New Q&As for CRA

The long-awaited Q&As for CRA are out. Now the question is: what do they actually say? Here the news is a bit disappointing. They don't actually say much. On the other hand, that means that there isn't a lot of change to deal with.

The publication includes three distinct parts. First, the agencies have published final Q&As for the four questions that were proposed in October 1997. Second, the agencies have published 13 final Q&As without publication for comment. These new Q&As represent codification of interpretive letters so that the information will be easier to find and use. Third, the agencies proposed several new Q&As and requested comments by July 2, 1999. Don't let that date stop you from commenting. The agencies usually consider anything received before they actually put out the final rule and since CRA proposals don't seem to convert to final rules very fast, you should actually have more time.

Primary purpose
In the small but important set of questions that finalize the 1997 proposal, the core issue is what constitutes "primary purpose" for evaluating community development activities in the definitions of community development loan, community development service, and qualified investment. The new Q&As adopt the language basically as proposed. Essentially, the interpretations endorse two approaches to determining whether an investment or a loan meets the primary purpose test.

One approach - the quantitative approach - is the simple majority measure. If more than half of the proceeds are for community development, than the "primary purpose" of the loan or investment is deemed to be for community development.

The qualitative approach is more subjective. In bureaucratic boilerplate, it provides that examiners may "find sufficient bases to conclude that an activity possesses the requisite primary purpose." In other words, a lot - perhaps everything - depends on your examiner.

Guidance on how to evaluate the extent or impact of community development loans and investments is included in new Q&As to .22(b)(4) and .23(e). These interpretations give examiners the ability to differentiate among community development loans or investments under the performance criteria. They may use the dollar amount, and the innovation, complexity, and responsiveness to evaluate the significance of the loan or investment. In addition, they may take into account how well the loan or investment advances its community development purpose.

For purposes of data reporting, you should only report an affordable housing loan or investment if its "express primary purpose" is to finance an affordable housing project. This appears to mean that the agencies are looking harder than ever for purpose declarations if the project is to qualify for CRA loan or investment consideration.

Affordable housing
One of the new Q&As gives guidance on how to consider the low- and moderate-income impact of a housing development that is not yet occupied. The agencies have concluded that fixed formulas based on median income or the number of LMI families won't work. Instead, the regulators will look at relevant information such as the median rents, home values, and population to be served by the project compared to the assessment area. This analysis can become highly subjective. The most important consideration will be whether the housing is affordable to low- and moderate-income individuals.

The bank's internal documentation may be important to the outcome. To ensure that projects are favorably considered, the bank should have the analysis ready for the examiner. Better yet, cinch it with a statement of purpose from the developer.

Loan Guarantees
The fact that a loan is guaranteed does not affect its consideration for CRA purposes. In short, the loan is not less valuable if it is fully guaranteed. CRA looks for the money loaned or invested in the community. That amount is not affected by the nature of the institution's risk. In making guaranteed loans, the bank is fulfilling its chartered purpose to bring financing expertise and money into the community. When looked at this way, guaranteed loans are just as valuable to the community as a loan where the bank shoulders the entire risk.

Taking business to borrowers
Taking bank business to small business borrowers located in low- and moderate-income census tracts would seem like a CRA slam dunk. For example, if the bank financed a local copying and printing company and supports the business by taking printing and copying jobs to the business, shouldn't the bank get CRA credit for this? However, the business is not exactly a loan, investment or service, so the issue of how to give consideration to this support of the bank's business loans and CRA activity had to be debated. The interpretations now admit that the examiner may consider these as related program activities. In short, getting points for this type of activity is not a slam dunk, but it should help.

Promoting economic development
The interpretations are revised to explain that "promoting economic development" can be construed broadly. An activity can be considered if it supports "permanent job creation, retention, and/or improvement for persons who are currently low- or moderate-income." An activity can also be considered if it accomplishes the same in a low- or moderate-income census tract.

This interpretation should be less restrictive by including areas that are not targeted by government redevelopment programs. It also provides for economic improvement by giving consideration to activities that affect currently LMI population or areas but allows them to improve.

Technical assistance and the Service Test
The revised interpretations make it clear that the bank may receive credit under the service test for developing and/or delivering educational programs for low- and moderate-income students. The time spent by bank staff in developing materials and teaching the course should be carefully quantified and tracked.

To get full credit for educational activities, it is a good idea for the activity to be connected to other aspects of the bank's CRA program efforts. For example, courses on managing a family budget and saving for a home could be offered in targeted communities.

Misc
Other positions include giving credit for investments in a community development fund. The bank's investment will be considered without regard to whether the investment is direct or indirect. This acceptance of community development investment funds is a significant help for smaller banks that must meet the investment test.

When reporting the income of a small business or small farm or for consumers, use and report the gross annual income. Do not use the adjusted gross income. Note that any income information in the loan application file should be used - not disregarded - in identifying the gross annual income. Examiners don't like it when the income data is blank but they find income or revenue information in the file.

When reporting location for businesses or farms, the bank should report the census tract or BNA whenever possible, even if the bank does not know the street address.

Not answered
The agency publication discusses several issues that were raised by commenters but are not the subject of a final or proposed interpretation. In response to suggestions that CRA should contain broader recognition of community development, the agencies noted that this issue will be considered when the regulations are reviewed in 2002. So stand by for another three years before looking for flexibility here.

Another issue raised by commenters - usually because of problems in the examination - is whether public funds deposits should be disregarded in calculating loan-to-deposit ratios. There are several reasons to support taking public funds out of the calculations. First, they are volatile and come and go with taxation cycles and political whims. Second, they may well be moved out of the bank if the bank's rating drops. Finally, the public funds cannot always be used to support lending programs.

Without issuing a formal interpretation, the agencies state in the Federal Register document that treatment of public funds is a performance context issue and that examiners may consider whether the loan-to-deposit ratio is "reasonable" in the context of the level and volatility of public funds on deposit. In other words, nothing has changed.

The Proposal
Along with the final action, the agencies have opened the box on some additional questions. These are officially open for comment until July 2, 1999 but experience tells us that you have much longer to get your comments in.

The first proposed Q&A would clarify that investments and community development loans need not have a direct or immediate impact in the assessment area in order to qualify. The interpretation would recognize investments and loans that have an indirect impact. This would include loans to or investments in organizations or activities that have projects in or work in the bank's assessment area. It will also be considered if the loan, investment, or recipient of either works in an area that is larger than the bank's assessment area.

One of the questions raised for comment is whether community development organizations that operate on a local, statewide, or even multi-state basis actually provide a benefit to all surrounding areas. If this presumption is allowed, the bank would not have to demonstrate what the direct or indirect benefit to its community would be.

The second proposed Q&A would prohibit double-dipping by investing in mortgage-backed securities backed by loans the bank originated. The simple answer would be "no."

Another proposal deals with renewals and refinancings. The proposal offers two ways to report these. The first would be to report a loan only once - when it is made. The second method would permit reporting a loan once per year. Under this approach, an 90-day note would be reported once each year, not four times.

What the proposal does not provide for is reporting the loan each year and indicating the number of times it was renewed or refinanced. This method might be the simplest for data collection purposes because loan officers would report the loan each time they renewed it. It would also be an accurate measure of the extent to which the bank is putting money into its community. It would, however, necessitate an additional code for reporting purposes.

ACTION STEPS

Comment on the proposal. Get in your comments as soon as you can and don't worry about the official deadline.
Review investments and community development lending for "primary purpose". Make this part of your self-assessment.
We know documentation is supposedly out, but it is a good idea to maintain information about loans and investments that promote community development even if they are reported as HMDA loans or small business loans.
In your audit procedures, review the income identification and reporting to be sure that income is being correctly captured.