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FAQ and Links

 

Types of Lending Activities That May Warrant Favorable Consideration as Activities Responsive to the Credit Needs of an Institution’s Community

 

Credit needs vary from community to community. However, there are some lending activities that are likely to be responsive in helping to meet the credit needs of many communities. The agencies are adopting a new question and answer, §ll.22(a)–1, which identifies the following activities as being responsive to the needs of an institution’s assessment area:

 

• Providing loan programs that include a financial education component about how to avoid lending activities that may be abusive or otherwise unsuitable;

 

• Establishing loan programs that provide small, unsecured consumer loans in a safe and sound manner (i.e., based on the borrower’s ability to repay) and with reasonable terms;

 

• Offering lending programs, which feature reporting to consumer reporting agencies, that transition borrowers from loans with higher interest rates and fees (based on credit risk) to lower-cost loans, consistent with safe and sound lending practices. Reporting to consumer reporting agencies allows borrowers accessing these programs the opportunity to improve their credit histories and thereby improve their access to competitive credit products.

 

Examiners may consider favorably such lending activities, which have features augmenting the success and effectiveness of the institution’s lending programs.

 

Indirect Community Development Services

 

The agencies are adopting a new question and answer, §ll.24(e)–1, that addresses the conditions under which an institution may receive consideration for community development services offered by affiliates or third parties. The guidance states that, at an institution’s option, the agencies will consider services performed by an affiliate or by a third party on the institution’s behalf under the service test if the services provided enable the institution to help meet the credit needs of its community. Indirect services that enhance an institution’s ability to deliver credit products or deposit services within its community and that can be quantified may be considered under the service test if those services have not been considered already under the lending or investment test. For example, an institution that contracts with a community organization to provide home ownership counseling to low- and moderate-income home buyers as part of the institution’s mortgage program may receive consideration for that indirect service under the service test. In contrast, donations to a community organization that offers financial services to low- or moderate-income individuals may be considered under the investment test, but would not also be eligible for consideration under the service test. Services performed by an affiliate will be treated the same as affiliate loans and investments made in the institution’s assessment area and may be considered if the service is not claimed by any other institution.

 

Are community development activities limited to those that promote economic development?

 

A1. No. Although the definition of ‘‘community development’’ includes activities that promote economic development by financing small businesses or farms, the rule does not limit community development loans and services and qualified investments to those activities. Community development also includes community or tribal-based child care, educational, health, or social services targeted to low- or moderate-income persons, affordable housing for low- or moderate income individuals, and activities that revitalize or stabilize low- or moderate income areas.

 

§§ll.12(h) & 563e.12(g)–2: Must a community development activity occur inside a low- or moderate-income area in order for an institution to receive CRA consideration for the activity?

  

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.

 

§§ll.12(h) & 563e.12(g)–3: Does the regulation provide flexibility in considering performance in high-cost areas?

 

A3. Yes, the flexibility of the performance standards allows examiners to account in their evaluations for conditions in high-cost areas. Examiners consider lending and services to individuals and geographies of all income levels and businesses of all sizes and revenues. In addition, the flexibility in the requirement that community development loans, community development services, and qualified investments have as their ‘‘primary’’ purpose community development allows examiners to account for conditions in high-cost areas. For example, examiners could take into account the fact that activities address a credit shortage among middle income people or areas caused by the disproportionately high cost of building, maintaining or acquiring a house when determining whether an institution’s loan to or investment in an organization that funds affordable housing for middle-income people or areas, as well as low- and moderate-income people or areas, has as its primary purpose community development.

 

§§ll.12(h)(1) & 563e.12(g)(1) Affordable Housing (Including Multifamily Rental Housing) for Low- or Moderate-Income Individuals

 

§§ll.12(h)(1) & 563e.12(g)(1)–1: When determining whether a project is ‘‘affordable housing for low- or moderate-income individuals,’’ thereby meeting the definition of "community development," will it be sufficient to use a formula that relates the cost of ownership, rental or borrowing to the income levels in the area as the only factor, regardless of whether the users, likely users, or beneficiaries of that affordable housing are low- or moderate-income individuals?

 

A1. The concept of ‘‘affordable housing’’ for low- or moderate- income individuals does hinge on whether low or moderate-income individuals benefit, or are likely to benefit, from the housing. It would be inappropriate to give consideration to a project that exclusively or predominately houses families that are not low- or moderate income simply because the rents or housing prices are set according to a particular formula. For projects that do not yet have occupants, and for which the income of the potential occupants cannot be determined in advance, or in other projects where the income of occupants cannot be verified, examiners will review factors such as demographic, economic and market data to determine the likelihood that the housing will ‘‘primarily’’ accommodate low- or moderate-income individuals. For example, examiners may look at median rents of the assessment area and the project; the median home value of either the assessment area, low- or moderate income geographies or the project; the low- or moderate-income population in the area of the project; or the past performance record of the organization(s) undertaking the project. Further, such a project could receive consideration if its express, bona fide intent, as stated, for example, in a prospectus, loan proposal or community action plan, is community development.

 

Community Development Loan

 

§§ll.12(i) & 563e.12(h)–1: What are examples of community development loans?

 

A1. Examples of community development loans include, but are not limited to, loans to:

 

• Borrowers for affordable housing rehabilitation and construction, including construction and permanent financing of multifamily rental property serving low- and moderate-income persons;

 

• Not-for-profit organizations serving primarily low- and moderate-income housing or other community development needs;

 

• Borrowers to construct or rehabilitate community facilities that are located in low- and moderate income areas or that serve primarily low- and moderate-income individuals;

 

• Financial intermediaries including Community Development Financial Institutions (CDFIs), Community  Development Corporations (CDCs), minority- and women-owned financial institutions, community loan funds or pools, and low-income or community development credit unions that  primarily lend or facilitate lending to promote community development.

• Local, state, and tribal governments for community development activities; and

 

• Borrowers to finance environmental clean-up or redevelopment of an industrial site as part of an effort to revitalize the low- or moderate-income community in which the property is located. The rehabilitation and construction of affordable housing or community facilities, referred to above, may include the abatement or remediation of, or other actions to correct, environmental hazards, such as lead-based paint, that are present in the housing, facilities, or site.

 

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 §ll.42(b)(2)–2.

 

§§ll.12(i) & 563e.12(h)–3: Do secured credit cards or other credit card programs targeted to low- or moderate income individuals qualify as community development loans?

 

A3. No. Credit cards issued to low- or moderate-income individuals for household, family, or other personal expenditures, whether as part of a program targeted to such individuals or otherwise, do not qualify as community development loans because they do not have as their primary purpose any of the activities included in the definition of ‘‘community development.’’

 

§§ll.12(i) & 563e.12(h)–4: The regulation indicates that community development includes ‘‘activities that revitalize or stabilize low- or moderate income geographies.’’ Do all loans in a low- to moderate-income geography have a stabilizing effect?

 

A4. No. Some loans may provide only indirect or short-term benefits to low- or moderate-income individuals in a low or moderate-income geography. These loans are not considered to have a community development purpose. For example, a loan for upper-income housing in a distressed area is not considered to have a community development purpose simply because of the indirect benefit to low- or moderate income persons from construction jobs or the increase in the local tax base that supports enhanced services to low- and moderate-income area residents. On the other hand, a loan for an anchor business in a distressed area (or a nearby area), that employs or serves residents of the area, and thus stabilizes the area, may be considered to have a community development purpose. For example, in an underserved, distressed area, a loan for a pharmacy that employs, and provides supplies to, residents of the area promotes community development.

 

§§ll.12(i) & 563e.12(h)–5: Must there be some immediate or direct benefit to the institution’s assessment area(s) to satisfy the regulations’ requirement that qualified investments and community development loans or services benefit an institution’s assessment area(s) or a broader statewide or regional area that includes the institution’s assessment area(s)?

 

A5. No. The regulations recognize that community development organizations and programs are efficient and effective ways for institutions to promote community development. These organizations and programs often operate on a statewide or even multi-state basis. Therefore, an institution’s activity is considered a community development loan or service or a qualified investment if it supports an organization or activity that covers an area that is larger than, but includes, the institution’s assessment area(s). The institution’s assessment area(s) need not receive an immediate or direct benefit from the institution’s specific participation in the broader organization or activity, provided that the purpose, mandate, or function of the organization or activity includes serving geographies or individuals located within the institution’s assessment area(s).

 

In addition, a retail institution that, considering its performance context, has adequately addressed the community development needs of its assessment area(s) will receive consideration for certain other community development activities. These community development activities must benefit geographies or individuals located somewhere within a broader statewide or regional area that includes the institution’s assessment area(s). Examiners will consider these activities even if they will not benefit the institution’s assessment area(s).

 

What are examples of community development services?

 

A3. Examples of community development services include, but are not limited to, the following:

 

• Providing technical assistance on financial matters to nonprofit, tribal or government organizations serving low and moderate-income housing or economic revitalization and development needs;

 

• Providing technical assistance on financial matters to small businesses or community development organizations, including organizations and individuals who apply for loans or grants under the Federal Home Loan Banks’ Affordable Housing Program;

 

• Lending employees to provide financial services for organizations facilitating affordable housing construction and rehabilitation or development of affordable housing;

 

• Providing credit counseling, homebuyer and home-maintenance counseling, financial planning or other examples of community development services?

 

A3. Examples of community development services include, but are not limited to, the following:

 

• Providing technical assistance on financial matters to nonprofit, tribal or government organizations serving low- and moderate-income housing or economic revitalization and development needs;

 

• Providing technical assistance on financial matters to small businesses or community development organizations, including organizations and individuals who apply for loans or grants under the Federal Home Loan Banks’ Affordable Housing Program;

 

• Lending employees to provide financial services for organizations facilitating affordable housing construction and rehabilitation or development of affordable housing;

 

• Providing credit counseling, homebuyer and home-maintenance counseling, financial planning or other financial services education to promote community development and affordable housing;

 

• Establishing school savings programs and developing or teaching financial education curricula for low- or moderate-income individuals;

 

• Providing electronic benefits transfer and point of sale terminal systems to improve access to financial services, such as by decreasing costs, for low- or moderate-income individuals; and

 

• Providing other financial services with the primary purpose of community development, such as low-cost bank accounts, including ‘‘Electronic Transfer Accounts’’ provided pursuant to the Debt Collection Improvement Act of 1996, or free government check cashing that increases access to financial services for low- or moderate-income individuals.

 

Examples of technical assistance activities that might be provided to community development organizations include:

 

• Serving on a loan review committee;

 

• Developing loan application and underwriting standards;

 

• Developing loan processing systems;

 

• Developing secondary market vehicles or programs;

 

• Assisting in marketing financial services, including development of advertising and promotions, publications, workshops and conferences;

 

• Furnishing financial services training for staff and management;

 

• Contributing accounting/bookkeeping services; and

 

• Assisting in fund raising, including soliciting or arranging investments.

 

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.