CRA Update:  The ever expanding possibilities for Meeting Community Development Needs 

 

One of the more interesting recent developments in the area of Community Reinvestment Act (“CRA”) compliance was the publishing of the Interagency Questions and Answers proposing to clarify issues around how community development loans and investments are treated for purposes of CRA ratings.      While these propose changes received little fanfare, they represent both significant change in the manner in which community development and community service can be considered.  We believe further, that these Q & A’s represented the beginning of something bigger and better for CRA in the near future. 

Community Development - Immediate and Direct Impact

Community development activities are considered for large banks and intermediate small bank CRA reviews.  As an aside, small banks cans can have their community development activities considered for the purpose of receiving an “outstanding rating”; although we are aware of very few institutions that actually pursue this course.  

One of the areas of confusion for community development has come with organizations that operate statewide, or regionally.  In many cases, the services these organizations provide do not necessary confer an immediate and direct benefit on the assessment area of the bank.  The original answer to this question said that these investments would be considered if the bank had “adequately addressed the community developments needs of its immediate community.    It was this language that seems to cause our clients to hesitate.  How do we know whether we have adequately addressed the community development needs of our assessment area?   

The changes to the answer to the questions attempt to address this.  Going forward, community development investments that do not give immediate direct impact to the assessment area must:

·       Be conducted in a safe and sound manner;

·       May not be conducted in lieu of, or to the detriment of activities within the assessment area. 

The FFIEC goes on to state that when agencies examine whether or not activities are being conducted in lieu of or to the detriment  of activities within the assessment area, the performance context and opportunities within the assessment area will be examined. 

Meeting the Test for Activities Not in Lieu or to the Detriment

It is clear form this language that Banks will need to do a clear and convincing job of showing research that indicates that they

·       Know the credit needs of the local assessment area;

·       Have researched the opportunities for community development investments and loans; and

·       Can demonstrate that these opportunities do not exist in significant numbers within the assessment area. 

We advise our clients to ensure that there is ongoing dialogue with community groups, documentation of the dialogue and substantial economic research on the needs of the community.   In addition, it is a best practice to ensure that the strategic plan of the Bank matches with the economic research that is being performed.  For example, when the strategic plan calls for home equity loans minimums that start at $130K, there should be research that shows that this minimum would not arbitrarily exclude significant portions of the population with the assessment area.   

The upshot here is that you can clearly investment in community development agencies that do not directly and immediately impact the assessment area as long as you can prove that there aren’t viable options. 

Investments in National Funds

A second area that was addressed by the Questions and Answers was the question about community development credit for investing in national of regional CD Funds.  Because these funds tend to provide economies of scale and efficiencies, it is clear that the FFIEC would like to encourage investment in the community development work of these funds.   As a result, the new question and answers give a very similar treatment to these funds above. In those circumstances where a Bank can show that it has researched and considered the credit needs of its assessment area and has gone as far as it can within that area, investments in national funds can be a good alternative. 

The real rub is in documenting your research in the local assessment area first.  You cannot replace local investment with national unless you can demonstrate that there simply are not appropriate opportunities in the local area. 

Regional Area

A final question that was addressed was the definition of “regional area”.  The answer here was expanded to include areas that have some economic interdependency.  Therefore regional areas can include multistate and interstate areas.   

More Changes Coming

We believe that these questions and answers demonstrate that there are positive changes coming in the manner in the area of CRA evaluations.  Stay tuned!