Correspondence Date: July 24, 1997

Dear [ ]:

This letter responds to your inquiry dated January 27, 1997, regarding the application of the Community Reinvestment Act (CRA) regulations to a financial institution's membership fee paid to an affordable housing finance initiative called the ["Program"]. As you know, the four bank and thrift regulatory agencies have promulgated identical CRA regulations. Therefore, staff from all of the agencies have considered the issue you raised, and they concur in the opinions expressed in this letter.

The Program will enlist the cooperation of commercial banks who will be expected to offer mortgages for home buyers whose incomes generally do not exceed 80% of the Area Median Income. You have designed this program to be a self-supporting business involving [Company A], [Corporation B], one or more mortgage insurance companies and a group of commercial lenders. Company A will conduct outreach, screen, counsel, and underwrite loans for the customers of the Program. The lenders will make the loans and sell them to Corporation B with mortgage insurance issued by the participating mortgage insurance companies, in appropriate cases.

The for-profit partners in the alliance, particularly Corporation B and the banks, are expected to support the non-profit partner, Company A, in two ways. First, Company A will receive a fee for each successful transaction (loans closed) in return for its counseling, loan processing and loan underwriting. The cost of counseling and underwriting these successful applicants will be borne by the bank which funds the loan. Second, each bank will be asked to pay an annual membership "fee" to participate in the Program. The membership fee will be used by Company A for outreach, screening and counseling prospective homebuyers that ultimately are not recommended for approval. You state that, from past experience, you anticipate that your organization will counsel roughly five applicants for every one successful applicant. You have asked whether the membership fee will receive positive consideration in CRA examinations as a qualified investment.

In the new CRA regulations, a "qualified investment" is defined as a lawful investment, deposit, membership share, or grant that has as its primary purpose community development. See 12 C.F.R. __ 25.12(s), 228.12(s), 345.12(s), and 563e.12(n). We believe the "membership fee" given to Company A could be considered a grant for purposes of the CRA regulation. The definition of "community development" in the regulation indicates that the concept includes: 1) affordable housing (including multifamily rental housing) for low- or moderate-income individuals; 2) community services targeted to low- or moderate-income individuals; 3) activities that promote economic development by financing businesses or farms that meet the size eligibility standards of 13 CFR 121.301 or have gross annual revenues of $1 million or less; or ) activities that revitalize or stabilize low- or moderate-income geographies. See 12 C.F.R. __25.12(h), 228.12(s), 345.12(s), and 563e.12(r).

The second element of the community development definition appears to address the purpose of the Program program. Further clarification can be found in the second footnote in the supplementary information to the CRA regulation (60 FR 22160, May 4, 1995) which lists home buyers’ counseling to low- or moderate-income individuals as an example of a community development service. Therefore, if your counseling services primarily benefit low- and moderate-income individuals whose incomes are less than 80% of the HUD adjusted median family income for the MSA in which the person lives, or, if not in an MSA, the statewide nonmetropolitan median family income, then it appears the membership fee paid by banks to fund this service is a qualified investment. For the member banks to receive favorable consideration in an examination, however, they will need to show that the primary beneficiaries of this service meet the above definition for low- and moderate-income individuals.

I trust this letter has been responsive to your inquiry. If you have any further questions, please feel free to contact me at (202) 452-3585.

Glenn E. Loney
Associate Director
Division of Consumer and Community Affairs
Board of Governors of the Federal Reserve System

cc: B.J. Norris, FDIC
A. Loikow, FDIC
T. Burniston, OTS
T. Stark, OTS
M. Hesse, OCC
M. Harris, OCC
R. Frierson, FRB
M. Bylsma, OCC
S. Cross, OCC