Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment; Notice

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2010-0002]

FEDERAL RESERVE SYSTEM

[Docket No. OP-1349]

FEDERAL DEPOSIT INSURANCE CORPORATION

RIN—3064-AC97

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket ID OTS-2010-0004]

Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment; Notice

AGENCIES:

Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS).

ACTION:

Notice.

SUMMARY:

The OCC, Board, FDIC, and OTS (the agencies) are adopting as final the Interagency Questions and Answers Regarding Community Reinvestment (Questions and Answers) that were proposed on January 6, 2009. In response to comments received, the agencies made minor clarifications to the new and revised questions and answers that were proposed.

DATES:

Effective Date:

March 11, 2010.

FOR FURTHER INFORMATION CONTACT:

OCC:

Gregory Nagel or Karen Tucker, National Bank Examiners, Compliance Policy Division, (202) 874-4428; or Margaret Hesse, Special Counsel, Community and Consumer Law Division, (202) 874-5750, Office of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.

Board:

Cathy Gates, Senior Project Manager, (202) 452-3946; or Brent Lattin, Attorney, (202) 452-3667, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551.

FDIC:

Janet R. Gordon, Senior Policy Analyst, Division of Supervision and Consumer Protection, Compliance Policy Branch, (202) 898-3850; or Susan van den Toorn, Counsel, Legal Division, (202) 898-8707, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.

OTS:

Stephanie M. Caputo, Senior Compliance Program Analyst, Compliance and Consumer Protection, (202) 906-6549; or Richard Bennett, Senior Compliance Counsel, Regulations and Legislation Division, (202) 906-7409, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Background

The OCC, Board, FDIC, and OTS implement the Community Reinvestment Act (CRA) (12 U.S.C. 2901

et seq.

) through their CRA regulations.

See

12 CFR parts 25, 228, 345, and 563e. The agencies' regulations are interpreted primarily through the “Interagency Questions and Answers Regarding Community Reinvestment” (Questions and Answers), which provide guidance for use by agency personnel, financial institutions, and the public. The Questions and Answers were first published under the auspices of the Federal Financial Institutions Examination Council (FFIEC) in 1996 (61 FR 54647), and were last revised on January 6, 2009 (2009 Questions and Answers) (74 FR 498).

The

supplementary information

published with the 2009 Questions and Answers also proposed for comment one new question and answer (Q&A) and two revised Q&As. 74 FR 504-06. Together, the agencies received comments from 19 different parties. The commenters represented financial institutions and their trade associations, community development advocates and organizations, and others.

As discussed below, this document adopts the three new and revised Q&As that were proposed in January 2009, with minor clarifications, as appropriate, in response to comments received. The agencies are also adopting conforming revisions to an existing Q&A.

The Interagency Questions and Answers are grouped by the provision of the CRA regulations that they discuss, are presented in the same order as the regulatory provisions, and employ an abbreviated method of citing to the regulations. For example, the small bank performance standards for national banks appear at 12 CFR 25.26; for Federal Reserve System member banks supervised by the Board, they appear at 12 CFR 228.26; for state nonmember banks, they appear at 12 CFR 345.26; and for thrifts, the small savings association performance standards appear at 12 CFR 563e.26. Accordingly, the citation would be to 12 CFR __.26. Each Q&A is numbered using a system that consists of the regulatory citation and a number, connected by a dash. For example, the first Q&A addressing 12 CFR __.26 would be identified as § __.26—1.

Although a particular Q&A may provide guidance on one regulatory provision,

e.g.,

12 CFR __.22, which relates to the lending test applicable to large institutions, its content may also be applicable to, for example, small institutions, which are evaluated pursuant to small institution performance standards found at 12 CFR __.26. Thus, readers with a particular interest in small institution issues, for example, should also consult the guidance that describes the lending, investment, and service tests.

The Questions and Answers are indexed to aid readers in locating specific information in the document. The index contains keywords, listed alphabetically, along with numerical indicators of questions and answers that relate to that keyword. The list of Q&As addressing each keyword in the index is not intended to be exhaustive.

New and Revised Q&As

New Q&A: Community Services Targeted to Low- or Moderate-Income Individuals

The agencies proposed a new Q&A, § __.12(g)(2)—1, that would provide examples of ways an institution that provides community services could determine that the community services are targeted to low- and moderate-income individuals when the institution does not know the actual income of the individuals. Several comments were received from community groups and banking organizations that supported the examples in the proposal. In addition, one suggestion was made to clarify that community services can include those provided by an entity with a broad mission, provided that the activities themselves qualify as community services. This suggestion was incorporated into the Q&A examples as a new fourth bullet.

Another commenter suggested that the definition of community services be broadened to cover financial literacy programs provided to school children of any income level in any school. Financial literacy programs are an example of community development services.

See

Q&A § __.12(i)—3. The commenter's suggestion was not adopted because community development services must have a primary purpose of community development, which would require the financial literacy programs to be targeted to low- or moderate-income individuals.

The new Q&A is being adopted as revised.

Revised Q&A § __.12(h)—8: Primary Purpose of Community Development

The regulations require community development activities to have a “primary purpose of community development.”

See

12 CFR __.12(h), __.12(i), and __.12(t). Q&A § __.12(h)—8 historically has provided two methods of determining whether an activity has a primary purpose of community development: (1) If a majority of the dollars or beneficiaries of the activity are identifiable to one or more of the enumerated community development purposes, then an activity will be considered to possess the requisite primary purpose; and (2) if the express, bona fide intent of the activity, as stated, for example, in a prospectus, loan proposal, or community action plan, is primarily one or more of the enumerated community development purposes; the activity is specifically structured (given any relevant market or legal constraints or performance context factors) to achieve the expressed community development purpose; and the activity accomplishes, or is reasonably certain to accomplish, the community development purpose involved, then the requisite primary purpose may be found.

To date, the agencies have generally indicated that if an activity has a primary purpose of community development (determined by either method above), the entire investment, loan, or service would be considered in an institution's CRA evaluation. However, if an activity does not have a primary purpose of community development applying these standards, then it would not be considered as a qualified investment, community development loan, or community development service.

The agencies proposed to revise Q&A § __.12(h)—8 to allow pro rata consideration for an activity that provides some affordable housing targeted to low- or moderate-income individuals, but when it would not be deemed to have a primary purpose of community development measured by a majority of the entire activity's beneficiaries or dollar value, or by relying on the express purpose of the activity. The proposed Q&A would specifically allow activities related to the provision of mixed-income housing, such as in connection with a development that has a mixed-income housing component or an affordable housing set-aside required by federal, state, or local government, to be eligible for consideration as an activity that has a “primary purpose” of community development at the election of the institution. In those cases, the proposed Q&A would allow an institution to receive pro rata consideration for the portion of the activity that provides affordable housing to low- or moderate-income individuals.

Commenters generally supported the proposed revision. One commenter suggested that the agencies should allow only pro rata treatment in all situations where less than a majority of an activity's dollars will be used for community development. This commenter further suggested that the agencies should eliminate full consideration of activities that have an “express, bona fide intent” of community development when the measurable portion of any benefit bestowed or dollars applied is less than a majority of the entire activity's benefits or dollar value. The agencies decline to adopt this suggestion. If the express, bona fide intent of an activity is community development, even though the measurable portion of any benefit bestowed or dollars applied is less than a majority of the entire activity's benefits or dollar value, the agencies continue to believe that it is important that such activities, such as projects involving low-income housing tax credits, receive full consideration.

Several commenters were concerned that the proposal would result in a reduction of the amount of CRA consideration provided to financial institutions' loans or investments in mixed-income properties. The agencies do not intend this result. In fact, the proposed revision should increase the amount of consideration available to institutions. Some commenters believed that all activities in connection with properties with a set-aside for affordable units received total quantitative CRA consideration. Although this is true if the express, bona fide intent of the entire project is community development, that is not always the intent. For example, a private development in which a developer is required to set aside a small percentage of the units as affordable housing in order to receive zoning approval would not have the requisite express, bona fide intent. As a result of the revision, however, the financial institution could receive consideration for the pro rata amount of the affordable housing set-aside.

The agencies had asked whether allowing pro rata consideration would spur the construction and rehabilitation of housing for low- or moderate-income persons. Commenters provided mixed responses. A number of commenters believed that allowing pro rata consideration may provide an added incentive to financial institutions. A couple of commenters, however, believed that the revision would not spur additional construction and rehabilitation because, for example, the development of local housing is based on a local agency's determination of its community housing needs and is not influenced by a financial institution's CRA requirements.

Commenters responded nearly unanimously that the pro rata treatment should not be restricted only to instances where a governmental entity requires a set-aside. Commenters believed that the voluntary inclusion of affordable housing components in development by private developers should also receive consideration. As one commenter stated, “Affordable housing is affordable housing.” The final question and answer would allow pro rata treatment in connection with any project that provides affordable housing, regardless of whether a governmental entity requires a set-aside.

In response to the agencies' question about how the amount of the pro rata share should be determined for reporting purposes (by units or by loan proceeds), several commenters urged flexibility. Several commenters believed that the entire amount of the loan should be reported. Other commenters suggested that when the actual amount of funds attributed to the affordable units is readily apparent, for example in connection with a construction loan, the actual dollar amount should be considered. However, in other cases, where the actual amount of funds is not readily apparent, the pro rata share should be determined based on the percentage of set-aside units.

The final question and answer has been clarified. Institutions will determine the pro rata share of the activity that provides affordable housing to low- or moderate-income individuals based on the percentage of units set-aside for affordable housing for low- or moderate-income individuals. The Agencies believe that this method of determining the portion of a loan or investment that provides affordable housing for low- or moderate-income individuals imposes the least amount of burden on developers and lenders to differentiate the construction costs, including the proportional share of costs related to infrastructure, common areas, and site amenities, between market and affordable units.

The proposed revision restricted the pro rata treatment only to affordable housing activities by financial

institutions. The agencies asked whether the pro rata treatment should apply only to affordable housing or whether the pro rata treatment should also apply to loans or investments with other community development purposes.

Since the CRA regulations were revised in 1995, affordable housing initiatives have included more and more mixed-income housing. Fewer new or rehabilitated housing projects provide primarily low-income housing. Mixed-income housing is an important goal in government housing assistance programs. Because of the compelling public interest in affordable housing programs, the agencies believe that it is appropriate that the pro rata treatment be adopted with regard to affordable housing. However, the agencies decline to expand the coverage of this treatment to activities other than those providing affordable housing at this time. The agencies will keep abreast of developments in other types of community development activities and evaluate the effectiveness of the pro rata treatment in connection with affordable housing programs. We will reassess whether such treatment should be afforded other types of community development activities at a later date. The agencies have added clarifying language to the final answer to emphasize that the pro rata treatment applies only to affordable housing activities.

Finally, the agencies asked for comment on whether the adoption of pro rata treatment would lead to unjustifiable inflation of community development activities. Commenters unanimously asserted that it would not.

The agencies are adopting the revised Q&A with the clarifications described above.

Revised Q&A § __.42(b)(2)—3: Data Collection

The agencies explained in January 2009 that if the proposed revision to Q&A § __.12(h)—8, described above, were adopted, the agencies would also revise Q&A § __.42(b)(2)—3 to address data collection and reporting of the pro rata share of the mixed-income housing loans described in the Q&A. The agencies proposed that, if an institution were to elect to have the portion of mixed-income housing loans that were set aside for low- or moderate-income housing considered as community development loans, in order to receive consideration for such loans, the institution would need to collect and report data on only the portions of the loans that provide housing that is affordable for low- or moderate-income individuals.

Three commenters addressed the proposed revision to this Q&A. The general concern addressed by the commenters was the potential for confusion in reporting the pro rata share of an affordable housing activity. As in the past, the full amount of the loan should be collected and reported if the majority of the dollars or beneficiaries are identifiable to a community development purpose. Similarly, the full amount of the loan should be collected and reported if the express, bona fide intent of the loan or investment is community development, even though a majority of the dollars or beneficiaries are not identifiable with a community development purpose. In connection with affordable housing projects that provide mixed-income housing, but where a majority of the dollars or units do not have a community development purpose and the express, bona fide intent of the loan is not community development, the institution must report only the pro rata dollar amount of the portion of the loan that provides affordable housing to low- or moderate-income individuals. The pro rata dollar amount of the total activity will be based on the percentage of units set-aside for affordable housing for low- or moderate-income individuals. The agencies are adopting the proposed revision to the Q&A, but have added a sentence to the final answer to clarify this guidance.

Conforming Revision to Q&A § __.22(a)(2)—4: Other Loan Data

Q&A § __.22(a)(2)—4, as adopted in January of 2009 (74 FR 517), stated that loans that do not have a primary purpose of community development, but where a certain amount or percentage of units is set aside for affordable housing, should be submitted by the financial institution for consideration as “other loan data.” In the supplementary information published with the proposed revisions to the interagency questions and answers, the agencies advised that, if the proposed revision to Q&A § __.12(h)—8 were adopted, a conforming change to Q&A § __.22(a)(2)—4 would be made. The answer to Q&A § __.22(a)(2)—4 has been revised to remove the reference to “loans that do not have a primary purpose of community development, but where a certain amount or percentage of units is set aside for affordable housing” as an example of “other loan data” because such activities are eligible for pro rata treatment.

The text of the final Interagency Questions and Answers follows:

Interagency Questions and Answers Regarding Community Reinvestment

§ __.11—Authority, purposes, and scope

§ __.11(c) Scope

§§ __.11(c)(3) & 563e.11(c)(2) Certain special purpose institutions

§§ __.11(c)(3) & 563e.11(c)(2)—1:

Is the list of special purpose institutions exclusive?

A1. No, there may be other examples of special purpose institutions. These institutions engage in specialized activities that do not involve granting credit to the public in the ordinary course of business. Special purpose institutions typically serve as correspondent banks, trust companies, or clearing agents or engage only in specialized services, such as cash management controlled disbursement services. A financial institution, however, does not become a special purpose institution merely by ceasing to make loans and, instead, making investments and providing other retail banking services.

§§ __.11(c)(3) & 563e.11(c)(2)—2:

To be a special purpose institution, must an institution limit its activities in its charter?

A2. No. A special purpose institution may, but is not required to, limit the scope of its activities in its charter, articles of association, or other corporate organizational documents. An institution that does not have legal limitations on its activities, but has voluntarily limited its activities, however, would no longer be exempt from Community Reinvestment Act (CRA) requirements if it subsequently engaged in activities that involve granting credit to the public in the ordinary course of business. An institution that believes it is exempt from CRA as a special purpose institution should seek confirmation of this status from its supervisory agency.

§ __.12—Definitions

§ __.12(a) Affiliate

§ __.12(a)—1:

Does the definition of “affiliate” include subsidiaries of an institution?

A1. Yes, “affiliate” includes any company that controls, is controlled by, or is under common control with another company. An institution's subsidiary is controlled by the institution and is, therefore, an affiliate.

§ __.12(f) Branch

§ __.12(f)—1:

Do the definitions of “branch,” “automated teller machine (ATM),” and “remote service facility

(RSF)” include mobile branches, ATMs, and RSFs?

A1. Yes. Staffed mobile offices that are authorized as branches are considered “branches,” and mobile ATMs and RSFs are considered “ATMs” and “RSFs.”

§ __.12(f)—2:

Are loan production offices (LPOs) branches for purposes of the CRA?

A2. LPOs and other offices are not “branches” unless they are authorized as branches of the institution through the regulatory approval process of the institution's supervisory agency.

§ __.12(g) Community development

§ __.12(g)—1:

Are community development activities limited to those that promote economic development?

A1. No. Although the definition of “community development” includes activities that promote economic development by financing small businesses or farms, the rule does not limit community development loans and services and qualified investments to those activities. Community development also includes community- or tribal-based child care, educational, health, or social services targeted to low- or moderate-income persons, affordable housing for low- or moderate-income individuals, and activities that revitalize or stabilize low- or moderate-income areas, designated disaster areas, or underserved or distressed nonmetropolitan middle-income geographies.

§ __.12(g)—2:

Must a community development activity occur inside a low- or moderate-income area, designated disaster area, or underserved or distressed nonmetropolitan middle-income area in order for an institution to receive CRA consideration for the activity?

A2. No. Community development includes activities, regardless of their location, that provide affordable housing for, or community services targeted to, low- or moderate-income individuals and activities that promote economic development by financing small businesses and farms. Activities that stabilize or revitalize particular low- or moderate-income areas, designated disaster areas, or underserved or distressed nonmetropolitan middle-income areas (including by creating, retaining, or improving jobs for low- or moderate-income persons) also qualify as community development, even if the activities are not located in these areas. One example is financing a supermarket that serves as an anchor store in a small strip mall located at the edge of a middle-income area, if the mall stabilizes the adjacent low-income community by providing needed shopping services that are not otherwise available in the low-income community.

§ __.12(g)—3:

Does the regulation provide flexibility in considering performance in high-cost areas?

A3. Yes, the flexibility of the performance standards allows examiners to account in their evaluations for conditions in high-cost areas. Examiners consider lending and services to individuals and geographies of all income levels and businesses of all sizes and revenues. In addition, the flexibility in the requirement that community development loans, community development services, and qualified investments have as their “primary” purpose community development allows examiners to account for conditions in high-cost areas. For example, examiners could take into account the fact that activities address a credit shortage among middle-income people or areas caused by the disproportionately high cost of building, maintaining or acquiring a house when determining whether an institution's loan to or investment in an organization that funds affordable housing for middle-income people or areas, as well as low- and moderate-income people or areas, has as its primary purpose community development. See also Q&A § __.12(h)—8 for more information on “primary purpose.”

§ __.12(g)—4:

The CRA provides that, in assessing the CRA performance of non-minority- and non-women-owned (majority-owned) financial institutions, examiners may consider as a factor capital investments, loan participations, and other ventures undertaken by the institutions in cooperation with minority- or women-owned financial institutions and low-income credit unions (MWLIs), provided that these activities help meet the credit needs of local communities in which the MWLIs are chartered. Must such activities also benefit the majority-owned financial institution's assessment area?

A4. No. Although the regulations generally provide that an institution's CRA activities will be evaluated for the extent to which they benefit the institution's assessment area(s) or a broader statewide or regional area that includes the institution's assessment area(s), the agencies apply a broader geographic criterion when evaluating capital investments, loan participations, and other ventures undertaken by that institution in cooperation with MWLIs, as provided by the CRA. Thus, such activities will be favorably considered in the CRA performance evaluation of the institution (as loans, investments, or services, as appropriate), even if the MWLIs are not located in, or such activities do not benefit, the assessment area(s) of the majority-owned institution or the broader statewide or regional area that includes its assessment area(s). The activities must, however, help meet the credit needs of the local communities in which the MWLIs are chartered. The impact of a majority-owned institution's activities in cooperation with MWLIs on the majority-owned institution's CRA rating will be determined in conjunction with its overall performance in its assessment area(s).

Examples of activities undertaken by a majority-owned financial institution in cooperation with MWLIs that would receive CRA consideration may include:

• Making a deposit or capital investment;

• Purchasing a participation in a loan;

• Loaning an officer or providing other technical expertise to assist an MWLI in improving its lending policies and practices;

• Providing financial support to enable an MWLI to partner with schools or universities to offer financial literacy education to members of its local community; or

• Providing free or discounted data processing systems, or office facilities to aid an MWLI in serving its customers.

§ __.12(g)(1) Affordable housing (including multifamily rental housing) for low- or moderate-income individuals

§ __.12(g)(1)—1:

When determining whether a project is “affordable housing for low- or moderate-income individuals,” thereby meeting the definition of “community development,” will it be sufficient to use a formula that relates the cost of ownership, rental, or borrowing to the income levels in the area as the only factor, regardless of whether the users, likely users, or beneficiaries of that affordable housing are low- or moderate-income individuals?

A1. The concept of “affordable housing” for low- or moderate-income individuals does hinge on whether low- or moderate-income individuals benefit, or are likely to benefit, from the housing. It would be inappropriate to give consideration to a project that exclusively or predominately houses families that are not low- or moderate-income simply because the rents or housing prices are set according to a particular formula.

For projects that do not yet have occupants, and for which the income of the potential occupants cannot be determined in advance, or in other projects where the income of occupants cannot be verified, examiners will

review factors such as demographic, economic, and market data to determine the likelihood that the housing will “primarily” accommodate low- or moderate-income individuals. For example, examiners may look at median rents of the assessment area and the project; the median home value of either the assessment area, low- or moderate-income geographies or the project; the low- or moderate-income population in the area of the project; or the past performance record of the organization(s) undertaking the project. Further, such a project could receive consideration if its express, bona fide intent, as stated, for example, in a prospectus, loan proposal, or community action plan, is community development.

§ __.12(g)(2) Community services targeted to low- or moderate-income individuals

§ __.12(g)(2)—1:

Community development includes community services targeted to low- or moderate-income individuals. What are examples of ways that an institution could determine that community services are offered to low- or moderate-income individuals?

A1: Examples of ways in which an institution could determine that community services are targeted to low- or moderate-income persons include:

• The community service is targeted to the clients of a nonprofit organization that has a defined mission of serving low- and moderate-income persons, or, because of government grants, for example, is limited to offering services only to low- or moderate-income persons.

• The community service is offered by a nonprofit organization that is located in and serves a low- or moderate-income geography.

• The community service is conducted in a low- or moderate-income area and targeted to the residents of the area.

• The community service is a clearly defined program that benefits primarily low- or moderate-income persons, even if it is provided by an entity that offers other programs that serve individuals of all income levels.

• The community service is offered at a workplace to workers who are low- and moderate-income, based on readily available data for the average wage for workers in that particular occupation or industry (

see, e.g., http://www.bls.gov/bls/blswage.htm

(Bureau of Labor Statistics)).

§ __.12(g)(3) Activities that promote economic development by financing businesses or farms that meet certain size eligibility standards

§ __.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. The concept of “community development” under 12 CFR __.12(g)(3) involves both a “size” test and a “purpose” test. An institution's loan, investment, or service meets the “size” test if it finances, either directly or through an intermediary, 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 institution's loan, investment, or service must promote economic development. These activities are considered to promote economic development if they support 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, Rural Business Investment Company, New Markets Venture Capital Company, or New Markets Tax Credit-eligible Community Development Entity promotes economic development. (But also refer to Q&As § __.42(b)(2)—2, § __.12(h)—2, and § __.12(h)—3 for more information about which loans may be considered community development loans.)

In addition to their quantitative assessment of the amount of a financial institution's community development activities, examiners must make qualitative assessments of an institution's leadership in community development matters and the complexity, responsiveness, and impact of the community development activities of the institution. In reaching a conclusion about the impact of an institution's community development activities, examiners may, for example, determine that a loan to a small business in a low- or moderate-income geography that provides needed jobs and services in that area may have a greater impact and be more responsive to the community credit needs than does a loan to a small business in the same geography that does not directly provide additional jobs or services to the community.

§ __.12(g)(4) Activities that revitalize or stabilize certain geographies

§ __.12(g)(4)—1:

Is the revised definition of community development, effective September 1, 2005 (under the OCC, Board, and FDIC rules) and effective April 12, 2006 (under OTS's rule), applicable to all institutions or only to intermediate small institutions?

A1. The revised definition of community development is applicable to all institutions. Examiners will not use the revised definition to qualify activities that were funded or provided prior to September 1, 2005 (under the OCC, Board, and FDIC rules) or prior to April 12, 2006 (under OTS's rule).

§ __.12(g)(4)—2:

Will activities that provide housing for middle-income and upper-income persons qualify for favorable consideration as community development activities when they help to revitalize or stabilize a distressed or underserved nonmetropolitan middle-income geography or designated disaster areas?

A2. An activity that provides housing for middle- or upper-income individuals qualifies as an activity that revitalizes or stabilizes a distressed nonmetropolitan middle-income geography or a designated disaster area if the housing directly helps to revitalize or stabilize the community by attracting new, or retaining existing, businesses or residents and, in the case of a designated disaster area, is related to disaster recovery. The Agencies generally will consider all activities that revitalize or stabilize a distressed nonmetropolitan middle-income geography or designated disaster area, but will give greater weight to those activities that are most responsive to community needs, including needs of low- or moderate-income individuals or neighborhoods. Thus, for example, a loan solely to develop middle- or upper-income housing in a community in need of low- and moderate-income housing would be given very little weight if there is only a short-term benefit to low- and moderate-income individuals in the community through the creation of temporary construction jobs. (Except in connection with intermediate small institutions, a housing-related loan is not evaluated as a “community development loan” if it has been reported or collected by the institution or its affiliate as a home mortgage loan,

unless it is a multifamily dwelling loan.

See

12 CFR __.12(h)(2)(i) and Q&As § __.12(h)—2 and § __.12(h)—3.) An activity will be presumed to revitalize or stabilize such a geography or area if the activity is consistent with a bona fide government revitalization or stabilization plan or disaster recovery plan.

See

Q&As § __.12(g)(4)(i)—1 and § __.12(h)—5.

In

underserved

nonmetropolitan middle-income geographies, activities that provide housing for middle- and upper-income individuals may qualify as activities that revitalize or stabilize such underserved areas if the activities also provide housing for low- or moderate-income individuals. For example, a loan to build a mixed-income housing development that provides housing for middle- and upper-income individuals in an underserved nonmetropolitan middle-income geography would receive positive consideration if it also provides housing for low- or moderate-income individuals.

§ __.12(g)(4)(i) Activities that revitalize or stabilize low- or moderate-income geographies

§ __.12(g)(4)(i)—1: What activities are considered to “revitalize or stabilize” a low- or moderate-income geography, and how are those activities considered?

A1. Activities that revitalize or stabilize a low- or moderate-income geography are activities that help to attract new, or retain existing, businesses or residents. Examiners will presume that an activity revitalizes or stabilizes a low- or moderate-income geography if the activity has been approved by the governing board of an Enterprise Community or Empowerment Zone (designated pursuant to 26 U.S.C. § 1391) and is consistent with the board's strategic plan. They will make the same presumption if the activity has received similar official designation as consistent with a federal, state, local, or tribal government plan for the revitalization or stabilization of the low- or moderate-income geography. For example, foreclosure prevention programs with the objective of providing affordable, sustainable, long-term loan restructurings or modifications to homeowners in low- or moderate-income geographies, consistent with safe and sound banking practices, may help to revitalize or stabilize those geographies.

To determine whether other activities revitalize or stabilize a low- or moderate-income geography, examiners will evaluate the activity's actual impact on the geography, if information about this is available. If not, examiners will determine whether the activity is consistent with the community's formal or informal plans for the revitalization and stabilization of the low- or moderate-income geography. For more information on what activities revitalize or stabilize a low- or moderate-income geography, see Q&As § __.12(g)—2 and § __.12(h)—5.

§ __.12(g)(4)(ii) Activities that revitalize or stabilize designated disaster areas

§ __.12(g)(4)(ii)—1:

What is a “designated disaster area” and how long does it last?

A1. A “designated disaster area” is a major disaster area designated by the federal government. Such disaster designations include, in particular, Major Disaster Declarations administered by the Federal Emergency Management Agency (FEMA) (

http://www.fema.gov

), but excludes counties designated to receive only FEMA Public Assistance Emergency Work Category A (Debris Removal) and/or Category B (Emergency Protective Measures).

Examiners will consider institution activities related to disaster recovery that revitalize or stabilize a designated disaster area for 36 months following the date of designation. Where there is a demonstrable community need to extend the period for recognizing revitalization or stabilization activities in a particular disaster area to assist in long-term recovery efforts, this time period may be extended.

§ __.12(g)(4)(ii)—2:

What activities are considered to “revitalize or stabilize” a designated disaster area, and how are those activities considered?

A2. The Agencies generally will consider an activity to revitalize or stabilize a designated disaster area if it helps to attract new, or retain existing, businesses or residents and is related to disaster recovery. An activity will be presumed to revitalize or stabilize the area if the activity is consistent with a bona fide government revitalization or stabilization plan or disaster recovery plan. The Agencies generally will consider all activities relating to disaster recovery that revitalize or stabilize a designated disaster area, but will give greater weight to those activities that are most responsive to community needs, including the needs of low- or moderate-income individuals or neighborhoods. Qualifying activities may include, for example, providing financing to help retain businesses in the area that employ local residents, including low- and moderate-income individuals; providing financing to attract a major new employer that will create long-term job opportunities, including for low- and moderate-income individuals; providing financing or other assistance for essential community-wide infrastructure, community services, and rebuilding needs; and activities that provide housing, financial assistance, and services to individuals in designated disaster areas and to individuals who have been displaced from those areas, including low- and moderate-income individuals (

see, e.g.,

Q&As § __.12(i)—3; § __.12(t)—4; § __.22(b)(2) & (3)—4; § __.22(b)(2) & (3)—5; and § __.24(d)(3)—1).

§ __.12(g)(4)(iii) Activities that revitalize or stabilize distressed or underserved nonmetropolitan middle-income geographies

§ __.12(g)(4)(iii)—1:

What criteria are used to identify distressed or underserved nonmetropolitan, middle-income geographies?

A1. Eligible nonmetropolitan middle-income geographies are those designated by the Agencies as being in distress or that could have difficulty meeting essential community needs (underserved). A particular geography could be designated as both distressed and underserved. As defined in 12 CFR __.12(k), a geography is a census tract delineated by the United States Bureau of the Census.

A nonmetropolitan middle-income geography will be designated as distressed if it is in a county that meets one or more of the following triggers: (1) An unemployment rate of at least 1.5 times the national average, (2) a poverty rate of 20 percent or more, or (3) a population loss of 10 percent or more between the previous and most recent decennial census or a net migration loss of five percent or more over the five-year period preceding the most recent census.

A nonmetropolitan middle-income geography will be designated as underserved if it meets criteria for population size, density, and dispersion that indicate the area's population is sufficiently small, thin, and distant from a population center that the tract is likely to have difficulty financing the fixed costs of meeting essential community needs. The Agencies will use as the basis for these designations the “urban influence codes,” numbered “7,” “10,” “11,” and “12,” maintained by the Economic Research Service of the United States Department of Agriculture.

The Agencies publish data source information along with the list of eligible nonmetropolitan census tracts on the Federal Financial Institutions

Examination Council Web site (

http://www.ffiec.gov

).

§ __.12(g)(4)(iii)—2:

How often will the Agencies update the list of designated distressed and underserved nonmetropolitan middle-income geographies?

A2. The Agencies will review and update the list annually. The list is published on the Federal Financial Institutions Examination Council Web site (

http://www.ffiec.gov

).

To the extent that changes to the designated census tracts occur, the Agencies have determined to adopt a one-year “lag period.” This lag period will be in effect for the twelve months immediately following the date when a census tract that was designated as distressed or underserved is removed from the designated list. Revitalization or stabilization activities undertaken during the lag period will receive consideration as community development activities if they would have been considered to have a primary purpose of community development if the census tract in which they were located were still designated as distressed or underserved.

§ __.12(g)(4)(iii)—3:

What activities are considered to “revitalize or stabilize” a distressed nonmetropolitan middle-income geography, and how are those activities evaluated?

A3. An activity revitalizes or stabilizes a distressed nonmetropolitan middle-income geography if it helps to attract new, or retain existing, businesses or residents. An activity will be presumed to revitalize or stabilize the area if the activity is consistent with a bona fide government revitalization or stabilization plan. The Agencies generally will consider all activities that revitalize or stabilize a distressed nonmetropolitan middle-income geography, but will give greater weight to those activities that are most responsive to community needs, including needs of low- or moderate-income individuals or neighborhoods. Qualifying activities may include, for example, providing financing to attract a major new employer that will create long-term job opportunities, including for low- and moderate-income individuals, and activities that provide financing or other assistance for essential infrastructure or facilities necessary to attract or retain businesses or residents.

See

Q&As § __.12(g)(4)(i)—1 and § __.12(h)—5.

§ __.12(g)(4)(iii)—4:

What activities are considered to “revitalize or stabilize” an underserved nonmetropolitan middle-income geography, and how are those activities evaluated

?

A4. The regulation provides that activities revitalize or stabilize an underserved nonmetropolitan middle-income geography if they help to meet essential community needs, including needs of low- or moderate-income individuals. Activities such as financing for the construction, expansion, improvement, maintenance, or operation of essential infrastructure or facilities for health services, education, public safety, public services, industrial parks, or affordable housing, will be evaluated under these criteria to determine if they qualify for revitalization or stabilization consideration. Examples of the types of projects that qualify as meeting essential community needs, including needs of low- or moderate-income individuals, would be a new or expanded hospital that serves the entire county, including low- and moderate-income residents; an industrial park for businesses whose employees include low- or moderate-income individuals; a new or rehabilitated sewer line that serves community residents, including low- or moderate-income residents; a mixed-income housing development that includes affordable housing for low- and moderate-income families; or a renovated elementary school that serves children from the community, including children from low- and moderate-income families.

Other activities in the area, such as financing a project to build a sewer line spur that connects services to a middle- or upper-income housing development while bypassing a low- or moderate-income development that also needs the sewer services, generally would not qualify for revitalization or stabilization consideration in geographies designated as underserved. However, if an underserved geography is also designated as distressed or a disaster area, additional activities may be considered to revitalize or stabilize the geography, as explained in Q&As § __.12(g)(4)(ii)—2 and § __.12(g)(4)(iii)—3.

§ __.12(h) Community development loan

§ __.12(h)—1:

What are examples of community development loans?

A1. Examples of community development loans include, but are not limited to, loans to:

• Borrowers for affordable housing rehabilitation and construction, including construction and permanent financing of multifamily rental property serving low- and moderate-income persons;

• Not-for-profit organizations serving primarily low- and moderate-income housing or other community development needs;

• Borrowers to construct or rehabilitate community facilities that are located in low- and moderate-income areas or that serve primarily low- and moderate-income individuals;

• Financial intermediaries including Community Development Financial Institutions (CDFIs), New Markets Tax Credit-eligible Community Development Entities, Community Development Corporations (CDCs), minority- and women-owned financial institutions, community loan funds or pools, and low-income or community development credit unions that primarily lend or facilitate lending to promote community development;

• Local, state, and tribal governments for community development activities;

• Borrowers to finance environmental clean-up or redevelopment of an industrial site as part of an effort to revitalize the low- or moderate-income community in which the property is located; and

• Businesses, in an amount greater than $1 million, when made as part of the Small Business Administration's 504 Certified Development Company program.

The rehabilitation and construction of affordable housing or community facilities, referred to above, may include the abatement or remediation of, or other actions to correct, environmental hazards, such as lead-based paint, that are present in the housing, facilities, or site.

§ __.12(h)—2:

If a retail institution that is not required to report under the Home Mortgage Disclosure Act (HMDA) makes affordable home mortgage loans that would be HMDA-reportable home mortgage loans if it were a reporting institution, or if a small institution that is not required to collect and report loan data under the CRA makes small business and small farm loans and consumer loans that would be collected and/or reported if the institution were a large institution, may the institution have these loans considered as community development loans?

A2. No. Although small institutions are not required to report or collect information on small business and small farm loans and consumer loans, and some institutions are not required to report information about their home mortgage loans under HMDA, if these institutions are retail institutions, the agencies will consider in their CRA evaluations the institutions' originations and purchases of loans that would have been collected or reported as small business, small farm, consumer or home mortgage loans, had the institution been

a collecting and reporting institution under the CRA or the HMDA. Therefore, these loans will not be considered as community development loans, unless the small institution is an intermediate small institution (

see

§ __.12(h)—3). Multifamily dwelling loans, however, may be considered as community development loans as well as home mortgage loans.

See also

Q&A § __.42(b)(2)—2.

§ __.12(h)—3:

May an intermediate small institution that is not subject to HMDA reporting have home mortgage loans considered as community development loans? Similarly, may an intermediate small institution have small business and small farm loans and consumer loans considered as community development loans?

A3. Yes. In instances where intermediate small institutions are not required to report HMDA or small business or small farm loans, these loans may be considered, at the institution's option, as community development loans, provided they meet the regulatory definition of “community development.” If small business or small farm loan data have been reported to the agencies to preserve the option to be evaluated as a large institution, but the institution ultimately chooses to be evaluated under the intermediate small institution examination standards, then the institution would continue to have the option to have such loans considered as community development loans. However, if the institution opts to be evaluated under the lending, investment, and service tests applicable to large institutions, it may not choose to have home mortgage, small business, small farm, or consumer loans considered as community development loans.

Loans other than multifamily dwelling loans may not be considered under both the lending test and the community development test for intermediate small institutions. Thus, if an institution elects to have certain loans considered under the community development test, those loans may not also be considered under the lending test, and would be excluded from the lending test analysis.

Intermediate small institutions may choose individual loans within their portfolio for community development consideration. Examiners will evaluate an intermediate small institution's community development activities within the context of the responsiveness of the activity to the community development needs of the institution's assessment area.

§ __.12(h)—4:

Do secured credit cards or other credit card programs targeted to low- or moderate-income individuals qualify as community development loans?

A4. No. Credit cards issued to low- or moderate-income individuals for household, family, or other personal expenditures, whether as part of a program targeted to such individuals or otherwise, do not qualify as community development loans because they do not have as their primary purpose any of the activities included in the definition of “community development.”

§ __.12(h)—5:

The regulation indicates that community development includes “activities that revitalize or stabilize low- or moderate-income geographies.” Do all loans in a low- to moderate-income geography have a stabilizing effect?

A5. No. Some loans may provide only indirect or short-term benefits to low- or moderate-income individuals in a low- or moderate-income geography. These loans are not considered to have a community development purpose. For example, a loan for upper-income housing in a low- or moderate-income area is not considered to have a community development purpose simply because of the indirect benefit to low- or moderate-income persons from construction jobs or the increase in the local tax base that supports enhanced services to low- and moderate-income area residents. On the other hand, a loan for an anchor business in a low- or moderate-income area (or a nearby area) that employs or serves residents of the area and, thus, stabilizes the area, may be considered to have a community development purpose. For example, in a low-income area, a loan for a pharmacy that employs and serves residents of the area promotes community development.

§ __.12(h)—6:

Must there be some immediate or direct benefit to the institution's assessment area(s) to satisfy the regulations' requirement that qualified investments and community development loans or services benefit an institution's assessment area(s) or a broader statewide or regional area that includes the institution's assessment area(s)?

A6. No. The regulations recognize that community development organizations and programs are efficient and effective ways for institutions to promote community development. These organizations and programs often operate on a statewide or even multistate basis. Therefore, an institution's activity is considered a community development loan or service or a qualified investment if it supports an organization or activity that covers an area that is larger than, but includes, the institution's assessment area(s). The institution's assessment area(s) need not receive an immediate or direct benefit from the institution's specific participation in the broader organization or activity, provided that the purpose, mandate, or function of the organization or activity includes serving geographies or individuals located within the institution's assessment area(s).

In addition, a retail institution that, considering its performance context, has adequately addressed the community development needs of its assessment area(s) will receive consideration for certain other community development activities. These community development activities must benefit geographies or individuals located somewhere within a broader statewide or regional area that includes the institution's assessment area(s). Examiners will consider these activities even if they will not benefit the institution's assessment area(s).

§ __.12(h)—7:

What is meant by the term “regional area”?

A7. A “regional area” may be as large as a multistate area. For example, the “mid-Atlantic states” may comprise a regional area.

Community development loans and services and qualified investments to statewide or regional organizations that have a bona fide purpose, mandate, or function that includes serving the geographies or individuals within the institution's assessment area(s) will be considered as addressing assessment area needs. When examiners evaluate community development loans and services and qualified investments that benefit a regional area that includes the institution's assessment area(s), they will consider the institution's performance context as well as the size of the regional area and the actual or potential benefit to the institution's assessment area(s). With larger regional areas, benefit to the institution's assessment area(s) may be diffused and, thus, less responsive to assessment area needs.

In addition, as long as an institution has adequately addressed the community development needs of its assessment area(s), it will also receive consideration for community development activities that benefit geographies or individuals located somewhere within the broader statewide or regional area that includes the institution's assessment area(s), even if those activities do not benefit its assessment area(s).

§ __.12(h)—8:

What is meant by the term “primary purpose” as that term is used to define what constitutes a community development loan, a

qualified investment, or a community development service?

A8. A loan, investment, or service has as its primary purpose community development when it is designed for the express purpose of revitalizing or stabilizing low- or moderate-income areas, designated disaster areas, or underserved or distressed nonmetropolitan middle-income areas, providing affordable housing for, or community services targeted to, low- or moderate-income persons, or promoting economic development by financing small businesses and farms that meet the requirements set forth in 12 CFR __.12(g). To determine whether an activity is designed for an express community development purpose, the agencies apply one of two approaches. First, if a majority of the dollars or beneficiaries of the activity are identifiable to one or more of the enumerated community development purposes, then the activity will be considered to possess the requisite primary purpose. Alternatively, where the measurable portion of any benefit bestowed or dollars applied to the community development purpose is less than a majority of the entire activity's benefits or dollar value, then the activity may still be considered to possess the requisite primary purpose, and the institution may receive CRA consideration for the entire activity, if (1) the express, bona fide intent of the activity, as stated, for example, in a prospectus, loan proposal, or community action plan, is primarily one or more of the enumerated community development purposes; (2) the activity is specifically structured (given any relevant market or legal constraints or performance context factors) to achieve the expressed community development purpose; and (3) the activity accomplishes, or is reasonably certain to accomplish, the community development purpose involved.

Generally, a loan, investment, or service will be determined to have a “primary purpose” of community development only if it meets the criteria described above. However, an activity involving the provision of affordable housing also may be deemed to have a “primary purpose” of community development in certain other limited circumstances in which these criteria have not been met. Specifically, activities related to the provision of mixed-income housing, such as in connection with a development that has a mixed-income housing component or an affordable housing set-aside required by federal, state, or local government, also would be eligible for consideration as an activity that has a “primary purpose” of community development at the election of the institution. In such cases, an institution may receive pro rata consideration for the portion of such activities that helps to provide affordable housing to low- or moderate-income individuals. For example, if an institution makes a $10 million loan to finance a mixed-income housing development in which ten percent of the units will be set aside as affordable housing for low- and moderate-income individuals, the institution may elect to treat $1 million of such loan as a community development loan. In other words, the pro rata dollar amount of the total activity will be based on the percentage of units set-aside for affordable housing for low- or moderate-income individuals.

The fact that an activity provides indirect or short-term benefits to low- or moderate-income persons does not make the activity community development, nor does the mere presence of such indirect or short-term benefits constitute a primary purpose of community development. Financial institutions that want examiners to consider certain activities should be prepared to demonstrate the activities' qualifications.

§ __.12(i) Community development service

§ __.12(i)—1:

In addition to meeting the definition of “community development” in the regulation, community development services must also be related to the provision of financial services. What is meant by “provision of financial services”?

A1. Providing financial services means providing services of the type generally provided by the financial services industry. Providing financial services often involves informing community members about how to get or use credit or otherwise providing credit services or information to the community. For example, service on the board of directors of an organization that promotes credit availability or finances affordable housing is related to the provision of financial services. Providing technical assistance about financial services to community-based groups, local or tribal government agencies, or intermediaries that help to meet the credit needs of low- and moderate-income individuals or small businesses and farms is also providing financial services. By contrast, activities that do not take advantage of the employees' financial expertise, such as neighborhood cleanups, do not involve the provision of financial services.

§ __.12(i)—2:

Are personal charitable activities provided by an institution's employees or directors outside the ordinary course of their employment considered community development services?

A2. No. Services must be provided as a representative of the institution. For example, if a financial institution's director, on her own time and not as a representative of the institution, volunteers one evening a week at a local community development corporation's financial counseling program, the institution may not consider this activity a community development service.

§ __.12(i)—3:

What are examples of community development services?

A3. Examples of community development services include, but are not limited to, the following:

• Providing financial services to low- and moderate-income individuals through branches and other facilities located in low- and moderate-income areas, unless the provision of such services has been considered in the evaluation of an institution's retail banking services under 12 CFR __.24(d);

• Increasing access to financial services by opening or maintaining branches or other facilities that help to revitalize or stabilize a low- or moderate-income geography, a designated disaster area, or a distressed or underserved nonmetropolitan middle-income geography, unless the opening or maintaining of such branches or other facilities has been considered in the evaluation of the institution's retail banking services under 12 CFR __.24(d);

• Providing technical assistance on financial matters to nonprofit, tribal, or government organizations serving low- and moderate-income housing or economic revitalization and development needs;

• Providing technical assistance on financial matters to small businesses or community development organizations, including organizations and individuals who apply for loans or grants under the Federal Home Loan Banks' Affordable Housing Program;

• Lending employees to provide financial services for organizations facilitating affordable housing construction and rehabilitation or development of affordable housing;

• Providing credit counseling, home-buyer and home-maintenance counseling, financial planning or other financial services education to promote community development and affordable housing, including credit counseling to assist low- or moderate-income borrowers in avoiding foreclosure on their homes;

• Establishing school savings programs or developing or teaching financial education or literacy curricula for low- or moderate-income individuals;

• Providing electronic benefits transfer and point of sale terminal systems to improve access to financial services, such as by decreasing costs, for low- or moderate-income individuals;

• Providing international remittance services that increase access to financial services by low- and moderate-income persons (for example, by offering reasonably priced international remittance services in connection with a low-cost account);

• Providing other financial services with the primary purpose of community development, such as low-cost savings or checking accounts, including “Electronic Transfer Accounts” provided pursuant to the Debt Collection Improvement Act of 1996, individual development accounts (IDAs), or free or low-cost government, payroll, or other check cashing services, that increase access to financial services for low- or moderate-income individuals; and

• Providing foreclosure prevention programs to low- or moderate-income homeowners who are facing foreclosure on their primary residence with the objective of providing affordable, sustainable, long-term loan modifications and restructurings.

Examples of technical assistance activities that might be provided to community development organizations include:

• Serving on a loan review committee;

• Developing loan application and underwriting standards;

• Developing loan processing systems;

• Developing secondary market vehicles or programs;

• Assisting in marketing financial services, including development of advertising and promotions, publications, workshops and conferences;

• Furnishing financial services training for staff and management;

• Contributing accounting/bookkeeping services; and

• Assisting in fund raising, including soliciting or arranging investments.

§ __.12(j) Consumer loan

§ __.12(j)—1:

Are home equity loans considered “consumer loans”?

A1. Home equity loans made for purposes other than home purchase, home improvement or refinancing home purchase or home improvement loans are consumer loans if they are extended to one or more individuals for household, family, or other personal expenditures.

§ __.12(j)—2:

May a home equity line of credit be considered a “consumer loan” even if part of the line is for home improvement purposes?

A2. If the predominant purpose of the line is home improvement, the line may only be reported under HMDA and may not be considered a consumer loan. However, the full amount of the line may be considered a “consumer loan” if its predominant purpose is for household, family, or other personal expenditures, and to a lesser extent home improvement, and the full amount of the line has not been reported under HMDA. This is the case even though there may be “double counting” because part of the line may also have been reported under HMDA.

§ __.12(j)—3:

How should an institution collect or report information on loans the proceeds of which will be used for multiple purposes?

A3. If an institution makes a single loan or provides a line of credit to a customer to be used for both consumer and small business purposes, consistent with the Call Report and TFR instructions, the institution should determine the major (predominant) component of the loan or the credit line and collect or report the entire loan or credit line in accordance with the regulation's specifications for that loan type.

§ __.12(l) Home mortgage loan

§ __.12(l)—1:

Does the term “home mortgage loan” include loans other than “home purchase loans”?

A1. Yes. “Home mortgage loan” includes “home improvement loan,” “home purchase loan,” and “refinancing,” as defined in the HMDA regulation, Regulation C, 12 CFR part 203. This definition also includes multifamily (five-or-more families) dwelling loans, and loans for the purchase of manufactured homes.

See also

Q&A § __.22(a)(2)—7.

§ __.12(l)—2:

Some financial institutions broker home mortgage loans. They typically take the borrower's application and perform other settlement activities; however, they do not make the credit decision. The broker institutions may also initially fund these mortgage loans, then immediately assign them to another lender. Because the broker institution does not make the credit decision, under Regulation C (HMDA), they do not record the loans on their HMDA-LARs, even if they fund the loans. May an institution receive any consideration under CRA for its home mortgage loan brokerage activities?

A2. Yes. A financial institution that funds home mortgage loans but immediately assigns the loans to the lender that made the credit decisions may present information about these loans to examiners for consideration under the lending test as “other loan data.” Under Regulation C, the broker institution does not record the loans on its HMDA-LAR because it does not make the credit decisions, even if it funds the loans. An institution electing to have these home mortgage loans considered must maintain information about all of the home mortgage loans that it has funded in this way. Examiners will consider these other loan data using the same criteria by which home mortgage loans originated or purchased by an institution are evaluated.

Institutions that do not provide funding but merely take applications and provide settlement services for another lender that makes the credit decisions will receive consideration for this service as a retail banking service. Examiners will consider an institution's mortgage brokerage services when evaluating the range of services provided to low-, moderate-, middle- and upper-income geographies and the degree to which the services are tailored to meet the needs of those geographies. Alternatively, an institution's mortgage brokerage service may be considered a community development service if the primary purpose of the service is community development. An institution wishing to have its mortgage brokerage service considered as a community development service must provide sufficient information to substantiate that its primary purpose is community development and to establish the extent of the services provided.

§ __.12(m) Income level

§ __.12(m)—1:

Where do institutions find income level data for geographies and individuals?

A1. The income levels for

geographies,

i.e., census tracts, are derived from Census Bureau information and are updated approximately every ten years. The income levels for

individuals

are derived from information calculated by the Department of Housing and Urban Development (HUD) and updated annually.

Institutions may obtain 2000 geography income information and the annually updated HUD median family incomes for metropolitan statistical areas (MSAs) and statewide nonmetropolitan areas by accessing the Federal Financial Institution Examination Council's (FFIEC's) Web

site at

http://www.ffiec.gov/cra

or by calling the FFIEC's CRA Assistance Line at (202) 872-7584.

§ __.12(n) Limited purpose institution

§ __.12(n)—1:

What constitutes a “narrow product line” in the definition of “limited purpose institution”?

A1. An institution offers a narrow product line by limiting its lending activities to a product line other than a traditional retail product line required to be evaluated under the lending test (i.e., home mortgage, small business, and small farm loans). Thus, an institution engaged only in making credit card or motor vehicle loans offers a narrow product line, while an institution limiting its lending activities to home mortgages is not offering a narrow product line.

§ __.12(n)—2:

What factors will the agencies consider to determine whether an institution that, if limited purpose, makes loans outside a narrow product line, or, if wholesale, engages in retail lending, will lose its limited purpose or wholesale designation because of too much other lending?

A2. Wholesale institutions may engage in some retail lending without losing their designation if this activity is incidental

and

done on an accommodation basis. Similarly, limited purpose institutions continue to meet the narrow product line requirement if they provide other types of loans on an infrequent basis. In reviewing other lending activities by these institutions, the agencies will consider the following factors:

• Is the retail lending provided as an incident to the institution's wholesale lending?

• Are the retail loans provided as an accommodation to the institution's wholesale customers?

• Are the other types of loans made only infrequently to the limited purpose institution's customers?

• Does only an insignificant portion of the institution's total assets and income result from the other lending?

• How significant a role does the institution play in providing that type(s) of loan(s) in the institution's assessment area(s)?

• Does the institution hold itself out as offering that type(s) of loan(s)?

• Does the lending test or the community development test present a more accurate picture of the institution's CRA performance?

§ __.12(n)—3:

Do “niche institutions” qualify as limited purpose (or wholesale) institutions?

A3. Generally, no. Institutions that are in the business of lending to the public, but specialize in certain types of retail loans (for example, home mortgage or small business loans) to certain types of borrowers (for example, to high-end income level customers or to corporations or partnerships of licensed professional practitioners) (“niche institutions”) generally would not qualify as limited purpose (or wholesale) institutions.

§ __.12(t) Qualified investment

§ __.12(t)—1:

Does the CRA regulation provide authority for institutions to make investments?

A1. No. The CRA regulation does not provide authority for institutions to make investments that are not otherwise allowed by Federal law.

§ __.12(t)—2:

Are mortgage-backed securities or municipal bonds “qualified investments”?

A2. As a general rule, mortgage-backed securities and municipal bonds are not qualified investments because they do not have as their primary purpose community development, as defined in the CRA regulations. Nonetheless, mortgage-backed securities or municipal bonds designed primarily to finance community development generally are qualified investments. Municipal bonds or other securities with a primary purpose of community development need not be housing-related. For example, a bond to fund a community facility or park or to provide sewage services as part of a plan to redevelop a low-income neighborhood is a qualified investment. Certain municipal bonds in underserved nonmetropolitan middle-income geographies may also be qualified investments.

See

Q&A § __.12(g)(4)(iii)—4. Housing-related bonds or securities must primarily address affordable housing (including multifamily rental housing) needs of low- or moderate-income individuals in order to qualify.

See also

Q&A § __.23(b)—2.

§ __.12(t)—3:

Are Federal Home Loan Bank stocks or unpaid dividends and membership reserves with the Federal Reserve Banks “qualified investments”?

A3. No. Federal Home Loan Bank (FHLB) stocks or unpaid dividends, and membership reserves with the Federal Reserve Banks do not have a sufficient connection to community development to be qualified investments. However, FHLB member institutions may receive CRA consideration as a community development service for technical assistance they provide on behalf of applicants and recipients of funding from the FHLB's Affordable Housing Program.

See

Q&A § __.12(i)—3.

§ __.12(t)—4:

What are examples of qualified investments?

A4. Examples of qualified investments include, but are not limited to, investments, grants, deposits, or shares in or to:

• Financial intermediaries (including Community Development Financial Institutions (CDFIs), New Markets Tax Credit-eligible Community Development Entities, Community Development Corporations (CDCs), minority- and women-owned financial institutions, community loan funds, and low-income or community development credit unions) that primarily lend or facilitate lending in low- and moderate-income areas or to low- and moderate-income individuals in order to promote community development, such as a CDFI that promotes economic development on an Indian reservation;

• Organizations engaged in affordable housing rehabilitation and construction, including multifamily rental housing;

• Organizations, including, for example, Small Business Investment Companies (SBICs), specialized SBICs, and Rural Business Investment Companies (RBICs) that promote economic development by financing small businesses;

• Community development venture capital companies that promote economic development by financing small businesses;

• Facilities that promote community development by providing community services for low- and moderate-income individuals, such as youth programs, homeless centers, soup kitchens, health care facilities, battered women's centers, and alcohol and drug recovery centers;

• Projects eligible for low-income housing tax credits;

• State and municipal obligations, such as revenue bonds, that specifically support affordable housing or other community development;

• Not-for-profit organizations serving low- and moderate-income housing or other community development needs, such as counseling for credit, home-ownership, home maintenance, and other financial literacy programs; and

• Organizations supporting activities essential to the capacity of low- and moderate-income individuals or geographies to utilize credit or to sustain economic development, such as, for example, day care operations and job training programs that enable low- or moderate-income individuals to work.

See also

Q&As § __.12(g)(4)(ii)—2; § __.12(g)(4)(iii)—3; § __.12(g)(4)(iii)—4.

§ __.12(t)—5:

Will an institution receive consideration for charitable

contributions as “qualified investments”?

A5. Yes, provided they have as their primary purpose community development as defined in the regulations. A charitable contribution, whether in cash or an in-kind contribution of property, is included in the term “grant.” A qualified investment is not disqualified because an institution receives favorable treatment for it (for example, as a tax deduction or credit) under the Internal Revenue Code.

§ __.12(t)—6:

An institution makes or participates in a community development loan. The institution provided the loan at below-market interest rates or “bought down” the interest rate to the borrower. Is the lost income resulting from the lower interest rate or buy-down a qualified investment?

A6. No. The agencies will, however, consider the responsiveness, innovativeness, and complexity of the community development loan within the bounds of safe and sound banking practices.

§ __.12(t)—7:

Will the agencies consider as a qualified investment the wages or other compensation of an employee or director who provides assistance to a community development organization on behalf of the institution?

A7. No. However, the agencies will consider donated labor of employees or directors of a financial institution as a community development service if the activity meets the regulatory definition of “community development service.”

§ __.12(t)—8:

When evaluating a qualified investment, what consideration will be given for prior-period investments?

A8. When evaluating an institution's qualified investment record, examiners will consider investments that were made prior to the current examination, but that are still outstanding. Qualitative factors will affect the weighting given to both current period and outstanding prior-period qualified investments. For example, a prior-period outstanding investment with a multi-year impact that addresses assessment area community development needs may receive more consideration than a current period investment of a comparable amount that is less responsive to area community development needs.

§ __.12(u) Small institution

§ __.12(u)—1:

How are Federal and State branch assets of a foreign bank calculated for purposes of the CRA?

A1. A Federal or State branch of a foreign bank is considered a small institution if the Federal or State branch has assets less than the asset threshold delineated in 12 CFR __.12(u)(1) for small institutions.

§ __.12(u)(2) Small institution adjustment

§ __.12(u)(2)—1:

How often will the asset size thresholds for small institutions and intermediate small institutions be changed, and how will these adjustments be communicated?

A1. The asset size thresholds for “small institutions” and “intermediate small institutions” will be adjusted annually based on changes to the Consumer Price Index. More specifically, the dollar thresholds will be adjusted annually based on the year-to-year change in the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted for each twelve-month period ending in November, with rounding to the nearest million. Any changes in the asset size thresholds will be published in the

Federal Register.

Historical and current asset-size threshold information may be found on the FFIEC's Web site at

http://www.ffiec.gov/cra.

§ __.12(v) Small business loan

§ __.12(v)—1:

Are loans to nonprofit organizations considered small business loans or are they considered community development loans?

A1. To be considered a small business loan, a loan must meet the definition of “loan to small business” in the instructions in the “Consolidated Reports of Conditions and Income” (Call Report) and “Thrift Financial Report” (TFR). In general, a loan to a nonprofit organization, for business or farm purposes, where the loan is secured by nonfarm nonresidential property and the original amount of the loan is $1 million or less, if a business loan, or $500,000 or less, if a farm loan, would be reported in the Call Report and TFR as a small business or small farm loan. If a loan to a nonprofit organization is reportable as a small business or small farm loan, it cannot also be considered as a community development loan, except by a wholesale or limited purpose institution. Loans to nonprofit organizations that are not small business or small farm loans for Call Report and TFR purposes may be considered as community development loans if they meet the regulatory definition of “community development.”

§ __.12(v)—2:

Are loans secured by commercial real estate considered small business loans?

A2. Yes, depending on their principal amount. Small business loans include loans secured by “nonfarm nonresidential properties,” as defined in the Call Report and TFR, in amounts of $1 million or less.

§ __.12(v)—3:

Are loans secured by nonfarm residential real estate to finance small businesses “small business loans”?

A3.

Applicable to banks filing Call Reports:

Typically not. Loans secured by nonfarm residential real estate that are used to finance small businesses are not included as “small business” loans for Call Report purposes unless the security interest in the nonfarm residential real estate is taken only as an abundance of caution. (

See

Call Report Glossary definition of “Loan Secured by Real Estate.”) The agencies recognize that many small businesses are financed by loans that would not have been made or would have been made on less favorable terms had they not been secured by residential real estate. If these loans promote community development, as defined in the regulation, they may be considered as community development loans. Otherwise, at an institution's option, the institution may collect and maintain data separately concerning these loans and request that the data be considered in its CRA evaluation as “Other Secured Lines/Loans for Purposes of Small Business.”

See also

Q&A § __.22(a)(2)—7.

Applicable to institutions that file TFRs:

Possibly, depending how the loan is classified for TFR purposes. Loans secured by nonfarm residential real estate to finance small businesses may be included as small business loans only if they are reported on the TFR as nonmortgage, commercial loans. (

See

TFR Q&A No. 62.) Otherwise, loans that meet the definition of mortgage loans, for TFR reporting purposes, may be classified as mortgage loans.

§ __.12(v)—4:

Are credit cards issued to small businesses considered “small business loans”?

A4. Credit cards issued to a small business or to individuals to be used, with the institution's knowledge, as business accounts are small business loans if they meet the definitional requirements in the Call Report or TFR instructions.

§ __.12(x) Wholesale institution

§ __.12(x)—1:

What factors will the agencies consider in determining whether an institution is in the business of extending home mortgage, small business, small farm, or consumer loans to retail customers?

A1. The agencies will consider whether:

• The institution holds itself out to the retail public as providing such loans; and

• The institution's revenues from extending such loans are significant when compared to its overall operations, including off-balance sheet activities.

A wholesale institution may make some retail loans without losing its wholesale designation as described above in Q&A § __.12(n)—2.

§ __.21—Performance tests, standards, and ratings, in general

§ __.21(a) Performance tests and standards

§ __.21(a)—1:

How will examiners apply the performance criteria?

A1. Examiners will apply the performance criteria reasonably and fairly, in accord with the regulations, the examination procedures, and this guidance. In doing so, examiners will disregard efforts by an institution to manipulate business operations or present information in an artificial light that does not accurately reflect an institution's overall record of lending performance.

§ __.21(a)—2:

Are all community development activities weighted equally by examiners?

A2. No. Examiners will consider the responsiveness to credit and community development needs, as well as the innovativeness and complexity, if applicable, of an institution's community development lending, qualified investments, and community development services. These criteria include consideration of the degree to which they serve as a catalyst for other community development activities. The criteria are designed to add a qualitative element to the evaluation of an institution's performance. (“Innovativeness” and “complexity” are not factors in the community development test applicable to intermediate small institutions.)

§ __.21(b) Performance context

§ __.21(b)—1:

What is the performance context?

A1. The performance context is a broad range of economic, demographic, and institution- and community-specific information that an examiner reviews to understand the context in which an institution's record of performance should be evaluated. The agencies will provide examiners with some of this information. The performance context is not a formal assessment of community credit needs.

§ __.21(b)(2) Information maintained by the institution or obtained from community contacts

§ __.21(b)(2)—1:

Will examiners consider performance context information provided by institutions?

A1. Yes. An institution may provide examiners with any information it deems relevant, including information on the lending, investment, and service opportunities in its assessment area(s). This information may include data on the business opportunities addressed by lenders not subject to the CRA. Institutions are not required, however, to prepare a formal needs assessment. If an institution provides information to examiners, the agencies will not expect information other than what the institution normally would develop to prepare a business plan or to identify potential markets and customers, including low- and moderate-income persons and geographies in its assessment area(s). The agencies will not evaluate an institution's efforts to ascertain community credit needs or rate an institution on the quality of any information it provides.

§ __.21(b)(2)—2:

Will examiners conduct community contact interviews as part of the examination process?

A2. Yes. Examiners will consider information obtained from interviews with local community, civic, and government leaders. These interviews provide examiners with knowledge regarding the local community, its economic base, and community development initiatives. To ensure that information from local leaders is considered—particularly in areas where the number of potential contacts may be limited—examiners may use information obtained through an interview with a single community contact for examinations of more than one institution in a given market. In addition, the agencies may consider information obtained from interviews conducted by other agency staff and by the other agencies. In order to augment contacts previously used by the agencies and foster a wider array of contacts, the agencies may share community contact information.

§ __.21(b)(4) Institutional capacity and constraints

§ __.21(b)(4)—1:

Will examiners consider factors outside of an institution's control that prevent it from engaging in certain activities?

A1. Yes. Examiners will take into account statutory and supervisory limitations on an institution's ability to engage in any lending, investment, and service activities. For example, a savings association that has made few or no qualified investments due to its limited investment authority may still receive a low satisfactory rating under the investment test if it has a strong lending record.

§ __.21(b)(5) Institution's past performance and the performance of similarly situated lenders

§ __.21(b)(5)—1:

Can an institution's assigned rating be adversely affected by poor past performance?

A1. Yes. The agencies will consider an institution's past performance in its overall evaluation. For example, an institution that received a rating of “needs to improve” in the past may receive a rating of “substantial noncompliance” if its performance has not improved.

§ __.21(b)(5)—2:

How will examiners consider the performance of similarly situated lenders?

A2. The performance context section of the regulation permits the performance of similarly situated lenders to be considered, for example, as one of a number of considerations in evaluating the geographic distribution of an institution's loans to low-, moderate-, middle-, and upper-income geographies. This analysis, as well as other analyses, may be used, for example, where groups of contiguous geographies within an institution's assessment area(s) exhibit abnormally low penetration. In this regard, the performance of similarly situated lenders may be analyzed if such an analysis would provide accurate insight into the institution's lack of performance in those areas. The regulation does not require the use of a specific type of analysis under these circumstances. Moreover, no ratio developed from any type of analysis is linked to any lending test rating.

§ __.22—Lending test

§ __.22(a) Scope of test

§ __.22(a)—1:

Are there any types of lending activities that help meet the credit needs of an institution's assessment area(s) and that may warrant favorable consideration as activities that are responsive to the needs of the institution's assessment area(s)?

A1. Credit needs vary from community to community. However, there are some lending activities that are likely to be responsive in helping to meet the credit needs of many communities. These activities include:

• Providing loan programs that include a financial education

component about how to avoid lending activities that may be abusive or otherwise unsuitable;

• Establishing loan programs that provide small, unsecured consumer loans in a safe and sound manner (i.e., based on the borrower's ability to repay) and with reasonable terms;

• Offering lending programs, which feature reporting to consumer reporting agencies, that transition borrowers from loans with higher interest rates and fees (based on credit risk) to lower-cost loans, consistent with safe and sound lending practices. Reporting to consumer reporting agencies allows borrowers accessing these programs the opportunity to improve their credit histories and thereby improve their access to competitive credit products;

• Establishing loan programs with the objective of providing affordable, sustainable, long-term relief, for example, through loan refinancings, restructures, or modifications, to homeowners who are facing foreclosure on their primary residences.

Examiners may consider favorably such lending activities, which have features augmenting the success and effectiveness of the small, intermediate small, or large institution's lending programs.

§ __.22(a)(1) Types of loans considered

§ __.22(a)(1)—1:

If a large retail institution is not required to collect and report home mortgage data under the HMDA, will the agencies still evaluate the institution's home mortgage lending performance?

A1. Yes. The agencies will sample the institution's home mortgage loan files in order to assess its performance under the lending test criteria.

§ __.22(a)(1)—2:

When will examiners consider consumer loans as part of an institution's CRA evaluation?

A2. Consumer loans will be evaluated if the institution so elects and has collected and maintained the data; an institution that elects not to have its consumer loans evaluated will not be viewed less favorably by examiners than one that does. However, if consumer loans constitute a substantial majority of the institution's business, the agencies will evaluate them even if the institution does not so elect. The agencies interpret “substantial majority” to be so significant a portion of the institution's lending activity by number and dollar volume of loans that the lending test evaluation would not meaningfully reflect its lending performance if consumer loans were excluded.

§ __.22(a)(2) Loan originations and purchases/other loan data

§ __.22(a)(2)—1:

How are lending commitments (such as letters of credit) evaluated under the regulation?

A1. The agencies consider lending commitments (such as letters of credit) only at the option of the institution, regardless of examination type. Commitments must be legally binding between an institution and a borrower in order to be considered. Information about lending commitments will be used by examiners to enhance their understanding of an institution's performance, but will be evaluated separately from the loans.

§ __.22(a)(2)—2:

Will examiners review application data as part of the lending test?

A2. Application activity is not a performance criterion of the lending test. However, examiners may consider this information in the performance context analysis because this information may give examiners insight on, for example, the demand for loans.

§ __.22(a)(2)—3:

May a financial institution receive consideration under CRA for home mortgage loan modification, extension, and consolidation agreements (MECAs), in which it obtains home mortgage loans from other institutions without actually purchasing or refinancing the home mortgage loans, as those terms have been interpreted under CRA and HMDA, as implemented by 12 CFR part 203?

A3. Yes. In some states, MECAs, which are not considered loan refinancings because the existing loan obligations are not satisfied and replaced, are common. Although these transactions are not considered to be purchases or refinancings, as those terms have been interpreted under CRA, they do achieve the same results. A small, intermediate small, or large institution may present information about its MECA activities with respect to home mortgages to examiners for consideration under the lending test as “other loan data.”

§ __.22(a)(2)—4:

In addition to MECAs, what are other examples of “other loan data”?

A4. Other loan data include, for example:

• Loans funded for sale to the secondary markets that an institution has not reported under HMDA;

• Unfunded loan commitments and letters of credit;

• Commercial and consumer leases;

• Loans secured by nonfarm residential real estate, not taken as an abundance of caution, that are used to finance small businesses or small farms and that are not reported as small business/small farm loans or reported under HMDA; and

• An increase to a small business or small farm line of credit if the increase would cause the total line of credit to exceed $1 million, in the case of a small business line; or $500,000, in the case of a small farm line.

§ __.22(a)(2)—5:

Do institutions receive consideration for originating or purchasing loans that are fully guaranteed?

A5. Yes. For all examination types, examiners evaluate an institution's record of helping to meet the credit needs of its assessment area(s) through the origination or purchase of specified types of loans. Examiners do not take into account whether or not such loans are guaranteed.

§ __.22(a)(2)—6:

Do institutions receive consideration for purchasing loan participations?

A6. Yes. Examiners will consider the amount of loan participations purchased when evaluating an institution's record of helping to meet the credit needs of its assessment area(s) through the origination or purchase of specified types of loans, regardless of examination type. As with other loan purchases, examiners will evaluate whether participations in loan purchased, which have been sold and purchased a number of times, artificially inflate CRA performance.

See, e.g.,

§ __.21(a)—1.

§ __.22(a)(2)—7:

How are refinancings of small business loans, which are secured by a one-to-four family residence and that have been reported under HMDA as a refinancing, evaluated under CRA?

A7.

For banks subject to the Call Report instructions:

A loan of $1 million or less with a business purpose that is secured by a one-to-four family residence is considered a small business loan for CRA purposes only if the security interest in the residential property was taken as an abundance of caution and where the terms have not been made more favorable than they would have been in the absence of the lien. (See Call Report Glossary definition of “Loan Secured by Real Estate.”) If this same loan is refinanced and the new loan is also secured by a one-to-four family residence, but only through an abundance of caution, this loan is reported not only as a refinancing under HMDA, but also as a small business loan under CRA. (Note that small farm loans are similarly treated.)

It is not anticipated that “double-reported” loans will be so numerous as to affect the typical institution's CRA rating. In the event that an institution

reports a significant number or amount of loans as both home mortgage and small business loans, examiners will consider that overlap in evaluating the institution's performance and generally will consider the “double-reported” loans as small business loans for CRA consideration.

The origination of a small business or small farm loan that is secured by a one-to-four family residence is not reportable under HMDA, unless the purpose of the loan is home purchase or home improvement. Nor is the loan reported as a small business or small farm loan if the security interest is not taken merely as an abundance of caution. Any such loan may be provided to examiners as “other loan data” (“Other Secured Lines/Loans for Purposes of Small Business”) for consideration during a CRA evaluation.

See

Q&A § __.12(v)—3. The refinancings of such loans

would be

reported under HMDA.

For savings associations subject to the Thrift Financial Reporting instructions:

A loan of $1 million or less with a business purpose secured by a one-to-four family residence is considered a small business loan for CRA purposes if it is reported as a small business loan for TFR purposes and was not reported on the TFR as a mortgage loan (TFR Instructions for Commercial Loans: Secured). If this same loan is refinanced and the new loan is also secured by a one-to-four family residence, and was not reported for TFR purposes as a mortgage loan, this loan is reported not only as a refinancing for HMDA, but is also reported as a small business loan under the TFR and CRA. The origination of a small business or small farm loan that is secured by a one-to-four family residence is not reportable under HMDA, unless the purpose of the loan is home purchase or home improvement. Nor is the loan reported as small business or small farm if it was reported as a mortgage on the TFR report.

OTS does not anticipate that “double-reported” loans will be so numerous as to affect the typical institution's CRA rating. In the event that an institution reports a significant number or amount of loans as both home mortgage and small business loans, examiners will consider that overlap in evaluating the institution's performance and generally will consider the “double-reported” loans as small business loans for CRA consideration.

The origination of a small business or small farm loan that is secured by a one-to-four family residence should be reported in accordance with Q&A § __.12(v)—3. The refinancings of such loans

would be

reported under HMDA.

§ __.22(b) Performance criteria

§ __.22(b)(1) Lending activity

§ __.22(b)(1)—1:

How will the agencies apply the lending activity criterion to discourage an institution from originating loans that are viewed favorably under CRA in the institution itself and referring other loans, which are not viewed as favorably, for origination by an affiliate?

A1. Examiners will review closely institutions with (1) a small number and amount of home mortgage loans with an unusually good distribution among low- and moderate-income areas and low- and moderate-income borrowers and (2) a policy of referring most, but not all, of their home mortgage loans to affiliated institutions. If an institution is making loans mostly to low- and moderate-income individuals and areas and referring the rest of the loan applicants to an affiliate for the purpose of receiving a favorable CRA rating, examiners may conclude that the institution's lending activity is not satisfactory because it has inappropriately attempted to influence the rating. In evaluating an institution's lending, examiners will consider legitimate business reasons for the allocation of the lending activity.

§ __.22(b)(2) & (3) Geographic distribution and borrower characteristics

§ __.22(b)(2) & (3)—1:

How do the geographic distribution of loans and the distribution of lending by borrower characteristics interact in the lending test applicable to either large or small institutions?

A1. Examiners generally will consider both the distribution of an institution's loans among geographies of different income levels, and among borrowers of different income levels and businesses and farms of different sizes. The importance of the borrower distribution criterion, particularly in relation to the geographic distribution criterion, will depend on the performance context. For example, distribution among borrowers with different income levels may be more important in areas without identifiable geographies of different income categories. On the other hand, geographic distribution may be more important in areas with the full range of geographies of different income categories.

§ __.22(b)(2) & (3)—2:

Must an institution lend to all portions of its assessment area?

A2. The term “assessment area” describes the geographic area within which the agencies assess how well an institution, regardless of examination type, has met the specific performance tests and standards in the rule. The agencies do not expect that simply because a census tract is within an institution's assessment area(s), the institution must lend to that census tract. Rather the agencies will be concerned with conspicuous gaps in loan distribution that are not explained by the performance context. Similarly, if an institution delineated the entire county in which it is located as its assessment area, but could have delineated its assessment area as only a portion of the county, it will not be penalized for lending only in that portion of the county, so long as that portion does not reflect illegal discrimination or arbitrarily exclude low- or moderate-income geographies. The capacity and constraints of an institution, its business decisions about how it can best help to meet the needs of its assessment area(s), including those of low- and moderate-income neighborhoods, and other aspects of the performance context, are all relevant to explain why the institution is serving or not serving portions of its assessment area(s).

§ __.22(b)(2) & (3)—3:

Will examiners take into account loans made by affiliates when evaluating the proportion of an institution's lending in its assessment area(s)?

A3. Examiners will not take into account loans made by affiliates when determining the proportion of an institution's lending in its assessment area(s), even if the institution elects to have its affiliate lending considered in the remainder of the lending test evaluation. However, examiners may consider an institution's business strategy of conducting lending through an affiliate in order to determine whether a low proportion of lending in the assessment area(s) should adversely affect the institution's lending test rating.

§ __.22(b)(2) & (3)—4:

When will examiners consider loans (other than community development loans) made outside an institution's assessment area(s)?

A4. Consideration will be given for loans to low- and moderate-income persons and small business and farm loans outside of an institution's assessment area(s), provided the institution has adequately addressed the needs of borrowers within its assessment area(s). The agencies will apply this consideration not only to loans made by large retail institutions being evaluated under the lending test, but also to loans made by small and

intermediate small institutions being evaluated under their respective performance standards. Loans to low- and moderate-income persons and small businesses and farms outside of an institution's assessment area(s), however, will not compensate for poor lending performance within the institution's assessment area(s).

§ __.22(b)(2) & (3)—5:

Under the lending test applicable to small, intermediate small, or large institutions, how will examiners evaluate home mortgage loans to middle- or upper-income individuals in a low- or moderate-income geography?

A5. Examiners will consider these home mortgage loans under the performance criteria of the lending test, i.e., by number and amount of home mortgage loans, whether they are inside or outside the financial institution's assessment area(s), their geographic distribution, and the income levels of the borrowers. Examiners will use information regarding the financial institution's performance context to determine how to evaluate the loans under these performance criteria. Depending on the performance context, examiners could view home mortgage loans to middle-income individuals in a low-income geography very differently. For example, if the loans are for homes or multifamily housing located in an area for which the local, state, tribal, or Federal government or a community-based development organization has developed a revitalization or stabilization plan (such as a Federal enterprise community or empowerment zone) that includes attracting mixed-income residents to establish a stabilized, economically diverse neighborhood, examiners may give more consideration to such loans, which may be viewed as serving the low- or moderate-income community's needs as well as serving those of the middle- or upper-income borrowers. If, on the other hand, no such plan exists and there is no other evidence of governmental support for a revitalization or stabilization project in the area and the loans to middle- or upper-income borrowers significantly disadvantage or primarily have the effect of displacing low- or moderate-income residents, examiners may view these loans simply as home mortgage loans to middle- or upper-income borrowers who happen to reside in a low- or moderate-income geography and weigh them accordingly in their evaluation of the institution.

§ __.22(b)(4) Community development lending

§ __.22(b)(4)—1:

When evaluating an institution's record of community development lending under the lending test applicable to large institutions, may an examiner distinguish among community development loans on the basis of the actual amount of the loan that advances the community development purpose?

A1. Yes. When evaluating the institution's record of community development lending under 12 CFR __.22(b)(4), it is appropriate to give greater weight to the amount of the loan that is targeted to the intended community development purpose. For example, consider two $10 million projects (with a total of 100 units each) that have as their express primary purpose affordable housing and are located in the same community. One of these projects sets aside 40 percent of its units for low-income residents and the other project allocates 65 percent of its units for low-income residents. An institution would report both loans as $10 million community development loans under the 12 CFR __.42(b)(2) aggregate reporting obligation. However, transaction complexity, innovation and all other relevant considerations being equal, an examiner should also take into account that the 65 percent project provides more affordable housing for more people per dollar expended.

Under 12 CFR __.22(b)(4), the extent of CRA consideration an institution receives for its community development loans should bear a direct relation to the benefits received by the community and the innovation or complexity of the loans required to accomplish the activity, not simply to the dollar amount expended on a particular transaction. By applying all lending test performance criteria, a community development loan of a lower dollar amount could meet the credit needs of the institution's community to a greater extent than a community development loan with a higher dollar amount, but with less innovation, complexity, or impact on the community.

§ __.22(b)(5) Innovative or flexible lending practices

§ __.22(b)(5)—1:

What is the range of practices that examiners may consider in evaluating the innovativeness or flexibility of an institution's lending under the lending test applicable to large institutions?

A1. In evaluating the innovativeness or flexibility of an institution's lending practices (and the complexity and innovativeness of its community development lending), examiners will not be limited to reviewing the overall variety and specific terms and conditions of the credit products themselves. In connection with the evaluation of an institution's lending, examiners also may give consideration to related innovations when they augment the success and effectiveness of the institution's lending under its community development loan programs or, more generally, its lending under its loan programs that address the credit needs of low- and moderate-income geographies or individuals. For example:

• In connection with a community development loan program, an institution may establish a technical assistance program under which the institution, directly or through third parties, provides affordable housing developers and other loan recipients with financial consulting services. Such a technical assistance program may, by itself, constitute a community development service eligible for consideration under the service test of the CRA regulations. In addition, the technical assistance may be favorably considered as an innovation that augments the success and effectiveness of the related community development loan program.

• In connection with a small business lending program in a low- or moderate-income area and consistent with safe and sound lending practices, an institution may implement a program under which, in addition to providing financing, the institution also contracts with the small business borrowers. Such a contracting arrangement would not, standing alone, qualify for CRA consideration. However, it may be favorably considered as an innovation that augments the loan program's success and effectiveness, and improves the program's ability to serve community development purposes by helping to promote economic development through support of small business activities and revitalization or stabilization of low- or moderate-income geographies.

§ __.22(c) Affiliate lending

§ __.22(c)(1) In general

§ __.22(c)(1)—1:

If an institution, regardless of examination type, elects to have loans by its affiliate(s) considered, may it elect to have only certain categories of loans considered?

A1. Yes. An institution may elect to have only a particular category of its affiliate's lending considered. The basic categories of loans are home mortgage loans, small business loans, small farm loans, community development loans, and the five categories of consumer loans (motor vehicle loans, credit card

loans, home equity loans, other secured loans, and other unsecured loans).

§ __.22(c)(2) Constraints on affiliate lending

§ __.22(c)(2)(i) No affiliate may claim a loan origination or loan purchase if another institution claims the same loan origination or purchase

§ __.22(c)(2)(i)—1:

Regardless of examination type, how is this constraint on affiliate lending applied?

A1. This constraint prohibits one affiliate from claiming a loan origination or purchase claimed by another affiliate. However, an institution can count as a purchase a loan originated by an affiliate that the institution subsequently purchases, or count as an origination a loan later sold to an affiliate, provided the same loans are not sold several times to inflate their value for CRA purposes. For example, assume that two institutions are affiliated. Bank A originates a loan and claims it as a loan origination. Bank B later purchases the loan. Bank B may count the loan as a purchased loan.

The same institution may not count both the origination and purchase. Thus, for example, if an institution claims loans made by an affiliated mortgage company as loan originations, the institution may not also count the loans as purchased loans if it later purchases the loans from its affiliate.

See also

Q&As § __.22(c)(2)(ii)—1 and § __.22(c)(2)(ii)—2.

§ __.22(c)(2)(ii) If an institution elects to have its supervisory agency consider loans within a particular lending category made by one or more of the institution's affiliates in a particular assessment area, the institution shall elect to have the agency consider all loans within that lending category in that particular assessment area made by all of the institution's affiliates

§ __.22(c)(2)(ii)—1:

Regardless of examination type, how is this constraint on affiliate lending applied?

A1. This constraint prohibits “cherry-picking” affiliate loans within any one category of loans. The constraint requires an institution that elects to have a particular category of affiliate lending in a particular assessment area considered to include all loans of that type made by all of its affiliates in that particular assessment area. For example, assume that an institution has several affiliates, including a mortgage company that makes loans in the institution's assessment area. If the institution elects to include the mortgage company's home mortgage loans, it must include all of its affiliates' home mortgage loans made in its assessment area. In addition, the institution cannot elect to include only those low- and moderate-income home mortgage loans made by its affiliates and not home mortgage loans to middle- and upper-income individuals or areas.

§ __.22(c)(2)(ii)—2:

Regardless of examination type, how is this constraint applied if an institution's affiliates are also insured depository institutions subject to the CRA?

A2. Strict application of this constraint against “cherry-picking” to loans of an affiliate that is also an insured depository institution covered by the CRA would produce the anomalous result that the other institution would, without its consent, not be able to count its own loans. Because the agencies did not intend to deprive an institution subject to the CRA of receiving consideration for its own lending, the agencies read this constraint slightly differently in cases involving a group of affiliated institutions, some of which are subject to the CRA and share the same assessment area(s). In those circumstances, an institution that elects to include all of its mortgage affiliate's home mortgage loans in its assessment area would not automatically be required to include all home mortgage loans in its assessment area of another affiliate institution subject to the CRA. However, all loans of a particular type made by any affiliate in the institution's assessment area(s) must either be counted by the lending institution or by another affiliate institution that is subject to the CRA. This reading reflects the fact that a holding company may, for business reasons, choose to transact different aspects of its business in different subsidiary institutions. However, the method by which loans are allocated among the institutions for CRA purposes must reflect actual business decisions about the allocation of banking activities among the institutions and should not be designed solely to enhance their CRA evaluations.

§ __.22(d) Lending by a consortium or a third party

§ __.22(d)—1:

Will equity and equity-type investments in a third party receive consideration under the lending test?

A1. If an institution has made an equity or equity-type investment in a third party, community development loans made by the third party may be considered under the lending test. On the other hand, asset-backed and debt securities that do not represent an equity-type interest in a third party will not be considered under the lending test unless the securities are booked by the purchasing institution as a loan. For example, if an institution purchases stock in a community development corporation (“CDC”) that primarily lends in low- and moderate-income areas or to low- and moderate-income individuals in order to promote community development, the institution may claim a pro rata share of the CDC's loans as community development loans. The institution's pro rata share is based on its percentage of equity ownership in the CDC. Q&A § __.23(b)—1 provides information concerning consideration of an equity or equity-type investment under the investment test and both the lending and investment tests. (Note that in connection with an intermediate small institution's CRA performance evaluation, community development loans, including pro-rata shares of community development loans, are considered only in the community development test.)

§ __.22(d)—2:

Regardless of examination type, how will examiners evaluate loans made by consortia or third parties?

A2. Loans originated or purchased by consortia in which an institution participates or by third parties in which an institution invests will be considered only if they qualify as community development loans and will be considered only under the community development criterion. However, loans originated directly on the books of an institution or purchased by the institution are considered to have been made or purchased directly by the institution, even if the institution originated or purchased the loans as a result of its participation in a loan consortium. These loans would be considered under the lending test or community development test criteria appropriate to them depending on the type of loan and type of examination.

§ __.22(d)—3:

In some circumstances, an institution may invest in a third party, such as a community development bank, that is also an insured depository institution and is thus subject to CRA requirements. If the investing institution requests its supervisory agency to consider its pro rata share of community development loans made by the third party, as allowed under 12 CFR __.22(d), may the third party also receive consideration for these loans?

A3. Yes, regardless of examination type, as long as the financial institution and the third party are not affiliates. The regulations state, at 12 CFR __.22(c)(2)(i), that two affiliates may not both claim the same loan origination or loan purchase. However, if the

financial institution and the third party are not affiliates, the third party may receive consideration for the community development loans it originates, and the financial institution that invested in the third party may also receive consideration for its pro rata share of the same community development loans under 12 CFR __.22(d).

§ __.23—Investment test

§ __.23(a) Scope of test

§ __.23(a)—1:

May an institution, regardless of examination type, receive consideration under the CRA regulations if it invests indirectly through a fund, the purpose of which is community development, as that is defined in the CRA regulations?

A1. Yes, the direct or indirect nature of the qualified investment does not affect whether an institution will receive consideration under the CRA regulations because the regulations do not distinguish between “direct” and “indirect” investments. Thus, an institution's investment in an equity fund that, in turn, invests in projects that, for example, provide affordable housing to low- and moderate-income individuals, would receive consideration as a qualified investment under the CRA regulations, provided the investment benefits one or more of the institution's assessment area(s) or a broader statewide or regional area(s) that includes one or more of the institution's assessment area(s). Similarly, an institution may receive consideration for a direct qualified investment in a nonprofit organization that, for example, supports affordable housing for low- and moderate-income individuals in the institution's assessment area(s) or a broader statewide or regional area(s) that includes the institution's assessment area(s).

§ __.23(a)—2:

In order to receive CRA consideration, what information may an institution provide that would demonstrate that an investment in a nationwide fund with a primary purpose of community development will directly or indirectly benefit one or more of the institution's assessment area(s) or a broader statewide or regional area that includes the institution's assessment area(s)?

A2. There are several ways to demonstrate that the institution's investment in a nationwide fund meets the geographic requirements, and the agencies will employ appropriate flexibility in this regard in reviewing information the institution provides that reasonably supports this determination.

As an initial matter, in making this determination, the agencies would consider whether the purpose, mandate, or function of the fund includes serving geographies or individuals located within the institution's assessment area(s) or a broader statewide or regional area that includes the institution's assessment area(s). Typically, information about where a fund's investments are expected to be made or targeted will be found in the fund's prospectus, or other documents provided by the fund prior to or at the time of the institution's investment, and the institution, at its option, may provide such documentation in connection with its CRA evaluation. At the institution's option, written documentation provided by fund managers in connection with the institution's investment indicating that the fund will use its best efforts to invest in a qualifying activity that meets the institution's geographic requirements also may be used for these purposes. Similarly, at the institution's option, information that a fund has explicitly earmarked its projects or investments to its investors and their specific assessment area(s) or broader statewide or regional areas that include the assessment area(s) also may be used for these purposes. (If any documentation that has been provided at the institution's option as described above clearly indicates that the fund “double-counts” investments, by earmarking the same dollars or the same portions of projects or investments in a particular geography to more than one investor, the investment may be determined not to meet the geographic requirements of the CRA regulations.) In addition, at the institution's option, an allocation method may be used to permit the institution to claim a pro-rata share of each project of the fund.

Nationwide funds are important sources of investments for low- and moderate-income and underserved communities throughout the country and can be an efficient vehicle for institutions in making qualified investments that help meet community development needs. Prior to investing in such a fund, an institution should consider reviewing the fund's investment record to see if it is generally consistent with the institution's investment goals and the geographic considerations in the regulations.

See also

Q&As § __.12(h)—6 and § __12(h)—7 (additional information about recognition of investments benefiting an area outside an institution's assessment area(s).)

§ __.23(b) Exclusion

§ __.23(b)—1:

Even though the regulations state that an activity that is considered under the lending or service tests cannot also be considered under the investment test, may parts of an activity be considered under one test and other parts be considered under another test?

A1. Yes, in some instances the nature of an activity may make it eligible for consideration under more than one of the performance tests. For example, certain investments and related support provided by a large retail institution to a CDC may be evaluated under the lending, investment, and service tests. Under the service test, the institution may receive consideration for any community development services that it provides to the CDC, such as service by an executive of the institution on the CDC's board of directors. If the institution makes an investment in the CDC that the CDC uses to make community development loans, the institution may receive consideration under the lending test for its pro-rata share of community development loans made by the CDC. Alternatively, the institution's investment may be considered under the investment test, assuming it is a qualified investment. In addition, an institution may elect to have a part of its investment considered under the lending test and the remaining part considered under the investment test. If the investing institution opts to have a portion of its investment evaluated under the lending test by claiming its pro rata share of the CDC's community development loans, the amount of investment considered under the investment test will be offset by that portion. Thus, the institution would receive consideration under the investment test for only the amount of its investment multiplied by the percentage of the CDC's assets that meet the definition of a qualified investment.

§ __.23(b)—2:

If home mortgage loans to low- and moderate-income borrowers have been considered under an institution's lending test, may the institution that originated or purchased them also receive consideration under the investment test if it subsequently purchases mortgage-backed securities that are primarily or exclusively backed by such loans?

A2. No. Because the institution received lending test consideration for the loans that underlie the securities, the institution may not also receive consideration under the investment test for its purchase of the securities. Of course, an institution may receive investment test consideration for

purchases of mortgage-backed securities that are backed by loans to low- and moderate-income individuals as long as the securities are not backed primarily or exclusively by loans that the same institution originated or purchased.

§ __.23(e) Performance criteria

§ __.23(e)—1:

When applying the four performance criteria of 12 CFR __.23(e), may an examiner distinguish among qualified investments based on how much of the investment actually supports the underlying community development purpose?

A1. Yes. By applying all the criteria, a qualified investment of a lower dollar amount may be weighed more heavily under the investment test than a qualified investment with a higher dollar amount that has fewer qualitative enhancements. The criteria permit an examiner to qualitatively weight certain investments differently or to make other appropriate distinctions when evaluating an institution's record of making qualified investments. For instance, an examiner should take into account that a targeted mortgage-backed security that qualifies as an affordable housing issue that has only 60 percent of its face value supported by loans to low- or moderate-income borrowers would not provide as much affordable housing for low- and moderate-income individuals as a targeted mortgage-backed security with 100 percent of its face value supported by affordable housing loans to low- and moderate-income borrowers. The examiner should describe any differential weighting (or other adjustment), and its basis in the Performance Evaluation. See also Q&A § __.12(t)—8 for a discussion about the qualitative consideration of prior period investments.

§ __.23(e)—2:

How do examiners evaluate an institution's qualified investment in a fund, the primary purpose of which is community development, as defined in the CRA regulations?

A2. When evaluating qualified investments that benefit an institution's assessment area(s) or a broader statewide or regional area that includes its assessment area(s), examiners will look at the following four performance criteria:

(1) The dollar amount of qualified investments;

(2) The innovativeness or complexity of qualified investments;

(3) The responsiveness of qualified investments to credit and community development needs; and

(4) The degree to which the qualified investments are not routinely provided by private investors.

With respect to the first criterion, examiners will determine the dollar amount of qualified investments by relying on the figures recorded by the institution according to generally accepted accounting principles (GAAP). Although institutions may exercise a range of investment strategies, including short-term investments, long-term investments, investments that are immediately funded, and investments with a binding, up-front commitment that are funded over a period of time, institutions making the same dollar amount of investments over the same number of years, all other performance criteria being equal, would receive the same level of consideration. Examiners will include both new and outstanding investments in this determination. The dollar amount of qualified investments also will include the dollar amount of legally binding commitments recorded by the institution according to GAAP.

The extent to which qualified investments receive consideration, however, depends on how examiners evaluate the investments under the remaining three performance criteria—innovativeness and complexity, responsiveness, and degree to which the investment is not routinely provided by private investors. Examiners also will consider factors relevant to the institution's CRA performance context, such as the effect of outstanding long-term qualified investments, the pay-in schedule, and the amount of any cash call, on the capacity of the institution to make new investments.

§ __.24—Service test

§ __.24(d) Performance criteria—retail banking services

§ __.24(d)—1:

How do examiners evaluate the availability and effectiveness of an institution's systems for delivering retail banking services?

A1. Convenient access to full service branches within a community is an important factor in determining the availability of credit and non-credit services. Therefore, the service test performance standards place primary emphasis on full service branches while still considering alternative systems, such as automated teller machines (“ATMs”). The principal focus is on an institution's current distribution of branches and its record of opening and closing branches, particularly branches located in low- or moderate-income geographies or primarily serving low- or moderate-income individuals. However, an institution is not required to expand its branch network or operate unprofitable branches. Under the service test, alternative systems for delivering retail banking services, such as ATMs, are considered only to the extent that they are effective alternatives in providing needed services to low- and moderate-income areas and individuals.

§ __.24(d)—2:

How do examiners evaluate an institution's activities in connection with Individual Development Accounts (IDAs)?

A2. Although there is no standard IDA program, IDAs typically are deposit accounts targeted to low- and moderate-income families that are designed to help them accumulate savings for education or job-training, down-payment and closing costs on a new home, or start-up capital for a small business. Once participants have successfully funded an IDA, their personal IDA savings are matched by a public or private entity. Financial institution participation in IDA programs comes in a variety of forms, including providing retail banking services to IDA account holders, providing matching dollars or operating funds to an IDA program, designing or implementing IDA programs, providing consumer financial education to IDA account holders or prospective account holders, or other means. The extent of financial institutions' involvement in IDAs and the products and services they offer in connection with the accounts will vary. Thus, subject to 12 CFR __.23(b), examiners evaluate the actual services and products provided by an institution in connection with IDA programs as one or more of the following: community development services, retail banking services, qualified investments, home mortgage loans, small business loans, consumer loans, or community development loans.

See, e.g.,

Q&A § __.12(i)—3.

Note that all types of institutions may participate in IDA programs. Their IDA activities are evaluated under the performance criteria of the type of examination applicable to the particular institution.

§ __.24(d)(3) Availability and effectiveness of alternative systems for delivering retail banking services

§ __.24(d)(3)—1:

How will examiners evaluate alternative systems for delivering retail banking services?

A1. The regulation recognizes the multitude of ways in which an institution can provide services, for example, ATMs, banking by telephone or computer, and bank-by-mail programs. Delivery systems other than branches will be considered under the regulation to the extent that they are effective alternatives to branches in providing needed services to low- and

moderate-income areas and individuals. The list of systems in the regulation is not intended to be comprehensive.

§ __.24(d)(3)—2:

Are debit cards considered under the service test as an alternative delivery system?

A2. By themselves, no. However, if debit cards are a part of a larger combination of products, such as a comprehensive electronic banking service, that allows an institution to deliver needed services to low- and moderate-income areas and individuals in its community, the overall delivery system that includes the debit card feature would be considered an alternative delivery system.

§ __.24(e) Performance criteria—community development services

§ __.24(e)—1:

Under what conditions may an institution receive consideration for community development services offered by affiliates or third parties?

A1. At an institution's option, the agencies will consider services performed by an affiliate or by a third party on the institution's behalf under the service test if the services provided enable the institution to help meet the credit needs of its community. Indirect services that enhance an institution's ability to deliver credit products or deposit services within its community and that can be quantified may be considered under the service test, if those services have not been considered already under the lending or investment test (

see

Q&A § __.23(b)—1). For example, an institution that contracts with a community organization to provide home ownership counseling to low- and moderate-income home buyers as part of the institution's mortgage program may receive consideration for that indirect service under the service test. In contrast, donations to a community organization that offers financial services to low- or moderate-income individuals may be considered under the investment test, but would not also be eligible for consideration under the service test. Services performed by an affiliate will be treated the same as affiliate loans and investments made in the institution's assessment area and may be considered if the service is not claimed by any other institution.

See

12 CFR __.22(c) and __.23(c).

§ __.25 Community development test for wholesale or limited purpose institutions

§ __.25(a) Scope of test

§ __.25(a)—1:

How can certain credit card banks help to meet the credit needs of their communities without losing their exemption from the definition of “bank” in the Bank Holding Company Act (the BHCA), as amended by the Competitive Equality Banking Act of 1987 (CEBA)?

A1. Although the BHCA restricts institutions known as CEBA credit card banks to credit card operations, a CEBA credit card bank can engage in community development activities without losing its exemption under the BHCA. A CEBA credit card bank could provide community development services and investments without engaging in operations other than credit card operations. For example, the bank could provide credit card counseling, or the financial expertise of its executives, free of charge, to community development organizations. In addition, a CEBA credit card bank could make qualified investments, as long as the investments meet the guidelines for passive and noncontrolling investments provided in the BHC Act and the Board's Regulation Y. Finally, although a CEBA credit card bank cannot make any loans other than credit card loans, under 12 CFR __.25(d)(2) (community development test—indirect activities), the bank could elect to have part of its qualified passive and noncontrolling investments in a third-party lending consortium considered as community development lending, provided that the consortium's loans otherwise meet the requirements for community development lending. When assessing a CEBA credit card bank's CRA performance under the community development test, examiners will take into account the bank's performance context. In particular, examiners will consider the legal constraints imposed by the BHCA on the bank's activities, as part of the bank's performance context in 12 CFR __.21(b)(4).

§ __.25(d) Indirect activities

§ __.25(d)—1:

How are investments in third party community development organizations considered under the community development test?

A1. Similar to the lending test for retail institutions, investments in third party community development organizations may be considered as qualified investments or as community development loans or both (provided there is no double counting), at the institution's option, as described above in the discussion regarding 12 CFR __.22(d) and __.23(b).

§ __.25(e) Benefit to assessment area(s)

§ __.25(e)—1:

How do examiners evaluate a wholesale or limited purpose institution's qualified investment in a fund that invests in projects nationwide and which has a primary purpose of community development, as that is defined in the regulations?

A1. If examiners find that a wholesale or limited purpose institution has adequately addressed the needs of its assessment area(s), they will give consideration to qualified investments, as well as community development loans and community development services, by that institution nationwide. In determining whether an institution has adequately addressed the needs of its assessment area(s), examiners will consider qualified investments that benefit a broader statewide or regional area that includes the institution's assessment area(s).

§ __.25(f) Community development performance rating

§ __.25(f)—1:

Must a wholesale or limited purpose institution engage in all three categories of community development activities (lending, investment, and service) to perform well under the community development test?

A1. No, a wholesale or limited purpose institution may perform well under the community development test by engaging in one or more of these activities.

§ __.26—Small institution performance standards

§ __.26—1:

When evaluating a small or intermediate small institution's performance, will examiners consider, at the institution's request, retail and community development loans originated or purchased by affiliates, qualified investments made by affiliates, or community development services provided by affiliates?

A1. Yes. However, a small institution that elects to have examiners consider affiliate activities must maintain sufficient information that the examiners may evaluate these activities under the appropriate performance criteria and ensure that the activities are not claimed by another institution. The constraints applicable to affiliate activities claimed by large institutions also apply to small and intermediate small institutions.

See

Q&As addressing 12 CFR __.22(c)(2) and related guidance provided to large institutions regarding affiliate activities. Examiners will not include affiliate lending in calculating the percentage of loans and, as appropriate, other lending-related activities located in an institution's assessment area.

§ __.26(a) Performance criteria

§ __.26(a)(2) Intermediate small institutions

§ __.26(a)(2)—1:

When is an institution examined as an intermediate small institution?

A1. When a small institution has met the intermediate small institution asset threshold delineated in 12 CFR __.12(u)(1) for two consecutive calendar year-ends, the institution may be examined under the intermediate small institution examination procedures. The regulation does not specify an additional lag period between becoming an intermediate small institution and being examined as an intermediate small institution, as it does for large institutions, because an intermediate small institution is not subject to CRA data collection and reporting requirements. Institutions should contact their primary regulator for information on examination schedules.

§ __.26(b) Lending test

§ __.26(b)—1:

May examiners consider, under one or more of the performance criteria of the small institution performance standards, lending-related activities, such as community development loans and lending-related qualified investments, when evaluating a small institution?

A1. Yes. Examiners can consider “lending-related activities,” including community development loans and lending-related qualified investments, when evaluating the first four performance criteria of the small institution performance test. Although lending-related activities are specifically mentioned in the regulation in connection with only the first three criteria (i.e., loan-to-deposit ratio, percentage of loans in the institution's assessment area, and lending to borrowers of different incomes and businesses of different sizes), examiners can also consider these activities when they evaluate the fourth criteria—geographic distribution of the institution's loans.

Although lending-related community development activities are evaluated under the community development test applicable to intermediate small institutions, these activities may also augment the loan-to-deposit ratio analysis (12 CFR __.26(b)(1)) and the percentage of loans in the intermediate small institution's assessment area analysis (12 CFR __.26(b)(2)), if appropriate.

§ __.26(b)—2:

What is meant by “as appropriate” when referring to the fact that lending-related activities will be considered, “as appropriate,” under the various small institution performance criteria?

A2. “As appropriate” means that lending-related activities will be considered when it is necessary to determine whether an institution meets or exceeds the standards for a satisfactory rating. Examiners will also consider other lending-related activities at an institution's request, provided they have not also been considered under the community development test applicable to intermediate small institutions.

§ __.26(b)—3:

When evaluating a small institution's lending performance, will examiners consider, at the institution's request, community development loans originated or purchased by a consortium in which the institution participates or by a third party in which the institution has invested?

A3. Yes. However, a small institution that elects to have examiners consider community development loans originated or purchased by a consortium or third party must maintain sufficient information on its share of the community development loans so that the examiners may evaluate these loans under the small institution performance criteria.

§ __.26(b)—4:

Under the small institution lending test performance standards, will examiners consider both loan originations and purchases?

A4. Yes, consistent with the other assessment methods in the regulation, examiners will consider both loans originated and purchased by the institution. Likewise, examiners may consider any other loan data the small institution chooses to provide, including data on loans outstanding, commitments, and letters of credit.

§ __.26(b)—5:

Under the small institution lending test performance standards, how will qualified investments be considered for purposes of determining whether a small institution receives a satisfactory CRA rating?

A5. The small institution lending test performance standards focus on lending and other lending-related activities. Therefore, examiners will consider only lending-related qualified investments for the purpose of determining whether a small institution that is not an intermediate small institution receives a satisfactory CRA rating.

§ __.26(b)(1) Loan-to-deposit ratio

§ __.26(b)(1)—1:

How is the loan-to-deposit ratio calculated?

A1. A small institution's loan-to-deposit ratio is calculated in the same manner that the Uniform Bank Performance Report/Uniform Thrift Performance Report (UBPR/UTPR) determines the ratio. It is calculated by dividing the institution's net loans and leases by its total deposits. The ratio is found in the Liquidity and Investment Portfolio section of the UBPR and UTPR. Examiners will use this ratio to calculate an average since the last examination by adding the quarterly loan-to-deposit ratios and dividing the total by the number of quarters.

§ __.26(b)(1)—2:

How is the “reasonableness” of a loan-to-deposit ratio evaluated?

A2. No specific ratio is reasonable in every circumstance, and each small institution's ratio is evaluated in light of information from the performance context, including the institution's capacity to lend, demographic and economic factors present in the assessment area, and the lending opportunities available in the assessment area(s). If a small institution's loan-to-deposit ratio appears unreasonable after considering this information, lending performance may still be satisfactory under this criterion taking into consideration the number and the dollar volume of loans sold to the secondary market or the number and amount and innovativeness or complexity of community development loans and lending-related qualified investments.

§ __.26(b)(1)—3:

If an institution makes a large number of loans off-shore, will examiners segregate the domestic loan-to-deposit ratio from the foreign loan-to-deposit ratio?

A3. No. Examiners will look at the institution's net loan-to-deposit ratio for the whole institution, without any adjustments.

§ __.26(b)(2) Percentage of lending within assessment area(s)

§ __.26(b)(2)—1:

Must a small institution have a majority of its lending in its assessment area(s) to receive a satisfactory performance rating?

A1. No. The percentage of loans and, as appropriate, other lending-related activities located in the institution's assessment area(s) is but one of the performance criteria upon which small institutions are evaluated. If the percentage of loans and other lending related activities in an institution's assessment area(s) is less than a majority, then the institution does not meet the standards for satisfactory performance only under this criterion. The effect on the overall performance rating of the institution, however, is considered in light of the performance context, including information regarding economic conditions; loan demand; the institution's size, financial

condition, business strategies, and branching network; and other aspects of the institution's lending record.

§ __.26(b)(3) & (4) Distribution of lending within assessment area(s) by borrower income and geographic location

§ __.26(b)(3) & (4)—1:

How will a small institution's performance be assessed under these lending distribution criteria?

A1. Distribution of loans, like other small institution performance criteria, is considered in light of the performance context. For example, a small institution is not required to lend evenly throughout its assessment area(s) or in any particular geography. However, in order to meet the standards for satisfactory performance under this criterion, conspicuous gaps in a small institution's loan distribution must be adequately explained by performance context factors such as lending opportunities in the institution's assessment area(s), the institution's product offerings and business strategy, and institutional capacity and constraints. In addition, it may be impracticable to review the geographic distribution of the lending of an institution with very few demographically distinct geographies within an assessment area. If sufficient information on the income levels of individual borrowers or the revenues or sizes of business borrowers is not available, examiners may use loan size as a proxy for estimating borrower characteristics, where appropriate.

§ __.26(c) Intermediate small institution community development test

§ __.26(c)—1:

How will the community development test be applied flexibly for intermediate small institutions?

A1. Generally, intermediate small institutions engage in a combination of community development loans, qualified investments, and community development services. An institution may not simply ignore one or more of these categories of community development, nor do the regulations prescribe a required threshold for community development loans, qualified investments, and community development services. Instead, based on the institution's assessment of community development needs in its assessment area(s), it may engage in different categories of community development activities that are responsive to those needs and consistent with the institution's capacity.

An intermediate small institution has the flexibility to allocate its resources among community development loans, qualified investments, and community development services in amounts that it reasonably determines are most responsive to community development needs and opportunities. Appropriate levels of each of these activities would depend on the capacity and business strategy of the institution, community needs, and number and types of opportunities for community development.

§ __.26(c)(3) Community development services

§ __.26(c)(3)—1:

What will examiners consider when evaluating the provision of community development services by an intermediate small institution?

A1. Examiners will consider not only the types of services provided to benefit low- and moderate-income individuals, such as low-cost checking accounts and low-cost remittance services, but also the provision and availability of services to low- and moderate-income individuals, including through branches and other facilities located in low- and moderate-income areas. Generally, the presence of branches located in low- and moderate-income geographies will help to demonstrate the availability of banking services to low- and moderate-income individuals.

§ __.26(c)(4) Responsiveness to community development needs

§ __.26(c)(4)—1:

When evaluating an intermediate small institution's community development record, what will examiners consider when reviewing the responsiveness of community development lending, qualified investments, and community development services to the community development needs of the area?

A1. When evaluating an intermediate small institution's community development record, examiners will consider not only quantitative measures of performance, such as the number and amount of community development loans, qualified investments, and community development services, but also qualitative aspects of performance. In particular, examiners will evaluate the responsiveness of the institution's community development activities in light of the institution's capacity, business strategy, the needs of the community, and the number and types of opportunities for each type of community development activity (its performance context). Examiners also will consider the results of any assessment by the institution of community development needs, and how the institution's activities respond to those needs.

An evaluation of the degree of responsiveness considers the following factors: the volume, mix, and qualitative aspects of community development loans, qualified investments, and community development services. Consideration of the qualitative aspects of performance recognizes that community development activities sometimes require special expertise or effort on the part of the institution or provide a benefit to the community that would not otherwise be made available. (However, “innovativeness” and “complexity,” factors examiners consider when evaluating a large institution under the lending, investment, and service tests, are not criteria in the intermediate small institutions' community development test.) In some cases, a smaller loan may have more qualitative benefit to a community than a larger loan. Activities are considered particularly responsive to community development needs if they benefit low- and moderate-income individuals in low- or moderate-income geographies, designated disaster areas, or distressed or underserved nonmetropolitan middle-income geographies. Activities are also considered particularly responsive to community development needs if they benefit low- or moderate-income geographies.

§ __.26(d) Performance rating

§ __.26(d)—1:

How can a small institution that is not an intermediate small institution achieve an “outstanding” performance rating?

A1. A small institution that is not an intermediate small institution that meets each of the standards in the lending test for a “satisfactory” rating and exceeds some or all of those standards may warrant an “outstanding” performance rating. In assessing performance at the “outstanding” level, the agencies consider the extent to which the institution exceeds each of the performance standards and, at the institution's option, its performance in making qualified investments and providing services that enhance credit availability in its assessment area(s). In some cases, a small institution may qualify for an “outstanding” performance rating solely on the basis of its lending activities, but only if its performance materially exceeds the standards for a “satisfactory” rating, particularly with respect to the penetration of borrowers at all income levels and the dispersion of loans throughout the geographies in its

assessment area(s) that display income variation. An institution with a high loan-to-deposit ratio and a high percentage of loans in its assessment area(s), but with only a reasonable penetration of borrowers at all income levels or a reasonable dispersion of loans throughout geographies of differing income levels in its assessment area(s), generally will not be rated “outstanding” based only on its lending performance. However, the institution's performance in making qualified investments and its performance in providing branches and other services and delivery systems that enhance credit availability in its assessment area(s) may augment the institution's satisfactory rating to the extent that it may be rated “outstanding.”

§ __.26(d)—2:

Will a small institution's qualified investments, community development loans, and community development services be considered if they do not directly benefit its assessment area(s)?

A2. Yes. These activities are eligible for consideration if they benefit a broader statewide or regional area that includes a small institution's assessment area(s), as discussed more fully in Q&As § __.12(h)—6 and § __.12(h)—7.

§ __.27—Strategic plan

§ __.27(c) Plans in general

§ __.27(c)—1:

To what extent will the agencies provide guidance to an institution during the development of its strategic plan?

A1. An institution will have an opportunity to consult with and provide information to the agencies on a proposed strategic plan. Through this process, an institution is provided guidance on procedures and on the information necessary to ensure a complete submission. For example, the agencies will provide guidance on whether the level of detail as set out in the proposed plan would be sufficient to permit agency evaluation of the plan. However, the agencies' guidance during plan development and, particularly, prior to the public comment period, will not include commenting on the merits of a proposed strategic plan or on the adequacy of measurable goals.

§ __.27(c)—2:

How will a joint strategic plan be reviewed if the affiliates have different primary Federal supervisors?

A2. The agencies will coordinate review of and action on the joint plan. Each agency will evaluate the measurable goals for those affiliates for which it is the pr

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