Changes in Community
Reinvestment Act Questions and Answers May bring Some Welcome News
One of the more difficult tasks that our clients must
accomplish is to try to meet the community development and community service
tests in the Community reinvestment Act (“CRA”). For many community banks the opportunities to
do community service that qualifies under the requirements of the CRA are very
limited. The same is true with
opportunities to conduct community development activities while staying within
ones assessment area. In many cases, the service opportunities have
been limited to teaching classes at organizations that serve community needs. Lending and investment opportunities are
often “gobble up” by the large banks in the assessment area, leaving the
community banks to scramble to try and comply with the requirements of the
regulation.
In November of 2013, the FFIEC announced changes to the Community
Reinvestment Act Q & A that have the
potential to greatly expand a bank’s ability to meet the tests of CRA while
doing CRA activities outside of the assessment area. [1]
In addition the ability to perform community service has also been
expanded. Just remember along with new
powers come additional responsibilities and therefore additional risks!
The Changes
There are actual several changes that were adopted in
November, 2013. We are only discussing a
few that we believe directly impact compliance with the community development tests
for small intermediate banks. Large
Banks are encouraged to read the full text of the changes.
In the past there was wording that suggested that banks
could do community development activities outside of the assessment area, the
caveat for how these activities might qualify for credit to the bank performing
them was unclear. The
original Q & A stated the following:
Q&A § .12(h) – 6 had stated
that examiners would consider such activities if an institution, considering its performance context, had adequately addressed the community development needs of
its assessment area(s).
In particular, the language created doubt that activities
outside of a defined assessment area would be given credit at all. The agencies first proposed new language that
indicated that as long as these activities were performed in a safe and sound
manner and weren’t done in lieu of activities within the assessment area, they
would be okay. However, because many
comments were received [2]
the language was changed. The adopted
new language says:
§ .12(h) – 6 states,
with respect to community development
activities that are conducted in the broader
statewide or regional area that includes the institution’s assessment area(s), that “examiners will consider these activities even if they will not
benefit the institution’s assessment area(s), as long
as the institution has been responsive
to community development needs and opportunities in its assessment
area(s).”
The definition of what a broader statewide of regional area
was left fairly open to a common sense application. There are not specific guidelines for
defining these. It is safe to say that
a definition that includes contiguous counties or economic zones that cross
state lines (Lake Tahoe in California and Nevada for example) would be an
acceptable definition.
Another significant
change is the service that can qualify as community service on the part of bank
employees. The current Q & A stated
that service to a community group was defined as
§ .12(i) – 3 stated that providing technical assistance to organizations that engage
in community development activities (as defined
by
the regulation) is considered
a community development service
For many of our clients this language has been taken to
limit the things that bank employees may do to get credit for the community
service. The FFIEC clearly wanted to expand
that definition and in particular wanted to add that serving on the Board of
community service organization can indeed count as community service
§ .12(i) – 3 to clarify that service
on the board of directors
of a community development organization is an explicit
example of a
technical assistance activity
that could be provided to community development organizations that
would receive consideration as a community development service
The idea here is that the service on the Board of these
organizations must be active and not symbolic.
In what looked almost like a throw away, the FFIEC also added the
following:
In addition,
in response to commenters’ suggestions, the Agencies are
adding the following example
of a technical assistance activity that might be
provided to community development
organizations: providing
services reflecting financial
institution employees’ areas of expertise at the institution, such as
human resources, information technology,
and legal services.
Of course this language greatly expands the sort of services
that a bank may provide to community development organizations while meeting
the service requirements of the CRA.
Broader
Implications
Simply put, the more work you do upfront, the more leeway
you get! For example, being able to prove
that there is broader region that you serve outside of your assessment area and
that this region is legitimately economically connected is an important step in
being able to perform community development activities out of the assessment area. The
second step is being able to show that the plan for activities allows the bank
to serve the needs of the immediately assessment area while expanding.
We believe that for a plan to expand to activities beyond
the assessment are must be well thought out, and there must be documentation to
show that the plan does not ignore low to moderate income groups within the
assessment area. However, for banks that
do not have these populations directly within the established assessment area, this
is a significant opportunity to expand and reach new levels of community development
that had heretofore been unattainable.
The key to a successful expansion is being able to document
the idea that the Bank understands the credit needs of the people within the established
assessment area. In conjunction with
understanding those needs the bank must be able to show how their activities
meet those needs.
[1]
For the full text of the changes see http://www.federalreserve.gov/newsevents/press/bcreg/20130318a.htm
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