by Neal C. Wise
The OCC, Federal Reserve and FDIC recently adopted final revisions to the Interagency Questions and Answers Regarding Community Reinvestment (Q&A) based on proposals the agencies issued September 10, 2014. The revisions – which clarify nine Q&As, revise four Q&As and adopt two new Q&As – provide guidance as to how banks may receive credit under the Community Reinvestment Act (CRA) towards their obligation of meeting the credit needs of their communities.
Among other topics, the agencies clarified Q&As addressing community development related topics that qualify for CRA consideration. Currently, CRA regulations define community development activities as those that “promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration’s Development Company (SBDC) or Small Business Investment Company (SBIC) programs (13 CFR 121.301) or have gross annual revenues of $1 million or less.”
To promote economic development, an activity must meet both (1) a size test – i.e., the beneficiary must meet the eligibility requirements of the SBDC or SBIC programs or have gross annual revenues of $1 million or less – and (2) a purpose test – i.e., the activity promotes job creation or retention for low-to-moderate income (LMI) persons or in LMI geographies. Currently, the agencies presume that any loan to or investment in a SBDC, SBIC, Rural Business Investment Company, New Markets Venture Capital Company, or New Markets Tax Credit-eligible Community Development Entity promotes economic development.
As part of the revised Q&As, the agencies added to this list that a loan to or investment in a Community Development Financial Institution (CDFI) which finances small business or small farms will be presumed to promote economic development. Within this CDFI qualification, the agencies made clear that the term “financing” not only means traditional bank financing (such as providing working capital), but also includes technical assistance and similar activities that readies a business who meets the size eligibility standards to obtain financing.
Finally, the agencies addressed the ability of banks to claim CRA credit for their loans to and investments in Historic Tax Credit (HTC) projects. Although the regulators stopped short of providing a clear presumption that activities related to HTC projects qualify for CRA consideration, they concurred that projects involving HTCs could qualify for CRA consideration if, for example, the project houses small businesses that support job creation for LMI individuals or the project revitalizes an LMI geography. Banks should consider the potential for increased CRA recognition when evaluating a HTC project and should consult with their examiners to point out ongoing HTC projects that may warrant CRA credit.