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Question & Answer
Question: We are a smaller "large bank" for CRA purposes and struggling with the investment test. I have recently become aware of investment funds that advertise compliance with the CRA investment test. How do these funds work and do examiners really give credit for these investments?
Answer: These funds do actually work. The idea behind the funds is to provide the smaller banks with the leverage and efficiency of the biggest banks in identifying and competing for investments. One way to think about these investments is that the bank is hiring an outside expert (some call them consultants!) to get the investment done.
The funds operate much like a mutual fund except that they target investments to match the assessment area needs of the investing banks. Although the fund is a pool, the investments are targeted for each investing bank. This approach gives each investor the leverage of a larger entity but with the ability to target the investment's location and impact.
So far, the regulatory agencies have accepted these funds. It is becoming clear that the new regulation's investment test is a problem for the non-enormous banks. These funds may provide a solution to the problem that is much easier than re-evaluating the regulation.
The down side of these funds is that they pave the way to deciding how much of an investment is enough. If the investment test can be satisfied by investing in a fund, the only question left is whether the bank has invested enough. Hopefully, examiners will refrain from asking that question too loudly.
Copyright © 1999 Compliance Action. Originally appeared in Compliance Action, Vol. 4, No. 8, 7/99
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