I need to further understand the following statement found in the CRA Q & A 12(h)(3) & 563e.12(g)(3):
§§ __.12(h)(3) & 563e.12(g)(3) – 1: “Community development” includes activities that promote economic development by financing businesses or farms that meet certain size eligibility standards. Are all activities that finance businesses and farms that meet these size eligibility standards considered to be community development?
A1. No. To be considered as “community development” under §§ __.12(h)(3) and 563e.12(g)(3), a loan, investment or service, whether made directly or through an intermediary, must meet both a size test and a purpose test. An activity meets the size requirement if it finances entities that either meet the size eligibility standards of the Small Business Administration’s Development Company (SBDC) or Small Business Investment Company (SBIC) programs, or have gross annual revenues of $1 million or less. To meet the purpose test, the activity must promote economic development. An activity is considered to promote economic development if it supports permanent job creation, retention, and/or improvement for persons who are currently low- or moderate-income, or supports permanent job creation, retention, and/or improvement either in low- or moderate-income geographies or in areas targeted for redevelopment by Federal, state, local or tribal governments. The agencies will presume that any loan to or investment in a SBDC, SBIC, or New Markets Venture Capital Company promotes economic development.

First, the Q & A states that you must meet BOTH the size and purpose test to qualify as a CD loan. I have been lead me to believe that having a loan in a federal, state, etc targeted area alone, would qualify as a CD loan/activity. I understand it to say that the entity must meet both SIZE and purpose. Being located in a Renewal/Enterprise zone seems to meet the purpose test. However the size test is the issue of my question. This Q & A states that it must meet the SBDC or SBIC size eligibility, or have gross annual revenues of $1 million or less. The size eligibility for SBDC is Net worth no more than $7 Million and net income (after Fed. Tax) of preceding two fiscal years of $2.5 Million. The SBIC is similar with $18. Million in net worth and $6 Million in annual net income. The only thing left is the gross annual revenues of $1 Million of less.
It will be somewhat rare and risky for a bank to have a loan of over $1 Million to a business entity with revenues of less than $1 Million. But that is what this seems to say.
I’m not understanding this properly. Could someone help me, please?

Your first mistake was reading the reg

The second was trying to make sense of it

Let me see if I can shorten up (or say what that says) in English for Dummies (my reading level)

To be considered a CD loan, you have to look at both purpose and size. Purpose falls to the above, it needs to be revitalizing, stabilizing, providing jobs (permanent) providing CD services, etc, that meet the goals of CRA. This could be anything from a $32 million loan in a Renaissance zone to build a new office building, creating no jobs what-so-ever, but instead meeting the goals of community revitalization by replacing a burnt down building, (whatever the goal of your zone is). It could also be a $300 thousand deal that finances the purchase of a multi-family apartment building providing below market affordable rental units. The "purpose" definition is broad. In the above, they're discussing ideas like a CDE that might provide small business loans within the zone. If you loan or invest in the entity, and they in turn loan back out under the size categories discussed above, it would be a CD loan.

Size for us is a consideration in reporting. If a loan is reportable (type 1 or 2) for CRA purposes, it would NOT be qualified to be a CD loan, unless it was a multi-family property. So for us, Size really doesn’t matter

What matters is if it was reportable in the first place

Did that help any?

Well... It kind of does help...
I guess I'm trying to find out if we make a loan that meets the purpose test how does the size test come into play? Example for simplicity: {$2 million loan to a company to build a truck stop in a very depressed moderate income tract that creates 16 new jobs. The area has a unemployment rate twice the state average. The new building is in a government program zoned area for historically under-developed areas that give tax incentives for job creation}
Okay... We have meet the purpose..Right? But what if the company have revenues of $10 million a year. Bases on what I tried to understand from the above Q & A it says that the revenue size has to be under $1 million.
Where am I getting off tract here???? Using this example would this qualify as a CD loan. Can we make "purpose" qualified CD loans to entities with annual revenues over $1 million? If yes, Where do I look in the Q & A to try to understand this?
Thank you Dawnie!!!

Where are you getting off track? You're reading too much into the reg

The size test they're discussing is in relation to entities who you can invest in, who then re-loan out the money. That is where the size is an issue. The goal is to be sure that these entities are really meeting the goals of CRA by lending to small business verses large. This is the ONLY place that they're discussing size. This does not apply to the deal you're discussing.

When it comes to straight out CD deals, not involving micro-loan program distribution, revenue size does not matter what so ever. I have reported CD deals where the revenues of the company are in the multi-millions and some to non-profits with revenues below one million Really, don't think about revenues when you look to find your CD deals UNLESS you're specifically lending or investing into a CDE or Microloan program of some sort that relends out your money.

The deal you describe is a pretty easy CD loan. How about if I find you a better location than the Q & A (easier to read) graph that discusses CD deals? ::running off to find it::

http://www.dallasfed.org/ca/pubs/craloan.pdf

You'll see that size is discussed ONLY in conjunction with loan size, not with revenue size. WHile this chart does not cover every possible CD deal, it does cover the major issues. You'll also see it does not really discuss loans to microenterprise entities (generally what that obscure piece you're reading is about) Cuz they're funky and they'll throw you off track

http://www.bankersonline.com/tools/tools_compliance.html#cdforms

These are my write up sheets for CD deals of all types. You'll see I don't discuss revenue size as well.

I can dig up more if you need it but do yourself a favor and file that one piece of the reg you're looking at under "lending to people who lend" and don't touch it until you provide money to someone who will in turn lend or give that money out You'll find life much easier

Also - never read the Q&A unless you have the actual regulation handy to see which section the Q&A refers to.

In this case, the Q&A was clarifying ONE component of what can be considered Community Development - i.e.:
(3) 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; or

There are 3 other "prongs" in what can be considered Community Development. Most of the loans that banks deal with will fit under one of the other 3 prongs since the "size" eligibility can be a tough nut to crack.

For reference, you should consider the entire defiintion of Community Development, and then look at the definition for Community Development loan:

(g) 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 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; or

(4) Activities that revitalize or stabilize low- or moderate-income geographies.


(h) Community development loan means a loan that:

(1) Has as its primary purpose community development; and

(2) Except in the case of a wholesale or limited purpose bank:

(i) Has not been reported or collected by the bank or an affiliate for consideration in the bank's assessment as a home mortgage, small business, small farm, or consumer loan, unless it is a multifamily dwelling loan (as described in Appendix A to Part 203 of this title); and

(ii) Benefits the bank's assessment area(s) or a broader statewide or regional area that includes the bank's assessment area(s).

I've read this post several times & just want to make sure I understand.

When the Bank "lends to people who lend", the ultimate recipient of the loan funds must have revenues <$1,000,000 for it to be considered economic development. Is this correct?

Thanks.

I've struggled with this all day & maybe I've fully pieced this puzzle together. When the bank "lends to people who lend", the ultimate recipients must meet the size eligibility requirements of the SBDC or the SBIC. If they don't meet either of these requirements, than the Bank could still get credit if the ultimate recipient has income less than $1 million? Is this correct?

Also, where would I find the SBDC & SBIC size eligibility requirements?

Thanks for helping.

SBADC, not SBDC (SBA size requirements are listed on their websites). These can be significantly larger than you'd think in regards to "small" businesses. And if they don't meet those requirements, yes if their REVENUES are below one million annually (we NEVER use the term income in regards to small business) they would also count.

Thanks for the clarification & guidance. I think I finally understand.

My first post, I look forward to many more.

Quote:

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When the bank "lends to people who lend", the ultimate recipients must meet the size eligibility requirements of the SBDC or the SBIC.

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Anyway, I don't believe what Anonymous is pulling from this discussion is correct. When the Reg states:

"activities that promote economic development by financing businesses or farms that meet the size eligibility standards...."

I believe they're talking about the bank financing businesses or farms that participate in community development activities. No where does it say that the bank is lending to other lenders.

The size standards are straight forward, too. Either the business is:
a. a qualified SBADC
b. a qualified SBIC
c. none of the above, so it must have revenues of $1 million or less

Actually MDC they are talking about banks lending to folks who then lend again in turn. This is done through special lending programs that are offered by a bank's clients. Many of us lend money to Community Development Corporations or similar entities who then lend the money out to encourage a particular sector of the business or consumer market. The reg discusses what level that lending must be for us to qualify it as CRA CD lending (for the loan we make to the CDC).

And as I conitinue to beat the horse....

...it seems to me that when they define "community development" in the Reg, they state what it is that cd truly is. In the line with economic development, it answers the what and the how question. I'm not sure how you pull from the line that it's the banks lending to lenders who lend to small businesses and farms. The line implies how it is that the bank can participate in economic development.

Right?

The question I answered was in regards to banks that lend to entities that re-lend money in turn.

If you want to see how to participate in economic development, via the reg, that's a much broader scope. MUCH broader, including items not listed herein. The scope differs depending on the CD activity, (lending, services or investments) as well.

But...as I mentioned, this question was specific to lending to lenders, hence my answer.

MDC, I totally understand your confusion because the wording is awkward. The terminology you are tripping up on is referring to community development activities that are in turn used to determine if a loan or investment qualifies as community development. What the reg is saying is that "community development" means "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 . . ." In other words, if you are looking at financing (by loan or investment) the " CD activity " which itself is defined as "financing small business . . ." you are making a loan that has as its primary purpose community development. Therefore, if you make a loan to an entity that "promotes economic development by financing businesses or farms. . . etc" you have a loan that, ipso facto, has as its primary purpose community development because it is financing "community development activity".
You have to really think hard about this to understand the distinction. Separate the definition of community development from the second step which is determining if a loan or investment qualifies as a cd loan or investment. It took me a long time to understand this too.

Am I not getting something? I don't understand the confusion.

With CRA, you have to "follow the money", and if your money flows through another entity that uses that money for a Community Development purpose, your credit under Community Development flows through right along with the money.

In other words, you get the Community Development credit because ultimately YOUR money did something good.

Len, the verbage does get a bit confusing when it gets to the economic development line, and it too, took me a long time staring at this to finally undersatnd the interpretation. Like you said, community development, what is it? It's lending or investing in activities that promote economic development. And more specifically how does it promote economic development? By financing small businesses or farms. It sounds so simple, but as the gov't always does, they love sprucing it up with technical jargon to make it near impossible. Thanks for your help on this issue.