Correspondence Date: July 25, 1997

Dear [ ]:

This is in response to your letter that inquires whether a financial institution might obtain positive consideration under the Community Reinvestment Act (CRA) for investing in projects through your Neighborhood Partnership Program. You also inquired if these investments might be considered differently if the financial institution's CRA performance was evaluated under the small financial institution performance standards. As you know, the four bank and thrift regulatory agencies have promulgated substantively identical Community Reinvestment Act regulations. Therefore, staff from all of the agencies have considered your letter, and they concur in the opinions expressed herein.

Your Neighborhood Partnership Program gives a financial institution or other corporate entity an opportunity to receive tax credits against their state income tax obligations in exchange for monetary investments or in-kind donations towards targeted community development projects sponsored by non-profit organizations. Typical projects consist of job training and placement, development of affordable housing, literacy training, and other community services.

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The revised CRA regulations contains a definition of what type of activities are considered "community development" for the purposes of the regulation. At 12 CFR 228.12(h), it states, "Community development" means: (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 121.802(a)(2) or have gross annual revenues of $1 million or less; or (4) Activities that revitalize or stabilize low- or moderate-income geographies. A financial institution can do community development activities through direct or indirect lending, through investments or donations, or through providing services to the community.

Although the information you submitted did not contain enough information to make a determination about how the CRA regulations apply to your projects, it appears that many of the projects you have approved for 1997 tax credits would meet the CRA definition of a "qualified" community development investment, provided they serve low- or moderate-income people, low- or-moderate income geographies, or small businesses or small farms, as defined in the regulation. Low-income is defined as less than 50 percent of the area median income, and moderate-income is at least 50 percent and less than 80 percent of the area median income. It is the responsibility of the investing financial institution to evaluate the individual projects to determine if they can be considered a "qualified" investment under the CRA.

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There are two basic tests under which a financial institution's CRA performance is judged - the small and large financial institution performance standards. A "small" financial institution has total assets of less than $250 million, and it is not affiliated through a holding company with other banks or thrifts that, in aggregate, have total banking and thrift assets of greater than $1 billion. All other financial institutions are evaluated under the large institution test, unless they have been approved as a wholesale or limited purpose financial institution, or they are operating under an approved CRA strategic plan. There are separate performance standards for these institutions.

If a financial institution is considered "large", it is evaluated under the Lending, Investment, and Services tests. Your projects would be considered qualified investments under the Investment test if they serve low- or moderate-income people, low- or moderate-income geographies, or small businesses or farms, as defined in the regulation. These investments would be evaluated at every CRA examination.

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If a financial institution is considered "small", we perform a streamlined evaluation that focuses on lending activities. However, at a small financial institution's option, we would consider its investment and service activities if doing so might contribute towards supporting an "outstanding" rating. This means that while your projects may be qualified investments, we would not routinely consider small financial institution's investments in your projects unless they requested us to do so.

If you have any questions, you may contact me at (202) 452-3583 or Karen Murtagh of this Division's staff at (202) 452-2652.

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