Dear [ ]:
This letter responds to your inquiry regarding whether financial institutions that invest in the [ ] (the "Fund")1 would receive positive Community Reinvestment Act ("CRA") consideration when its performance is evaluated by agency examiners. As you may know, the four financial institutions regulatory agencies issue interagency CRA interpretive letters for the purpose of providing consistent guidance to our examiners, financial institutions, and the public. The letters are intended to provide broadly applicable guidance and not to endorse any specific projects or products.
In order to provide that guidance, this letter will focus on the considerations an examiner will take into account when determining whether an investment in the Fund, or a similar entity, should receive favorable consideration under the CRA regulations. As you know, the four federal bank and thrift regulatory agencies promulgated substantially similar CRA regulations on May 4, 1995.2 Staff from all four agencies has considered your inquiry and concur in the opinions expressed in this letter.
The CRA regulations set out different evaluation methods that depend on the business strategy and size of the institution. Regardless of the performance test under which a regulated financial institution is evaluated,3 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).
According to the summary of CRF’s investment program that you supplied, the primary criterion for the Fund’s project investment is whether they are eligible for favorable CRA consideration.4 The Fund intends that all project investments be deemed likely to qualify for positive CRA consideration under the investment test as investments for which community development is the primary purpose.
"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.5
"Community development" is defined as:
Affordable housing (including multifamily rental housing) for low- or moderate-income individuals;
Community services targeted to low- or moderate-income individuals;
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;
Activities that revitalize or stabilize low- or moderate-income geographies.
In determining whether an activity has as its "primary purpose" community development, examiners will review any loan documents, prospectus or other information provided to them by the financial institutions. If a majority of the activity meets the definition of community development an examiner will consider it to have as its "primary purpose" community development. If a majority does not meet the definition, the examiner will generally consider the following factors:
Whether the express, bona fide intent of the Fund, as stated, for example, in the prospectus, is primarily to provide affordable housing for low- and moderate-income individuals and/or to revitalize or stabilize a low- or moderate-income area ("the community development purpose(s)");
Whether an activity is specifically structured to achieve the expressed community development purpose(s); and
Whether an activity is reasonably certain to accomplish the community development purposes.6
I trust this letter is responsive to your inquiry. If you have further questions, please contact me at (202) 452-3585 or Christina Nejezchleb, on my staff, at (202) 452-3946.
Glenn E. Loney
Division of Consumer and Community Affairs
Board of Governors of the Federal Reserve System
1 The Fund will make limited partner equity investments in the following types of real estate developments: for-sale housing, retail/commercial facilities and historic rehabilitation projects. All projects will have characteristics and locations designed to contribute to the revitalization and economic development of Chicago-area neighborhoods and communities in need of equity investment.
2 See 12 C.F.R. pts. 25, 228, 345, and 563e.
3 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(c)(1), and 563e.25(c)(1). And, finally, institutions evaluated on the basis of a strategic 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).
4 The investment criteria contained in the summary of CRF’s investment program you supplied indicates that for-sale housing investments must be in low- or moderate-income census tracts and meet one of the following criteria: occupied by residents that are 100% low- or moderate-income, mixed market-rate housing with a percentage of the residents low- or moderate-income, or 100% market-rate if the project is built in accordance with a local plan. The retail/commercial investments must be located in or immediately adjacent to low- or moderate-income census tracts. The historic rehabilitation projects the Fund will invest in will be located in low- or moderate-income census tracts . If they are housing related, they must meet the characteristics under for-sale housing. If they are non-residential projects they must provide jobs, services, or amenities to the surrounding community. The historical rehabilitation investments that are not in low- or moderate-income geographies must be for affordable housing.
5 This letter neither determines, nor assumes that the financial institutions’ contributions to the Program would be lawful.
6 Examiners may consider the past record of performance of the Fund in community development endeavors as relevant to this factor.