FFIEC Community Reinvestment Act Header

Correspondence Date: May 22, 1997

Dear [ ]:

This letter responds to your March 10, 1997 letter requesting an opinion about the applicability of the Community Reinvestment Act ("CRA") to financial institutions contributions to the [ ] ("Program"). As you know, the four federal bank and thrift regulatory agencies ("Agencies")  promulgated substantially similar CRA regulations on May 4, 1995. In order to promote consistent interpretation of these CRA regulations, staff from all four agencies have considered your inquiry and concur in the opinions expressed in this letter.

In your letter, you explain that the financial institution's contributions will support two funds administered by the Program. One fund will provide loans to small businesses in [ city, state ]; the other fund will cover the operating expenses associated with the lending operation. In your letter, you ask whether the financial institutions would receive positive consideration under the Community Reinvestment Act ("CRA") for their contributions to the Program's operating fund. As discussed below, financial institutions may receive positive consideration in their CRA evaluations for their contributions to both funds administered by the Program.

The CRA regulations establish the framework and criteria by which the Agencies assess an institution's record of helping to meet the credit needs of its community. The CRA regulations set out a number of different evaluation methods for examiners to use, depending on the business strategy and size of the institution under examination.

Regardless of the performance test under which a regulated financial institution is evaluated1, an institution can receive positive consideration for making "qualified investments" that help meet the credit needs of the institution's assessment area(s) or a broader statewide or regional area that includes the institution's assessment area(s).2

"Qualified investment" is defined in the revised CRA regulations as:

[A] lawful investment, deposit, membership share or grant that has as its primary purpose community development.3

"Community development"is defined 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 or Small Business Investment Company programs (13 CFR 121.301) or have gross annual revenues of $1 million or less.4

Financing businesses meeting the above size eligibility standards does not always necessarily promote economic development. The Agencies' examiners will presume that any loan to or investment in a Small Business Development Company or Small Business Investment Company promotes economic development. Other activities that finance small businesses that meet the size eligibility standards must support permanent job creation, retention, and/or improvement for persons who are currently low- or moderate-income or support permanent job creation, retention, and/or improvement in low- or moderate-income geographies targeted for redevelopment by Federal, state, local or tribal governments.

Financial institutions' contributions to the Program would be grants5 that have as their primary purpose community development. The Program will provide small loans to new and expanding small businesses in [ city, state ]. Provided that the small businesses meet the size eligibility standards discussed above and that financing them will promote economic development, institutions may receive positive CRA consideration for their investments in the Program's loan fund. Contributions to the Program's operating fund would help an institution meet the credit needs of its community by enabling the Program to extend the small business loans. Therefore, operating fund contributions would also receive favorable consideration during an institution's CRA evaluation, provided the Program loans promote economic development and the financial institutions' qualified investments benefit the institution's assessment area(s).6

I trust this letter is responsive to your inquiry. If you have further questions, please contact me or Michele Meyer, an attorney on my staff, at (202) 874-5750.


Sincerely,

/s/
Michael S. Bylsma
Director
Community and Consumer Law Division
Office of the Comptroller of the Currency



Footnotes

1  Large institutions' CRA performance is typically evaluated under the lending, investment and service tests. Examiners consider large institutions' qualified investments under the investment test. See 12 C.F.R. §§ 25.23(a), 228.23(a), 345.23(a), and 563e.23(a). In a small institution examination, examiners may adjust an institution's evaluation under the small institution performance criteria, if appropriate, based on lending-related qualified investments. See 12 C.F.R. §§ 25.26(a)(1), 228.26(a)(1), 345.26(a)(1), and 563e.26(a)(1). See also Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment (hereinafter "Qs and As"), 61 Fed. Reg. 54,647, 54,658 (Oct. 21, 1996) (Q and A 1 addressing § __.26(a) (consideration of small institutions' lending-related activities)). Qualified investments may also be considered to determine if a small institution merits an outstanding CRA rating. See 12 C.F.R. pt. 25 app. A(d)(2), pt. 228 app. A(d)(2), pt. 345 app. A(d)(2), and pt. 563e app. A(d)(2). See also Q and A 5 addressing § __.26(a), 61 Fed. Reg. at 54,659. The community development test, which is appropriate for wholesale and limited purpose institutions, evaluates, inter alia, the number and amount of qualified investments. See 12 C.F.R. §§ 25.25(c)(1), 228.25(c)(1), 345.25(c)(1), and 563e.25(c)(1). And, finally, institutions evaluated on the basis of a strategic p plan must include in their plan how they intend to meet the credit needs of their assessment area(s). They may meet credit needs through lending, investment, and/or services, as appropriate. See 12 C.F.R. §§ 25.27(f)(1), 228.27(f)(1), 345.27(f)(1), and 563e.27(f)(1)

2  See 12 C.F.R. §§ 25.23(a), 25.25(e)(1), 25.26(a), 25.27(f)(1)(i), 228.23(a), 228.25(e)(1), 228.26(a), 228.27(f)(1)(i), 345.23(a), 345.25(e)(1), 345.26(a), 345.27(f)(1)(i), 563e.23(a), 563e.25(e)(1), 563e.26(a), and 563e.27(f)(1)(i). See also Q and A 2 addressing § __.26(b), 61 Fed. Reg. at 54,659-60 (consideration of a small institution's qualified investments in a statewide or regional area that includes the institution's assessment area(s)). In the case of wholesale and limited purpose institutions, examiners will give positive consideration to qualified investments nationwide if the institution has adequately addressed the needs of its assessment area(s). See 12 C.F.R. §§ 25.25(e)(2), 228.25(e)(2), 345.25(e)(2), 563e.25(e)(2).

3  12 C.F.R. §§ 25.12(s), 228.12(s), 345.12(s) and 563e.12(r). This letter assumes, without deciding, that the financial institutions' contributions to the Program would be lawful.

4   12 C.F.R. §§ 25.12(h)(3), 228.12(h)(3), 345.12(h)(3), and 563e.12(g)(3).

5  See Q and A 5 addressing §§.12(s) and 563e.12(r), 61 Fed. Reg. at 54,653.

6  As explained supra in note 2, in the case of wholesale and limited purpose institutions, examiners will give positive consideration to qualified investments nationwide if the institution has adequately addressed the needs of its assessment area(s).