Correspondence Date: May 16, 1996

Dear [ ]:

This letter responds to your inquiry regarding the application of Community Reinvestment Act (CRA) regulations to a financial institutions investment in an Empowerment Zone (EZ) or Enterprise Community (EC) designated pursuant to 26 U.S.C. § 1391. As you probably know, the four federal financial supervisory agencies finalized new CRA regulations on May 4, 1995. See 60 Fed. Reg. 22,156 (May 4, 1995) (to be codified at 12 C.F.R. parts 25, 228, 345 and 563e).1 The agencies' regulations are substantively identical. Therefore, staff from all of the agencies have considered the issue you raised, and they concur in the opinions expressed in this letter.

EZ/ECs are geographic areas designated pursuant to certain statutory criteria including the requirement that the area designated be "one of pervasive poverty, unemployment, and general distress." 26 U.S.C. § 1392(a)(2). Each designated EZ/EC must have in place a strategic plan that describes the coordinated economic, human, community and physical development and related activities proposed to be conducted for accomplishing the purposes of the authorizing legislation, 26 U.S.C. § 1391(f)(2)(A). Those Congressional purposes are the "revitalization of economically distressed areas through expanded business and employment opportunities, especially for residents of those distressed areas, [thereby to] help alleviate both economic and social problems......" 1993 H.R. Budget Comm. Report, P.L. 103-66 at p. 791, 1993 U.S. Code, Cong. & Admin. News p. 1021. The [ ] Enterprise Community ([ ]EC) is one such officially designated EZ/EC.

You have asked whether a financial institutions investment in the [ ]EC designated area that is approved by the [ ]EC governing board and is consistent with the [ ]EC's strategic plan would be considered innovative within the meaning of that term's usage in the CRA regulations. Before reaching the question of how examiners may regard the innovative nature of this kind of investment, we must first address whether investment in a [ ]EC approved endeavor2 qualifies for positive CRA consideration under the new regulations.

The new CRA regulation provides a detailed framework for evaluating an institution's CRA performance. The new rule sets 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 evaluation methods used by examiners, however, any financial institution can receive positive consideration for making a "qualified investment" or a "community development loan" that benefits its assessment area or a broader statewide or regional area that includes the assessment area. As explained below, depending on the nature of the transaction, an institution's financial participation in a [ ]EC approved endeavor generally would be considered either a qualified investment or a community development loan.

The new CRA regulation defines "qualified investment" as "a lawful investment, deposit, membership share or grant that has as its primary purpose community development." See e.g., 60 22,180, and 22,213(§§XXX.12(s),and 563e.12(r)). "Community development" is defined to include, among other things, "activities that revitalize or stabilize low- or moderate income geographies." See e.g., 60 Fed. Reg. at 22,179, and 22,213 (§§XXX.12(h), and 563e.12(g)).

A lawful investment3 in a [ ]EC approved endeavor usually will be found to have as its primary purpose community development because the investment finances a program (1) that is geographically targeted to an area of pervasive poverty defined in a manner that covers low- and moderate-income geographies; and (2) that has, as part of [ ]EC's approval, been expressly found to be consistent with and to further the strategic plans economic revitalization purposes as required by statute.4 Therefore, assuming the [ ]EC designated area is at least partly within the assessment area of the financial institution, examiners will likely give positive consideration to an investment in the [ ]EC approved endeavor as a qualified investment under any of the new performance tests and standards in the new CRA regulations.5

Under similar geographic and purpose conditions, if a financial institution structured its participation in the [ ]EC approved endeavor as a loan rather than as an investment, the loan would generally be considered a community development loan under the new CRA regulation. A community development loan, like a qualified investment, receives favorable consideration under any of the evaluation methods in the CRA regulation.6

In evaluating the degree of positive consideration that a qualified investment in, or community development loan to, a [ ]EC approved endeavor receives, the examiner will take into account the "innovativeness" of the investment or loan. §§XXX.22(b)(5), XXX.23(e)(2), XXX.25(c)(2), cf., §XXX.27(g)(3)(i) & (ii). An innovative practice is one that serves low- and moderate-income individuals or areas in new ways or serves such groups or areas not previously served by an institution. Although a practice ceases to be innovative if its use is widespread, it may nonetheless receive further consideration as a flexible lending practice or a complex investment structure. See e.g., 60 Fed. Reg. at 22,165; and §§XXX.22(b)(5), XXX.23(e)(2), XXX.25(c)(2), cf., §XXX.27(g)(3)(i) & (ii). Moreover, a [ ]EC approved endeavor’s connection with the [ ]EC strategic plan may improve coordination in the delivery of revitalization efforts. To the extent such improved coordination increases responsiveness to community needs, the [ ]EC approved endeavor may qualify for enhanced consideration. See e.g., §§XXX.23(e)(3), XXX.25(c)(3), cf., §XXX.27(g)(3)(ii).

Ultimately, whether an investment in, or loan to, a [ ]EC approved endeavor receives enhanced consideration due to innovativeness, responsiveness, complexity or flexibility, its possession of a primary community development purpose will continue to warrant its positive inclusion in a CRA evaluation as a qualified investment or a community development loan.

I trust this letter has been responsive to your inquiry. You may also be interested to know that the staffs of the four financial supervisory agencies are presently developing written guidance to assist in resolving interpretive questions rising under the new CRA regulation. In the meantime, if you have any further questions, please feel free to call me or Richard R. Riese, at (202) 906-6134.

Timothy R. Burniston
Director, Compliance Policy
Office of Thrift Supervision


1 The agencies have adopted a convention for citation to the regulations that will be followed in this letter. Whether it is OCC's part 25, FRB's part 228, FDIC's part 345, or OTS's part 563e, the corresponding sections will usually bear the same suffix after the point. Therefore, this letter cites only to the suffix. In other words, the lending test for large national banks appears at 12 C.F.R. § 25.22. For thrifts, it appears at 12 C.F.R. §.563e.22. Accordingly, citation in this letter would be to §XXX.22.22. If the suffix in one of the regulations is different, the specific cite for that regulation is provided. Until codification, the regulations may be found at 60 Fed. Reg. 22156 et seq. (May 4, 1995).

2 For purposes of this letter, we will use the phrase "[ ]EC approved endeavor" to mean a program, project or undertaking that has been expressly approved by the [ ]EC governing board as consistent with and contributing to the [ ]EC's strategic plan for the economic revitalization of its designated area.

3 You have described for us different possible forms for structuring an investment in a [ ]EC approved endeavor, e.g., payment of earmarked funds to city administered programs, grants to the non-profit governing body, or contributions to community centers conducting approved endeavors. This letter does not constitute an opinion that a particular investment structure or financial transaction between a [ ]EC approved endeavor and a financial institution is "lawful". The CRA does not provide financial institutions with any independent authority to make investments, grants or loans. Furthermore, the agencies do not endorse particular lending or investment products.

4 The full range of programs that may receive endorsement by the [ ]EC board is unknown. Consequently, an examiner may need to develop additional programmatic detail before confirming the primary community development purpose under the CRA.

5 Examiners of large institutions consider qualified investments under the investment test §XXX.23(a). In a small institution examination, examiners may consider qualified investments that are lending-related activities. §XXX.26(a). Qualified investments may also be considered to determine whether a small institution merits an outstanding CRA rating. Part XXX Appendix A(d)(2). The community development test, which is applied to institutions designated as wholesale or limited purpose institutions, evaluates, inter alia, the number and amount of qualified investments. §XXX.25(c)(1). The community development test also permits designated institutions to receive CRA credit for qualified investments that benefit areas beyond the institution's assessment area. §XXX.25(e). 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, qualified investment and/or services. §XXX.27(f)(1).

6 See §§XXX.12(i) and 563e(h). A large institution's record of helping to meet community credit needs through its lending activities is evaluated under the lending test. §XXX.22. Under the lending test, examiners consider an institution's originations and purchases of loans, including community development loans. §XXX.22(a)-(c). Community development loans may also be considered favorably in the evaluations of small institutions, wholesale and limited purpose institutions, and institutions evaluated based on a strategic plan. See e.g., §§XXX.25(c), XXX.26(a), XXX.27(f)(l),(g)(3)(i) and app. A(d)(2).