Sept. 17, 1997). Specifically, we are
clarifying that institutions may receive CRA consideration for the
services provided by its employees in developing financial education
curricula or teaching financial education courses to low- or moderate-
income students.
Is providing Electronic Transfer Accounts pursuant to the Debt
Collection Improvement Act of 1996 a community development service? The
terms, costs, and features of low-cost accounts offered by financial
institutions may vary depending on the particular needs of the
institutions' low- and moderate-income customers. In response to an
inquiry we received concerning whether a particular account for federal
benefits payments would be considered to be a community development
service, we are revising Q&A3 addressing Secs. ____.12(j) and
563e.12(i) by amending the seventh bullet to provide an example of one
low-cost transaction account targeted to low- and moderate-income
individuals.
Under the provisions of the Debt Collection Improvement Act of 1996
relating to electronic payment of federal

[[Page 23623]]

benefits payments (EFT ``99), codified at 31 U.S.C. 3332, insured
depository institutions may offer basic, low-cost ``electronic transfer
accounts'' (ETAs) specified in Treasury Department regulations (63 FR
51490) to recipients of federal benefits payments. These accounts are
designed to attract low-income persons who do not currently have
account relationships with insured depository institutions. A
demographic and market analysis commissioned by the Treasury Department
in connection with EFT ``99 concluded that ETA account holders are
likely to be primarily individuals with less than $10,000 in annual
income. Therefore, the ETA is an account targeted to low- and moderate-
income individuals and providing such accounts qualifies as a community
development service.
Under the lending test, how will examiners evaluate home mortgage
loans to middle- or upper-income individuals in a low- or moderate-
income geography? We received 24 letters commenting on Q&A5 addressing
Sec. ____.22(b) (2) & (3). The commenters generally were in agreement
that loans to middle- or upper-income individuals in a low- or
moderate-income geography should receive CRA consideration. Some
commenters were concerned that requiring that there be a revitalization
or stabilization plan for the area may be too restrictive, especially
in rural communities, where a formal plan may not exist. However, a
``formal'' plan is not necessary. An informal plan, such as town
council resolutions, or a plan developed by a private entity, such as a
community-based development organization, may be sufficient evidence,
so long as it offers evidence of a plan for development designed to
ensure economic diversity among the prospective residents and not just
displacement of low- and moderate-income individuals.
One commenter stated that examiners should compare an institution's
percentage of lending to low- and moderate-income households to the
aggregate percentage of lending by all reporting institutions to these
households and to the percentage of low- and moderate-income households
in the area. The agencies' examination procedures already suggest that
examiners may perform these types of comparisons and others, if
appropriate, to help them explain examination findings.
One commenter asked whether multifamily housing loans in low- and
moderate-income geographies would be considered in the same fashion as
loans for single family housing. In response to the comment, we are
clarifying the answer by adding the phrase, ``or multifamily housing.''
In addition, examiners may also consider loans for multifamily housing
as community development loans if they are targeted to low- and
moderate-income individuals, or if they benefit middle- or upper-income
borrowers as part of a plan to encourage attracting mixed-income
residents to stabilize and create an economically diverse area out of a
low- or moderate-income geography.
How should an institution collect and report the location of a loan
made to a small business or small farm if the borrower provides an
address consisting of a post office box number or rural route and box
number?
We adopted Q&A10 addressing Sec. ____.42(a) in the 1997 Interagency
Questions and Answers answering this question. In response to this Q&A,
we received nine comments. Several commenters questioned the accuracy
and usefulness of data collected and/or reported without the census
tract or block numbering area (BNA). One commenter stated that we
should allow institutions more lead time when providing interpretations
of data collection and reporting provisions to allow the institutions
to change their reporting systems, if necessary. We believe that data
collection according to this Q&A results in the most accurate data,
even though in some cases no information about census tract or BNA is
provided, but agree that sufficient time should be provided to
implement changes to data collection procedures, whenever possible.
In addition to formal comments on the Q&As, regulated institutions
requested clarification about whether an institution should report the
census tract or block numbering area (BNA) of a location, if known,
even if there is no street address for that location. We are amending
Q&A10 addressing Sec. ____.42(a) to clarify that if the census tract or
BNA is known, it should be reported, even if the institution does not
know the street address for that particular location (or there is no
street address). We are also revising the Q&A to delete obsolete 1997
data collection instructions.
What small business and small farm data should be reported?
We are making a technical change to Q&A1 addressing
Sec. ____.42(b)(1). The regulations define a ``small farm loan'' as
those included in ``loans to small farms'' as defined in the
instructions for preparation of the Consolidated Report of Condition
and Income or the Thrift Financial Report. These instructions define
such loans as having original amounts of $500,000 or less. Accordingly,
we are clarifying in Q&A1 that institutions need not report small farm
loan data as to loans having original amounts greater than $500,000.
What are the data requirements regarding consumer loans?
We have revised Q&A1 addressing Sec. ____.42(c)(1) to clarify that
our questions and answers written with respect to data collection (and
reporting) in connection with small business and small farm loans also
apply to the collection of consumer loan data.

Discussion of Other Comments Received

We received several other comments that are not addressed by
specific questions and answers.
Community development. Several commenters suggested that the
current definition of ``community development'' does not include all
the types of activities that institutions engage in and that should be
considered as having a community development purpose.
Before adopting the definition of ``community development'' in the
revised regulations in 1995, the agencies received and considered a
number of comments on the characteristics of activities with community
development purposes. The agencies also committed to conduct a complete
review of the regulations in 2002. See 60 FR 22,177. We will ensure
that comments on the definition of ``community development'' are
considered at that time.
Loan-to-deposit ratio. Two commenters raised issues regarding the
use of a loan-to-deposit ratio as a measure of performance in the small
institution performance test. One stated that the loan-to-deposit ratio
should not be the only indicator of performance. The other suggested
that, due to their volatility, public funds should be subtracted from
the deposit side of the ratio prior to calculation.
The first concern, the relative importance of the loan-to-deposit
ratio in the overall rating of a small institution, is one that the
agencies routinely address in examiner training. As a general matter,
we agree that the loan-to-deposit ratio is not the only indicator of
lending activity performance. However, there may be cases in which a
loan-to-deposit ratio is so low that it indicates that the institution
is not lending. In such cases, the proportion of lending inside the
institution's assessment area, together with the geographic and
borrower distribution of those loans, will not excuse the low level of
lending overall.
The second concern, the subtraction of public funds from the
calculations of loan-to-deposit ratios, is a performance

[[Page 23624]]

context issue. We believe that examiners have the flexibility to
consider the level of public funds on deposit, and their volatility, in
determining whether a particular loan-to-deposit ratio is reasonable.
Letters of credit. One commenter asserted that lenders should
receive consideration under the CRA regulations for providing letters
of credit because institutions often use letters of credit to meet
small business needs. Q&A1 addressing Sec. ____.22(a)(2) specifically
addresses this issue and permits information about letters of credit to
be used by examiners to enhance their understanding of an institution's
performance.
Loans to nonprofit organizations. One commenter suggested that
loans under $1 million for business purposes, or under $500,000 for
farm purposes, made to nonprofit organizations, should be considered
community development loans even though they are secured by real
property. Under the CRA regulations, these loans often must be counted
as loans to small businesses or small farms rather than community
development loans, depending on the type of property securing the loan.
Q&A1 addressing Sec. ____.12(u) addresses instances in which loans to
nonprofit organizations may be considered as community development
loans.
The number and dollar amount of community development loans is a
criterion under the lending test that is meant to capture any loans for
a community development purpose that are otherwise not reported as home
mortgage, small business or small farm loans. Institutions may wish to
highlight the community development purpose of particular loans that
are considered as home mortgage, small business or small farm loans
during an examination. Such information may be relevant to the
examiners' evaluation of qualitative lending test criteria or to the
performance context within which community development loans are
evaluated. The regulation is clear, however, that, except for loans for
multifamily housing targeted for low-and moderate-income individuals,
home mortgage, small farm, and small business loans may not be reported
as community development loans.
Assessment areas and non-branch delivery systems. We received
several letters requesting clarification of how examiners evaluate a
retail institution's lending, investment, and service activities
outside the institution's assessment area(s) and the broader statewide
or regional area that includes its assessment area(s). This question
has been of special concern to commenters in the context of
institutions that obtain deposits and deliver products and services
through non-branch systems, such as the Internet. We are adopting Q&A1
addressing Appendix A to Part ____--Ratings, and are proposing a
revision to Q&A5 addressing Secs. ____.12(i) and 563e.12(h), which may
be particularly relevant to issues arising in this context.
Furthermore, we expect to address comments relating to out-of-
assessment area activities through materials issued for public comment
later this year.

Proposed Questions and Answers and Request for Comment

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)? Q&A5 addressing
Secs. ____.12(i) and 563e.12(h) in the 1997 Interagency Questions and
Answers states that there does not need to be a direct benefit to the
institution's assessment area(s) to satisfy the regulation's
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, provided the purpose, mandate, or function of the organization or
activity includes serving geographies or individuals located within the
institution's assessment area.
The Q&A addresses organizations and activities, operating statewide
or regionally, that may ultimately have a direct benefit on an
assessment area. However, it does not specifically address local
community development organizations or activities serving a locale
somewhere in the broader statewide or regional area surrounding an
institution's assessment area(s), which may not benefit low- and
moderate-income areas or individuals located inside the assessment
area(s). We are proposing to revise that Q&A to address both types of
organizations or activities. The proposed Q&A would clarify that an
institution's assessment area(s) need not receive an immediate or
direct benefit from the institution's specific participation in a
community development organization or activity provided the purpose,
mandate, or activity benefits the broader statewide or regional area by
servicing geographies or individuals located somewhere within the
broader statewide or regional area that includes the institution's
assessment area(s).
The text of the proposed Q&A follows:
Sections ____.12(i) and 563e.12(h)
Proposed Q5. 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)?
Proposed A5. No. The regulations, for example, recognize that
community development organizations and programs are frequently
efficient and effective ways for institutions to promote community
development. These organizations and programs often operate on a local,
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 is located in, the broader
statewide or regional area that includes the institution's assessment
area(s). The institution's assessment area need not receive an
immediate or direct benefit from the institution's specific
participation in the broader organization or activity, provided the
purpose, mandate, or function of the organization or activity includes
serving geographies or individuals located within the statewide or
regional area that includes the institution's assessment area.
Furthermore, the regulations permit a wholesale or limited purpose
institution to consider community development loans, community
development services, and qualified investments wherever they are
located, as long as the institution has otherwise adequately addressed
the credit needs within its assessment area(s).
In addition to general comments agreeing or disagreeing with the
proposed revisions to this Q&A, we would like comments on whether
community development organizations and programs that operate on a
local, statewide, or even multi-state basis ultimately provide benefit
to all surrounding areas.
May an institution receive consideration under the investment test
for mortgage-backed securities backed by home mortgages that the same
institution originated or purchased? We have received inquiries about
whether examiners will consider as qualified investments mortgage-
backed securities backed by home mortgages to low- and

[[Page 23625]]

moderate-income individuals that the investing institution initially
originated or purchased.
The revised regulations, at 12 CFR ____.23(b), provide that
activities considered under the lending or service tests may not be
considered under the investment test. Examiners consider the home
mortgages underlying mortgage-backed securities, if originated or
purchased by the institution, under the lending test when they examine
an institution. Therefore, examiners would not be permitted also to
consider as qualified investments mortgage-backed securities, purchased
or securitized by an institution, that are backed primarily or
exclusively by loans that the institution originated or purchased,
because the examiners would be considering the same activities under
both the lending and investment tests.
To clarify our opinion, we are proposing, and requesting public
comment specifically on, the following question and answer:

Section ____.23(b)

Proposed Q2: 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?
Proposed 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.
Should renewals and refinancings of small business and small farm
loans be collected and reported? Six commenters inquired whether loans
to small businesses and small farms, when renewed or refinanced, should
be reported for CRA purposes. The 1997 Interagency Questions and
Answers, at Q&A5 addressing Sec. ____.42(a), provided guidance that
``refinancing'' such loans should be reported as originations, but that
``renewing'' them should not. According to the guidance, the primary
distinction between ``refinancing'' and ``renewing'' a loan is that, in
connection with a loan refinancing, the existing obligation or note is
satisfied, and a new note is written. Distinguishing refinancings and
renewals on this basis is consistent with the guidance provided by the
Board in connection with home mortgage loan data reporting pursuant to
the Home Mortgage Disclosure Act (HMDA) regulation (12 CFR part 203).
Commenters asserted that small business and small farm lending
practices are sufficiently different from home mortgage lending
practices that renewals and refinancings of small business and small
farm loans should be treated differently from renewals and refinancings
of home mortgage loans for CRA reporting and evaluation purposes.
Further, they suggested that there is very little distinction between
refinancings and renewals of small business and small farm loans. Based
on these comments and other inquiries from financial institutions, we
propose that refinancings and renewals of small business and small farm
loans be treated uniformly for CRA purposes. To that end, we are
proposing two alternative revised Q&A5s addressing Sec. ____.42(a).
Alternative I: The first proposed Q&A states that, for CRA
purposes, financial institutions should report neither renewals nor
refinancings of small business and small farm loans as loan
originations. However, if institutions increase the amount of a small
business or small farm loan or line of credit, the amount of the
increase should be reported as a loan origination. Institutions should
continue to report home mortgage loans according to the instructions
provided in 12 CFR part 203.
Reporting neither renewals nor refinancings of small business or
small loans reflects that the lending test's performance criteria
emphasize loan originations and purchases. Renewals and refinancings,
especially if made frequently, would inflate the actual amounts of
small business and small farm lending. In addition, we believe that
recordkeeping and reporting burden of large institutions will be
lessened if they need not collect and report information about small
business and small farm loan refinancings and renewals.
If this proposed Q&A is adopted, institutions would not collect or
report as loan originations data on either small business and small
farm loan refinancings or renewals. However, any institution could
bring to its examiners' attention data on small business and small farm
loan refinancing or renewals by providing ``other loan data'' pursuant
to Sec. ____.22(a)(2), including information about its small business
and small farm loans outstanding. The text of the first alternative
proposed Q&A follows:

Section ____.42(a)--Alternative I:

Proposed Q5: Should institutions collect and report data about
small business and small farm loans that are refinanced or renewed?
Proposed A5: No. When an institution extends the term of one of its
existing small business or small farm loans in the same or a lesser
amount as the existing obligation, the institution should not report
this event as a small business or small farm loan origination. If an
institution increases the amount of a small business or small farm loan
when it extends the term of the loan, however, it should report the
amount of the increase as a small business or small farm loan
origination. The institution should report only the amount of the
increase; the original or remaining amount of the loan is not reported
again as an origination. For example, a financial institution extends a
loan (as opposed to a line of credit) for $25,000; principal payments
have resulted in a present outstanding balance of $15,000. The customer
requests an additional $5,000, which is approved, and a new note is
written for $20,000. In this example, the institution should report the
$5,000 increase.
An institution may provide ``other loan data,'' including
information about small business or small farm loans outstanding, to
examiners for consideration as part of the institution's lending test
performance evaluation.
Alternative II: Several institutions have stressed that ongoing
credit availability is important to the economic condition of small
businesses and small farms, as well as the community as a whole. These
institutions suggested that both refinancings and renewals of small
business and small farm loans should be considered by examiners when
evaluating an institution's small business and small farm lending
performance. The second alternative proposed Q&A would take these
concerns into consideration.
Because small business and small farm loan refinancings and
renewals are nearly indistinguishable, Alternative II, like Alternative
I, would not treat small business and small farm refinancings and
renewals differently. Institutions would collect and report data about
both refinancings and renewals as loan originations. However, because
institutions often write small business and small farm loans for short
terms and refinance or renew them at the end of the term, in order to
avoid inflation of amounts actually lent, institutions

[[Page 23626]]

would be limited to reporting only one origination per year.
The text of the second alternative proposed Q&A follows:
Section ____.42(a)--Alternative II:
Proposed Q5: Should institutions collect and report data about
small business and small farm loans that are refinanced or renewed?
Proposed A5: An institution should collect information about small
business and small farm loans that they refinance or renew as loan
originations. (A refinancing generally occurs when the existing loan
obligation or note is satisfied, and a new note is written, while a
renewal refers to an extension of the term of a loan.) When reporting
small business and small farm loan data, however, an institution may
only report one origination per loan per year unless an increase in the
loan amount is granted.
If an institution increases the amount of a small business or small
farm loan when it extends the term of the loan, it should always report
the amount of the increase as a small business or small farm loan
origination. The institution should report only the amount of the
increase if the original or remaining amount of the loan has already
been reported one time that year. For example, a financial institution
makes a loan (as opposed to a line of credit) for $25,000; principal
payments have resulted in a present outstanding balance of $15,000. The
customer requests an additional $5,000, which is approved, and a new
note is written for $20,000. In this example, the institution should
report the $5,000 increase. The bank may also report the renewal or
refinancing of the $15,000 balance one time that year.
An institution may provide ``other loan data,'' including
information about small business or small farm loans outstanding, to
examiners for consideration as part of the institution's lending test
performance evaluation.
In addition to general comments about these proposed questions and
answers, we would also appreciate receiving your views on the following
questions:
<bullet> Are there other fair and meaningful alternative methods of
collecting data on small business and small farm loan renewals and
refinancings? If so, please describe.
<bullet> Does allowing collection and reporting data of one renewal
or refinancing per year make sense?
<bullet> Will these proposed questions and answers increase or
decrease substantially the data collection and reporting burden of
financial institutions? Which alternative is less burdensome?
<bullet> Which alternative (including the guidance currently in
effect) best promotes accurate data that reflects the actual lending
activity of financial institutions?
Depending on what final guidance we eventually adopt, we understand
that we may have to make conforming changes to other Q&As.
Until a new Q&A has been adopted through publication in the Federal
Register, the existing Q&A5 addressing Sec. ____.42(a) remains in
effect. This means that, for the time being, financial institutions
will continue to collect and report data about small business and small
farm loan refinancings, but not renewals.

General Comments

In addition to the specific request for comments on the proposed
questions and answers, we invite public comment on the new and revised
questions and answers. We also invite public comment on a continuing
basis on any issues raised by the CRA and these Interagency Questions
and Answers. If, after reading the Interagency Questions and Answers,
financial institutions, examiners, community organizations, or other
interested parties have unanswered questions or comments about the
agencies' community reinvestment regulations, they should submit them
to the agencies or the FFIEC. We will consider addressing such
questions in future revisions to the Interagency Questions and Answers.

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:

Text of the Interagency Questions and Answers

Interagency Questions and Answers Regarding Community Reinvestment

Table of Contents

This document provides answers to questions pertaining to the
following provisions and topics of the CRA regulations:

Sec. ____.11--Authority, Purposes, and Scope

Sec. ____.11(c) Scope
Secs. 25.11(c)(3), 228.11(c)(3) & 345.11(c)(3) Certain special
purpose banks

Sec. ____.12--Definitions

Sec. ____.12(a) Affiliate
Secs. ____.12(f) & 563e.12(e) Branch
Secs. ____.12(h) & 563e.12(g) 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)(3) & 563e.12(g)(3) Activities that promote
economic development by financing businesses or farms that meet
certain size eligibility standards
Secs. ____.12(i) & 563e.12(h) Community development loan
Secs. ____.12(j) & 563e.12(i) Community development service
Secs. ____.12(k) & 563e.12(j) Consumer loan
Secs. ____.12(m) & 563e.12(l) Home mortgage loan
Secs. ____.12(n) & 563e.12(m) Income level
Secs. ____.12(o) & 563e.12(n) Limited purpose institution
Secs. ____.12(s) & 563e.12(r) Qualified investment
Sec. ____.12(t) Small institution
Sec. ____.12(u) Small business loan
Sec. ____.12(w) Wholesale institution

Sec. ____.21--Performance Tests, Standards, and Ratings, in General

Sec. ____.21(a) Performance tests and standards
Sec. ____.21(b) Performance context
Sec. ____.21(b)(2) Information maintained by the institution or
obtained from community contacts
Sec. ____.21(b)(4) Institutional capacity and constraints
Sec. ____.21(b)(5) Institution's past performance and the
performance of similarly situated lenders

Sec. ____.22--Lending Test

Sec. ____.22(a) Scope of test
Sec. ____.22(a)(1) Types of loans considered

[[Page 23627]]

Sec. ____.22(a)(2) Loan originations and purchases/other loan
data
Sec. ____.22(b) Performance criteria
Sec. ____.22(b)(1) Lending activity
Sec. ____.22(b)(2) & (3) Geographic distribution and borrower
characteristics
Sec. ____.22(b)(4) Community development lending
Sec. ____.22(b)(5) Innovative or flexible lending practices
Sec. ____.22(c) Affiliate lending
Sec. ____.22(c)(1) In general
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)(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(d) Lending by a consortium or a third party

Sec. ____.23--Investment Test

Sec. ____.23(a) Scope of test
Sec. ____.23(b) Exclusion
Sec. ____.23(e) Performance criteria

Sec. ____.24--Service Test

Sec. ____.24(d) Performance criteria--retail banking services
Sec. ____.24(d)(3) Availability and effectiveness of alternative
systems for delivering retail banking services

Sec. ____.25--Community Development Test for Wholesale or Limited
Purpose Institutions

Sec. ____.25(d) Indirect activities
Sec. ____.25(e) Benefit to assessment area(s)
Sec. ____.25(f) Community development performance rating

Sec. ____.26--Small Institution Performance Standards

Sec. ____.26(a) Performance criteria
Sec. ____.26(a)(1) Loan-to-deposit ratio
Sec. ____.26(a)(2) Percentage of lending within assessment
area(s)
Sec. ____.26(a)(3) and (4) Distribution of lending within
assessment area(s) by borrower income and geographic location
Sec. ____.26(b) Performance rating

Sec. ____.27--Strategic Plan

Sec. ____.27(c) Plans in general
Sec. ____.27(f) Plan content
Sec. ____.27(f)(1) Measurable goals
Sec. ____.27(g) Plan approval
Sec. ____.27(g)(2) Public participation

Sec. ____.28--Assigned Ratings

Sec. ____.28(a) Ratings in general

Sec. ____.29--Effect of CRA Performance on Applications

Sec. ____.29(a) CRA performance
Sec. ____.29(b) Interested parties

Sec. ____.41--Assessment Area Delineation

Sec. ____.41(a) In general
Sec. ____.41(c) Geographic area(s) for institutions other than
wholesale or limited purpose institutions
Sec. ____.41(c)(1) Generally consist of one or more MSAs or one
or more contiguous political subdivisions
Sec. ____.41(d) Adjustments to geographic area(s)
Sec. ____.41(e) Limitations on delineation of an assessment area
Sec. ____.41(e)(3) May not arbitrarily exclude low- or moderate-
income geographies
Sec. ____.41(e)(4) May not extend substantially beyond a CMSA
boundary or beyond a state boundary unless located in a multistate
MSA
Sec. ____.42(a) Loan information required to be collected and
maintained
Sec. ____.42(a)(2) Loan amount at origination
Sec. ____.42(a)(3) The loan location
Sec. ____.42(a)(4) Indicator of gross annual revenue
Sec. ____.42(b) Loan information required to be reported
Sec. ____.42(b)(1) Small business and small farm loan data
Sec. ____.42(b)(2) Community development loan data
Sec. ____.42(b)(3) Home mortgage loans
Sec. ____.42(c) Optional data collection and maintenance
Sec. ____.42(c)(1) Consumer loans
Sec. ____.42(c)(1)(iv) Income of borrower
Sec. ____.42(c)(2) Other loan data
Sec. ____.42(d) Data on affiliate lending

Sec. ____.43--Content and Availability of Public File

Sec. ____.43(a) Information available to the public
Sec. ____.43(a)(1) Public comments
Sec. ____.43(b) Additional information available to the public
Sec. ____.43(b)(1) Institutions other than small institutions
Sec. ____.43(c) Location of public information

Sec. ____.44--Public Notice by Institutions

Sec. ____.45--Publication of Planned Examination Schedule

Appendix A to Part ____--Ratings

Appendix B to Part ____--CRA Notice

The body of the Interagency Questions and Answers Regarding
Community Reinvestment follows:

Sec. ____.11--Authority, Purposes, and Scope

Sec. ____.11(c) Scope

Sec. 25.11(c)(3), 228.11(c)(3) & 345.11(c)(3) Certain special
purpose banks.
Q1. Is the list of special purpose banks exclusive?
A1. No, there may be other examples of special purpose banks. These
banks engage in specialized activities that do not involve granting
credit to the public in the ordinary course of business. Special
purpose banks 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 bank merely by ceasing to
make loans and, instead, making investments and providing other retail
banking services.
Q2. To be a special purpose bank, must a bank limit its activities
in its charter?
A2. No. A special purpose bank may, but is not required to, limit
the scope of its activities in its charter, articles of association or
other corporate organizational documents. A bank 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. A bank that believes it is exempt from CRA as a
special purpose bank should seek confirmation of this status from its
supervisory agency.

Sec. ____.12--Definitions

Sec. ____.12(a) Affiliate

Q1. 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

Q1. 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.''
Q2. 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.

Secs. ____.12(h) & 563e.12(g) Community Development

Q1. Are community development activities limited to those that
promote economic development?
A1. No. Although the definition of ``community development''
includes

[[Page 23628]]

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.
Q2. 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.
Q3. 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

Q1. 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 is not knowable in advance, 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) and 563e.12(g)(3) Activities That Promote Economic
Development by Financing Businesses or Farms That Meet Certain Size
Eligibility Standards

Q1. ``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 or SBIC 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 same geography that does not directly
provide additional jobs or services to the community.

Secs. ____.12(i) and 563e.12(h) Community Development Loan

Q1. What are examples of community development loans?
A1. Examples of community development loans include, but are not
limited to, loans to:
<bullet> Borrowers for affordable housing rehabilitation and
construction, including construction and permanent financing of
multifamily rental property

[[Page 23629]]

serving low- and moderate-income persons;
<bullet> Not-for-profit organizations serving primarily low- and
moderate-income housing or other community development needs;
<bullet> 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;
<bullet> 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.
<bullet> Local, state, and tribal governments for community
development activities; and
<bullet> 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 of affordable housing or community facilities,
referred to above, may include the abatement of environmental hazards,
such as lead-based paint, that are present in the housing or
facilities.
Q2. 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 Q&A2
addressing Sec. ____.42(b)(2).
Q3. 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.''
Q4. 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.
Q5. 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, for example, recognize that community
development organizations and programs are frequently 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
institution's assessment area need not receive an immediate or direct
benefit from the institution's specific participation in the broader
organization or activity, provided the purpose, mandate, or function of
the organization or activity includes serving geographies or
individuals located within the institution's assessment area.
Furthermore, the regulations permit a wholesale or limited purpose
institution to consider community development loans, community
development services, and qualified investments wherever they are
located, as long as the institution has otherwise adequately addressed
the credit needs within its assessment area(s).
Q6. What is meant by a ``regional area'' in the requirement that a
community development loan must benefit the institution's assessment
area(s) or a broader statewide or regional area that includes the
institution's assessment area(s)?
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. When examiners evaluate community
development loans that benefit a regional area that includes the
institution's assessment area, however, the examiners will consider the
size of the regional area and the actual or potential benefit to the
institution's assessment area(s). In most cases, the larger the
regional area, the more diffuse the benefit will be to the
institution's assessment area(s). Examiners may view loans with more
direct benefits to an institution's assessment area(s) as more
responsive to the credit needs of the area(s) than loans for which the
actual benefit to the assessment area(s) is uncertain or for which the
benefit is diffused throughout a larger area that includes the
assessment area(s).
Q7. 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

[[Page 23630]]

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) and 563e.12(i) Community Development Service

Q1. 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.
Q2. 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.
Q3. What are examples of community development services?
A3. Examples of community development services include, but are not
limited to, the following:
<bullet> Providing technical assistance on financial matters to
nonprofit, tribal or government organizations serving low- and
moderate-income housing or economic revitalization and development
needs;
<bullet> 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;
<bullet> Lending employees to provide financial services for
organizations facilitating affordable housing construction and
rehabilitation or development of affordable housing;
<bullet> Providing credit counseling, home-buyer and home-
maintenance counseling, financial planning or other financial services
education to promote community development and affordable housing;
<bullet> Establishing school savings programs and developing or
teaching financial education curricula for low- or moderate-income
individuals;
<bullet> 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
<bullet> 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:
<bullet> Serving on a loan review committee;
<bullet> Developing loan application and underwriting standards;
<bullet> Developing loan processing systems;
<bullet> Developing secondary market vehicles or programs;
<bullet> Assisting in marketing financial services, including
development of advertising and promotions, publications, workshops and
conferences;
<bullet> Furnishing financial services training for staff and
management;
<bullet> Contributing accounting/bookkeeping services; and
<bullet> Assisting in fund raising, including soliciting or
arranging investments.

Sec. ____.12(k) & 563e.12(j) Consumer Loan

Q1. 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.
Q2. 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.
Q3. 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

[[Page 23631]]

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.

Sec. ____.12(m) & 563e.12(l) Home Mortgage Loan

Q1. 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.
Q2. 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.

Sec. ____.12(n) & 563e.12(m) Income Level

Q1. 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.''
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/''.

Sec. ____.12(o) & 563e.12(n) Limited Purpose Institution

Q1. 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.
Q2. 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:
<bullet> Is the other lending provided as an incident to the
institution's wholesale lending?
<bullet> Are the loans provided as an accommodation to the
institution's wholesale customers?
<bullet> Are the loans made only infrequently to the limited
purpose institution's customers?
<bullet> Does only an insignificant portion of the institution's
total assets and income result from the other lending?
<bullet> How significant a role does the institution play in
providing that type(s) of loan(s) in the institution's assessment
area(s)?
<bullet> Does the institution hold itself out as offering that
type(s) of loan(s)?
<bullet> Does the lending test or the community development test
present a more accurate picture of the institution's CRA performance?
Q3. Do ``niche institutions'' qualify as limited purpose (or
wholesale) institutions?
A3. Generally, no. Institutions that are in the business of lending
to the public,

[[Page 23632]]

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.

Sec. ____.12(s) & 563e.12(r) Qualified Investment

Q1. 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.
Q2. 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.
Q3. 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 Q&A 3 addressing
Secs. ____.12(j) and 563e.12(i).
Q4. 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:
<bullet> 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;
<bullet> Organizations, including, for example, Small Business
Investment Companies (SBICs) and specialized SBICs, that promote
economic development by financing small businesses;
<bullet> 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;
<bullet> Projects eligible for low-income housing tax credits;
<bullet> State and municipal obligations, such as revenue bonds,
that specifically support affordable housing or other community
development;
<bullet> 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
<bullet> Organizations supporting activities essential to the
capacity of low- and 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.
Q5. 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.
Q6. 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.
Q7. 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.

Sec. ____.12(t) Small Institution

Q1. 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.
Q2. 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.
3103(a)(8)).

Sec. ____.12(u) Small Business Loan

Q1. 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

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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.
Q2. 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.
Q3. Are loans secured by nonfarm residential real estate to finance
small businesses ``small business loans'?
A3. No. Loans secured by nonfarm residential real estate that are
used to finance small businesses are not included as ``small business''
loans for Call Report and TFR purposes. The agencies recognize that
many small businesses are financed by loans secured by residential real
estate. If these loans promote community developmen