CRA: Solving the Investment Test Problem

by Lucy Griffin, BOL Guru

FDIC has announced its latest effort at being a kinder, gentler regulator. FIL-19-2004 is a Community Development Investment Guide. While issued by FDIC, the guidance is solid for any institution subject to CRA. And, in addition to providing guidance for banks and thrifts, the document provides a solid resource for discussion of investments during CRA examinations.

For most institutions, the investment test is the most difficult and confusing part of the CRA examination. And how examiners will view your investments is always a murky guess. This guidance gives both clarification and a measurement tool.

There are two important elements to the guidance. First, the guidance clarifies what qualifies as a community development investment and why. Second, the guidance provides key resources for investment opportunities and ideas. By following at least some of these suggestions that are appropriate for your assessment area, you should be in a safe harbor of sorts.

But First
But first, make sure that the investment is legal for your institution to make. Before going into the CRA qualifying guidance, the FIL reminds banks about how to determine whether the investment is permissible. If the investment is permissible for a national bank, the FDIC-regulated bank need not seek specific permission to make the investment. This means that the National Bank Act and regulations and interpretations of the OCC are a guide for all banks.

If the investing institution needs permission to make the investment because it is not clearly authorized by the National Bank Act, FDIC reminds the institution to seek approval before making the investment.

CRA Qualified
To evaluate the CRA value of an investment, the guidance looks at or for several factors. Community development includes affordable housing, community services targeted to LMI, activities that promote economic development and activities that revitalize or stabilize LMI geographies.

Another essential factor is that what the investment supports must have a clear and direct beneficial effect on low- and moderate-income people or geographies. If the investment lacks this connection, it doesn't count.

The most difficult part of identifying CRA investments is finding and explaining the LMI connection. This is ephemeral at best. Several types of investments are defined as counting. SBA programs for small development companies and SBIC programs count by definition. They count, in short, because SBA says so. Similar programs authorized by state and local governments should also count, but always look for the LMI connection.

Whether activities promote economic development are also difficult to pin down. There are all kinds of economic development. Most of it is good. But it is not always possible to draw the connection to LMI. When considering the economic impact of development, the important factor to look for is job creation. To the extent that the investment creates or supports the creation of permanent jobs for LMI, it should count.

One shortcoming in the FDIC guidance is that, while it describes a qualified investment as benefiting LMI people or communities within the assessment area, it does not provide a clear definition of or measurement for what benefiting means. This remains a subjective test and the only way to be sure of the outcome is to know your examiner and how the examiner thinks.

The Exam
Two important questions presented in the FIL are "Is community development the primary purpose of the investment?" and Does the investment benefit the bank's assessment area or a broader statewide or regional area that includes the bank's assessment area?" If you can answer these questions in the positive with good information to support the answer, then the investment should be a good one. When preparing for the exam, follow the FIL's guidance and information. Use it to lay out the information supporting your CRA investments.

Tips and Ideas
Perhaps the greatest value in the FIL is the clear guidance on four federal investment vehicles. The FIL describes Small Business Investment Companies, New Market Venture Capital Companies, Qualified Housing Protects, and Public Welfare Investments. These are identified as almost-slam-dunks, with the caveat that the bank is always responsible for knowing the importance of the investment to the assessment area.

The FIL provides a concise description of each of these investment opportunities. You might find this part of the FIL useful in briefings - especially if you need to persuade anyone that CRA investments can be made. The specific programs mentioned in the FIL give you a roadmap to CRA investments. Even if you are well beyond getting started, the list is useful for checking against the investments you have made.

Finally, the FIL includes what can easily be turned into a checklist for investment officers. The list identifies what counts and why it counts. For example, affordable housing counts if it finances, acquires, develops, rehabilitates, manages, sells or rents housing primarily for low- and moderate-income individuals.

Bonds
Municipal bonds have been a sore spot with institutions during CRA examinations because the investment cannot easily meet the requirements for showing a positive LMI impact. The FIL provides guidance on how to do this. One example given is a bond issued to fund public improvements that stabilize or revitalize a low-income neighborhood.

If there are such activities going on in your assessment area, it may be worth sharing this information with the government issuing the bonds. If the government is interested in CRA investments from banks, the guidance should help the government to structure the offering.Interesting thought. If examiners will only count an investment if it has a clear benefit to low- and moderate-income people or areas for the duration of the investment, why do they only count investments for the year in which the investments are made? Shouldn't the same rule apply?

ACTION STEPS

Get a copy of the FDIC guidance, read it from cover to cover, and share it with your CRA team.
Use the guide as a resource for investment ideas. Be sure to put the ideas in the context of your market.
Share the guidance with those who generate investment opportunities so that they appreciate the low- and moderate-income connection.
Compare your CRA investments with those identified in the FDIC guidance. Identify ideas for broadening the scope and impact of your investments. Do this every six months.
When preparing for your CRA examination, use your bi-annual analysis of investments to present your investment portfolio to your examiner.
Use FIL-19-2004 as the basis for discussion of investments during your CRA examination.