Paycheck Protection Program and CRA

My bank will begin to fund loans under the new Paycheck Protection Program, administered under the SBA. My initial thought is that these loans would be considered temporary financing, since they can be forgiven after 8 weeks, and not reportable for CRA. However, would they qualify as community development loans (Activities that promote economic development by financing businesses or farms that have gross annual revenues of $1 million or less or that meet the size eligibility requirements of the Small Business Administration’s (SBA) Small Business Development Company or Small Business Investment Company (SBIC) programs)?

It sounds like they CAN be forgiven after eight weeks but that they could be on our books up to two years if the balance isn't forgiven. In that case, I would think they should be CRA reported.

If reported, do we have to mark all as having a Gross Revenue Code of 3 because the application does not require verification of income? If they are existing customers, should we report the revenue available on a recent tax return? Am curious to know what other banks are doing here... Thanks!

I am thinking we would use code 3 for revenues as they aren’t collected under the SBA PPP program. Am I correct?

Regarding whether or not SBA PPP loans might be reportable as Community Development loans, I'd take a look at the Joint Statement on CRA Consideration for Activities in Response to COVID-19. That was issued back on March 19 (which feels like at least a couple of lifetimes ago now), well before the CARES Act was finalized. Even so, the Community Development Activities section states that FIs will receive CRA consideration for qualifying activities, which include:

- Loans, investments or services that support access to health care, particularly for low- and moderate-income individuals or communities;

- Economic development activities that sustain small business operations, particularly in low- and moderate-income communities;

Based on those examples, I'd say that a good number of SBA PPP loans might qualify as Community Development loans, if they aren't considered standard small loans to businesses.

(If the loan is to a larger business, we'd have to know whether or not that business provides health insurance coverage for its workers, but I presume most larger businesses probably do. I think lending to such a business in a way that requires retention of employees would be considered supporting access to health care.)

As I read A CRA Guide to Data Collection and Reporting and the Interagency Q&A, we're supposed to report the revenue amount used in making the credit decision. My understanding is that SBA PPP loans are based solely on payroll information. Per the Interagency Q&A 42(a)(4)--2, if we don't consider revenue, we should report the code indicating "revenues not known." So, I believe that you are right, and we should use rev code 3 for all SBA PPP loans.

We are thinking these loans could be Community Development - Job Retention as the loans are to allow the businesses to continue to provide paychecks to their employees even while the business may not be operating fully due to the “safer at home” orders.

We are a large bank and most of these loans will be under $1 million. So, should they be reported in the small business data or can they be counted as community development loans? Technically, community development loans need to be over $1 million.

We are a large bank too and I understand it to be if the loans are less than $1 million they will be part of the small business data. If over $1 million then they could be community development. I'm thinking economic development since it is to keep folks employed. Thoughts?

I was hoping all SBA - PPP loans could be considered community development loans (economic development), but I suppose the dollar amount is the issue for large banks.

IMO - Regardless of the amount, the primary purpose of these loans is community development during a time of crisis and should be counted as such, rather than included in the data. The significant increase in small business/small farm loans is going to inflate our numbers, which may be a little misleading.

https://www.occ.gov/publications-an...et-desig-disaster-areas-cra-aug-2018.pdf

If you are large bank and the PPP loan meets the small business reporting requirements you have to put it on your LR. If it's over 1MM we are counting them for CD.

I think having a separate list of the PPP loans or another way of identifying them would be a good idea. We will definitely want to share the number and dollar amount of loans that we did come exam time.

Ain't it weird that the whole dang country is under a disaster declaration....

ABA is working on a list of these types of questions to ask. It will be great to get input from regulators at a higher level than our local folks.
So many questions....so few answers.

Has anyone come across the type of information we should be gathering for CRA purposes for all these PPP loans to provide to examiners?

Take a look at OCC Bulletin 2020-45

so helpful that the OCC decided NOW is the time to tell us to collect revenue information...and the FDIC hasn't said a word yet.

GRRRRRRRR!

I'm curious why some of you say that the loan has to be over 1MM in order to be CD. Why is that the case?

If you have an unsecured loan to a non-profit (which the PPP loans are unsecured), they are not reportable as a SB loan. So, if they meet the definition of CD, why not report them?

Does the non-profit need to serve LMI in order for an unsecured loan under $1 million to qualify as community development?

There are a number of considerations here:

First, loans of $1 million or less for a business purpose are reported as small business loans (assuming they don't have any disqualifying factors such as being directly secured by residential real estate not taken as an abundance of caution). Typically, loans that are reported as small business loans are evaluated as small business loans, but if they are also qualified as "community development" under one of the four CRA definitions of community development" they may be considered as community development loans for examination purposes (even though they may be reported as small business loans) for banks being evaluated under the Intermediate-Small Bank CRA examination standards. In this situation, the qualification likely would fall under the "revitalization/stabilization" definition because (as someone above remarked) the entire country is not considered to be a qualified disaster area. Loans under the PPP program may possibly qualify under the "economic development" definition because the loans would be preserving jobs, in many cases for LMI employees.

Another consideration is the use of flexible and innovative loan programs or flexible and complex community development loans that are responsive to community needs. All loans (whether qualified as small business or CD loans) extended under the PPP program are likely to be recognized to fall under these considerations which are supposed to enhance the value of the lending or community development activity. So if you extend a loan under the program whether it is qualified and reported as a CD loan (because it exceeds $1 million) or as a small business loan (because it is for $1 million or less) it can receive enhanced consideration during a CRA exam.

And again, banks undergoing a CRA exam using the ISB standards would have the elective (loan by loan) to have any such loans considered under either the lending test or the community development test. This means if you report the loans as small business loans you should maintain a separate file on such loans so you can identify them and determine how you want them to be used for examination purposes.

We're an ISB, and we do not report small business data annually yet. We have our list of PPP loans and are identifying those that are in a LMIT. Aside from that, what else should I do on these loans to prepare for our CRA exam early next year? I don't have gross annual revenues- does this present a problem or a disadvantage for us?

Thanks.

First, I suggest you and any other ISB-size bank should voluntarily report your CRA activity annually. Why? There are several reasons:

(1) you preserve your elective to be examined for CRA purposes under the large bank exam standards rather than the more difficult ISB standards,

(2) if you are being a responsible banker you should be collecting and monitoring your lending activity for CRA purposes (only a masochist would go into a CRA exam blind, not knowing how your bank will look in a CRA exam and not being prepared to anticipate and answer examiner questions,

(3) you will know exactly the data the examiners will use to evaluate your performance (if you don't report the examiners will use random sampling to develop a basis for evaluating your performance which means you will have no idea what they come up with - isn't that crazy?!) and

(4) you may be pleasantly surprised at the results (recently we saw a bank get a NTI CRA performance rating. They hadn't reported their lending activity, but when we looked at their lending we advised them they would have been ranked #3 within their AA for lending to very small businesses - and it was their lending to those businesses that was heavily criticized by examiners - if they were prepared and had known about how important they were as a lender to very small businesses they could have mitigated examiner criticism).

I've explained in previous threads that the ISB exam standards are much more difficult than the Large Bank standards (yes it's counterintuitive) because community development is much more heavily emphasized in an ISB exam compared to a Large Bank exam. Community Development is much more vaguely defined and measured in CRA and there is an appalling lack of performance context data (CD loans are reported but not geocoded so no one knows where they are) and CD investments are not reported at all. At least with small business and small farm lending there is a good amount of data reported and published which helps develop performance context.

Any time you extend a small business loan you should attempt to collect the GAR data. It's mandatory if you relied upon it in the credit decision. The latest I've seen from the Agencies is they recommend (but do not require) collecting the GAR even when extending loans in response to Covid-19. BTW, you should geocode every small business loans whether they are in LMI tracts or not.

I have two questions concerning the PPP loans. First, would LAR reporters be required to ensure (or be penalized for not reporting) revenues $1MM or less to meet reporting requirement? Second, prior posters noted that the revenue code should be a 3 (unknown). Would it not be considered a 4 (Not Applicable) since it was not was required as per the PPP guidelines? My feeling is that a 4, address my first concern better than as a 3.

1- when you originate a small business loan you are required to enter the GAR code based on the information you used for the credit decision. If you didn't rely on GAR then code 3 would be appropriate
2- when entering the code for the GAR for a business loan the answer is never "4" because 4 is intended to be used to indicate the loan is not a small business (or small farm) loan. You use code "4" if you are capturing the non-mandatory consumer loans. When you extend a auto loan the GAR field would be coded "4" for example. So code "4" indicates the GAR is not applicable because the loan is a consumer loan.

Len, I appreciate the clarification.

The OCC came out with these FAQs regarding CRA and COVID-19. They mention PPP loans. https://www.occ.gov/topics/supervis...vid-19-information/covid-19-cra-faqs.pdf

We are a Large reporting bank regulated by the Fed.The majority of the PPP loans we originated were under $1M. We plan to report revenue for these loans as NA. It is my understanding from reading the COVID FAQs that these will be reported as small business as they will likely all fall into the "Commercial & Industrial" (not secured by residential real estate) Call Report coding. The COVID FAQs state these will be small business regardless of the revenues reported; however, bank examiners will give some extra consideration for the increase in small business loans with NA revenues for these types of loans. With this being said, I'm still unclear on the PPP loans over $1M being reported as community development. Has it been determined if these will "automatically" qualify under economic development based on the "purpose" of these loans (employee retention) and that they have been approved by the SBA so these loans must have met the "size" requirement also (based on number of employees/NAICS code)?

Thank you.

PPP loans over $1MILLION could be given credit as CD loans under either economic development or revitalization stabilization and can also be given credit as innovative and flexible loans. This is stated in the interagency Q&As.

My understanding is that they would not be automatic as CD loans as they would need to meet the parameters for either CD hook noted above. So for economic development you would already have the size test covered, you would just need to evidence that the jobs are for LMI. Revitalization I would guess it would be near automatic if the loan was in a low, modest, or distressed/underserved tract.

That said, the interagency Q&As do kind of make it sound automatic so I dont know how it will be applied in practice.

I have been on two different trade association calls with the OCC recently and in both cases they were asked specifically about the burden of additional documentation for qualifying PPP loans over $1 million as CD loans. Both times they seemed a little confused by our question and clearly didn't have an answer. They said they would review it and get back to us. I hope that means there will be additional guidance provided.

I just wanted to round back to something asked about in the original post. Are you all reporting PPP loans of $1MM or less on the CRA LAR and removing them if they are forgiven prior to year end? Am struggling with how to report these and manage the process. Thanks!

My plan is to report them regardless of if they end up being forgiven. When we made the loan we commit to a two year term. If any other loan paid off in less than the term we would still report those, so why not report these?

Great POST for all to read, bank employees have worked very hard to meet the needs of the small businesses in such difficult times. At our bank we had to get employees form other department to help gather all the date needed for those employees funding the loans. Hope everyone gets the credit well deserved..

I can see there is much confusion about the PPP loans. So here are some points:
1 - for the most part "community development" activity remains the same as normal, however an exception has been made for CD qualification insofar as activity that finances or supports healthcare in middle- and upper-income tracts (all tracts have been designated as disaster areas eligible for Type A and Type B relief which ordinarily doesn't qualify for the revitalization stabilization definition or for credit for activities in distressed or underserved tracts, but will be considered as disaster areas for this type of activity only. In other words the PPP activity is not affected by this unless it is related to healthcare)
2 - PPP may qualify for CD recognition under the Economic Development definition if the activity meets the primary purpose requirement which contains a size factor and a purpose factor (permanent job creation, preservation or improvement for LMI persons) and if the loan is >$1 million. It is is <= $1 million it must be reported as a small business loan. Banks undergoing a CRA exam under the ISB standards may elect to treat such loans as CD loans rather than small business loans for examination purposes
3- the concept of innovative, flexible and complex and responsive to community needs continues to apply for extra credit and this certainly pertains to PPP loans whether they are CD qualified or ordinary small business loans.

We are NOT an SBA lender, but are under a holding company which has an SBA lender - so we spent countless hours working with our borrowers to collect the information and assist with the application and approval process through our sister bank. Unfortunately that doesn't generate any CRA credit (other than "positive consideration" for our efforts).

We participate loans back and forth with this sister bank. So I was thinking, this might be a good opportunity for us to buy these PPP loans to our customers back. Participation loans are eligible for CRA credit as I recall (they're in our assessment area, we have revenue information on them already as existing loan customers, etc.). Looking to improve our small business lending here before EOY to get credit for some of the vast PPP work we did. Our numbers are down as borrowers targeted the funds thru SBA programs, most aren't looking to expand, lenders spent time helping these existing customers vs. bringing in new relationships, etc. We're a small bank (ISB) so purchasing even 15-20 would make a big difference. There are also some in there we could pick up as CDL.

Anyone know if we can purchase these SBA loans if we're not an SBA lender? Any additional considerations - please feel free to comment and shoot holes in my logic as necessary. Seems like a win/win - we get our customer's PPP loans on our books and in doing so will take loans that are outside the assessment area for the other bank off of their books.

Len S. - Can you please provide the source for this information? I want to make sure I have documentation when the regulators come to review my CD loans for 2020.

1 - for the most part "community development" activity remains the same as normal, however an exception has been made for CD qualification insofar as activity that finances or supports healthcare in middle- and upper-income tracts (all tracts have been designated as disaster areas eligible for Type A and Type B relief which ordinarily doesn't qualify for the revitalization stabilization definition or for credit for activities in distressed or underserved tracts, but will be considered as disaster areas for this type of activity only. In other words the PPP activity is not affected by this unless it is related to healthcare)

Would a PPP loan over $1 million to an organization that supports healthcare (i.e. pathology lab, imaging center) automatically qualify as revitalize/stabilize? These facilities serve all income levels, but the loan definitely helped retain jobs during the pandemic.

Is it in a low, mod, or distressed or underserved middle tract? If yes then I think its good. If not does it primarily serve those areas that are? If not, I would consider under economic development. Unless I am missing something special about a medical center.

If I can find documentation that middle and upper tracts were considered "distressed" because of COVID, I believe they would qualify....

I would move to economic development, are the jobs retained low or moderate income jobs? If not, then what about community service? Do they do Covid testing, treatment, anything like that? Or free up space so other places could?

Great thoughts, Inspector. The pathology lab was the primary COVID testing site in the county. Thanks!

BTW, I don't know if I mentioned this above. All PPP loans do have a job preservation qualification which is important for getting credit under the economic development definition in CRA. But there is a second part to qualifying - the "size test". Only businesses that have GAR <=$1 million or meet the size standards in the SBA regulations, Part 121 qualify under the definition. So if you make a PPP loan to Walmart it won't qualify. The SBA size standards are somewhat liberal and allow companies with as many as 1,500 employees to qualify if they are in the right NAICS category.

I would suggest that even if a business is too big by the size test I would capture the information anyways and give it to examiners for consideration on how your bank helped the community.

Honestly, you should put it forth as such. Worst case scenario, the examiners decide it doesn't count. Frankly, this goes for loans that you would think are slam dunks too. You never know exactly how examiners are going to decide on community development loans. Just too subjective.

One other aspect of this PPP issue is that aside from the "economic development" definition (which has a purpose and size tests) PPP loans extended in LMI tracts or distressed and underserved tracts may qualify under the revitalization/stabilization definition. The advantage of that angle is the "size test" doesn't apply. So a PPP loan to a large business would potentially qualify as CD under the revitalization/stabilization definition. "The devil is in the details" certainly applies here.

So....are you reporting(submitting) PPP to non-profits with a community development purpose with your usual Community Development Loans OR are you segregating these loans and providing the list to the examiners for "special mention" at exam time?

If you are speaking about "submitting" your loans for your annual CRA filing, loans to non-profits if they qualify for CD recognition would be reported as CD loans (unless they are secured by commercial real estate in which case if they are <= $1 million they are reported as small bus loans).
If you are speaking of "submitting" your PPP loans to examiners for examination purposes then I would suggest you isolate the PPP loans to non-profits that have a community development purpose (providing community services primarily to LMI persons for example) because they would qualify for recognition under potentially 3 CD purposes, (1) community services, (2) economic development and (3) revitalization/stabilization (if they are in a low- or moderate-income tract or a distressed or underserved area. Furthermore, they would qualify for flexible and innovative programs responsive to community needs.

We currently are tracking our "normal" CDL and our "PPP" Loans (those to non-profits with a CDL Purpose) separately. For the 2020 submission, are you reporting both the "normal" CDLs AND the "PPP" Loans (those to non-profits with a CDL Purpose) in your CDL totals? When I say submit, you have to report at the minimum the # and dollars of CDLs, correct?

What about the "PPP Loans" greater than 1 million that are not reported on the CRA LAR. Are those being added to the CDL total as well....claiming that they helping to retain jobs?

For reporting purposes, you would submit any loan that qualifies as CD. This would include PPP loans to non-profits even if they may not qualify for CD recognition (in cases when they don't provide services "primarily" to LMI persons for example) because the PPP loan itself would qualify under the economic development definition (assuming the non-profit passes the "size" test because for econ development you must have a qualified purpose which would be permanent job protection and the borrower cannot exceed $1 MM GAR or the SBA size standards under Part 121).

When you submit your annual report you would include all the PPP loans as CD except those that are <=$1 million. For those that are <= $1 million if they were to a non-profit and are not secured by non-farm, non-residential property they also could be reported as CD loans. Any PPP loans over a million dollars would be qualified as CD if they pass the purpose test (permanent job preservation) and size test (as explained above).

I don't know if I have made this clear, but every PPP loan should qualify for economic development because they meet the purpose test of job preservation. However, there is a second part to the qualification - the so-called "size" test. This pertains to the borrower's size as measured by its GAR or by the SBA Part 121 size standards. Many banks that have extended PPP loans have not collected the GAR. That could jeopardize the loans' qualifications as community development under the economic development definition (although it will not affect the revitalization/stabilization qualifications) because those banks won't have the information needed to pass the size test. So I strongly recommend that you go back and get the GAR information so you can establish the CD qualifications of your PPP loans.

Here is the link to the SBA size test:

https://www.sba.gov/size-standards

For either size standard, you will need to know the GAR and/or the number of employees working for the PPP borrower which you can then compare to the straight forward $1 million GAR or the SBA Size standards