# Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment; Guidance

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-16693

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** July 25, 2016
- **Citation:** 81 FR 48506

## Text

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 25 and 195
[Docket ID OCC-2014-0021]
FEDERAL RESERVE SYSTEM
12 CFR Part 228
[Docket No. OP-1497]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 345
Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment; Guidance

AGENCY:

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

ACTION:

Guidance on the interpretation and application of the Community Reinvestment Act regulations.

SUMMARY:

The OCC, Board, and FDIC (the Agencies) are adopting as final revisions to the Interagency Questions and Answers Regarding Community Reinvestment (Questions and Answers) based on the proposal issued on September 10, 2014 addressing alternative systems for delivering retail banking services; community development-related issues; and the qualitative aspects of performance, including innovative or flexible lending practices and the responsiveness and innovativeness of an institution's loans, qualified investments, and community development services. The Agencies are clarifying nine of the 10 proposed questions and answers (Q&A), revising four existing Q&As for consistency, and adopting two new Q&As. The Agencies are not adopting one of the proposed revisions to guidance that addressed the availability and effectiveness of retail banking services. Finally, the Agencies are making technical corrections to the Questions and Answers to update cross-references and remove references related to the Office of Thrift Supervision (OTS) as obsolete. The Agencies are publishing all of the new and revised Q&As, as well as those Q&As that were published in 2010 and 2013 and that remain in effect in this final guidance.

DATES:

This document goes into effect on July 25, 2016.

FOR FURTHER INFORMATION CONTACT:

OCC:
Bobbie K. Kennedy, Bank Examiner, Compliance Policy Division, (202) 649-5470; Vonda Eanes, National Bank Examiner and District Community Affairs Officer, Community Affairs, (202) 649-6420; or Margaret Hesse, Senior Counsel, Community and Consumer Law Division, (202) 649-6350, Office of the Comptroller of the Currency, 400 7th Street SW., Washington, DC 20219.

Board:
Catherine M.J. Gates, Senior Project Manager, (202) 452-2099; or Theresa A. Stark, Senior Project Manager, (202) 452-2302, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551.

FDIC:
Patience R. Singleton, Senior Policy Analyst, Supervisory Policy Branch, (202) 898-6859; Sharon B. Vejvoda, Senior Examination Specialist, Compliance and CRA Examinations Branch, (202) 898-3881; Surya Sen, Section Chief, Supervisory Policy Branch, (202) 898-6699, Division of Depositor and Consumer Protection; or Richard M. Schwartz, Counsel (202) 898-7424; or Sherry Ann Betancourt, Counsel, (202) 898-6560, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

The Agencies implement the Community Reinvestment Act (CRA) (12 U.S.C. 2901
et seq.
) through their CRA regulations.
See
12 CFR parts 25, 195, 228, and 345. The CRA is designed to encourage regulated financial institutions to help meet the credit needs of their entire communities. The CRA regulations establish the framework and criteria by which the Agencies assess an institution's record of helping to meet the credit needs of its community, including low- and moderate-income neighborhoods, consistent with safe and sound operations. The regulations provide different evaluation standards for institutions of different asset sizes and types.

The Agencies publish the Questions and Answers
1

to provide guidance on the interpretation and application of the CRA regulations to agency personnel, financial institutions, and the public. The Agencies first published the Questions and Answers under the auspices of the Federal Financial Institutions Examination Council (FFIEC) in 1996 (61 FR 54647). The Questions and Answers were last published in full by the Agencies on March 11, 2010 (2010 Questions and Answers) (75 FR 11642). In 2013, the Agencies adopted revised guidance on community development topics that amended and superseded five Q&As and added two new Q&As (2013 Questions and Answers) (78 FR 69671), which supplemented the 2010 Questions and Answers. This document supplements, revises, republishes, and supersedes the 2010 Questions and Answers and the 2013 Questions and Answers.

1
Throughout this document, “Questions and Answers” refers to the “Interagency Questions and Answers Regarding Community Reinvestment” in its entirety; “Q&A” refers to an individual question and answer within the Questions and Answers.

The 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, for thrifts, the small savings association performance standards appear at 12 CFR 195.26; for national banks, the small bank performance standards appear at 12 CFR 25.26; for Federal Reserve System member banks supervised by the Board, they appear at 12 CFR 228.26; and for state nonmember banks, they appear at 12 CFR 345.26. 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 review Q&As relevant to other financial institutions as well.

A. The 2014 Proposal and Overview of Comments

On September 10, 2014, the Agencies proposed to revise six existing Q&As.
2

Two Q&As addressed the availability and effectiveness of retail banking services
3

and one Q&A addressed innovative or flexible lending practices.
4

The other three proposed

revised Q&As addressed community development-related issues, including economic development, community development loans, and activities that are considered to revitalize or stabilize an underserved nonmetropolitan middle-income geography.
5

The Agencies also proposed to add four new Q&As, two of which addressed community development services,
6

and two of which provided general guidance on responsiveness and innovativeness.
7

2
75 FR 53838 (Sept. 10, 2014).

3
Q&As § __.24(d)-1 and § __.24(d)(3)-1.

4
Q&A § __.22(b)(5)-1.

5
Q&As § __.12(g)(3)-1; § __.12(h)-1; and § __.12(g)(4)(iii)-4.

6
Q&As § __.24(a)-1 and § __.24(e)-2.

7
Q&As § __.21(a)-3 and § __.21(a)-4.

Together, the Agencies received 126 different comment letters on the proposed Q&As, plus over 900 form letter submissions. The commenters included financial institutions and their trade associations (collectively, industry commenters), community development advocates and consumer organizations (collectively, community organization commenters), state bank supervisors, Federal agencies, and other interested parties.

Most commenters supported the Agencies' efforts to clarify the CRA guidance. Some commenters also suggested revisions to the proposed new and revised Q&As, as well as posed questions or stated concerns about the Q&As. Comments received by the Agencies on each revised or new proposed Q&A are discussed in further detail below in Parts II and III.

B. Summary of Final Q&As

The Agencies are adopting nine of the 10 proposed Q&As with clarifications to reflect commenters' suggestions. Parts II and III below discuss the clarifications made to these nine Q&As. Further, as discussed more fully below in Part II.C.i., in response to comments received, the Agencies are not adopting as final the proposed revisions to Q&A § __.24(d)-1, one of the Q&As that addresses the availability and effectiveness of retail banking services.

The Agencies are also revising four additional existing Q&As
8

and adopting two new Q&As
9

based on questions and suggestions provided by the commenters. Finally, as discussed in Part IV, the Agencies have made technical corrections to 25 Q&As to update, for example, regulatory references, addresses, and references related to the former OTS.

8
Q&As § __.12(g)-1, § __.12(i)-3, § __.12(t)-4, and § __.26(c)(3)-1.

9
Q&As § __.12(g)-4 and § __.24(d)(4)-1.

As has been done in the past, the Agencies intend to provide training on all aspects of the new and revised Questions and Answers for examiners, as well as outreach for bankers and other interested parties.

II. Revisions to Existing Q&As

A. Community Development

Community development is an important component of community reinvestment and is considered in the CRA evaluations of financial institutions of all types and sizes. Community development activities are considered under the regulations' large institution, intermediate small institution, and wholesale and limited purpose institution performance tests.
See
12 CFR __.22(b)(4), __.23, __.24(e), __.26(c), and __.25. In addition, small institutions may use community development activities to receive consideration toward an outstanding rating. The Agencies believe that community development generally improves the circumstances for low- and moderate-income individuals and stabilizes and revitalizes the communities in which they live or work.

The Agencies proposed to provide additional clarification of three Q&As addressing community development-related topics.

i. Economic Development

The CRA regulations define community development to include “activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration's Development Company (SBDC) or Small Business Investment Company (SBIC) programs (13 CFR 121.301) or have gross annual revenues of $1 million or less.”
See
12 CFR __.12(g)(3). The Questions and Answers provide additional guidance on activities that promote economic development in Q&As § __.12(g)(3)-1, § __.12(i)-1, § __.12(i)-3, and § __.12(t)-4.

Existing Q&A § __.12(g)(3)-1 explained the phrase “promote economic development.” This Q&A stated that activities promote economic development by financing small businesses or farms if they meet two “tests”: (i) A “size test” (the beneficiaries of the activity must meet the size eligibility standards of the SBDC or SBIC programs or have gross annual revenues of $1 million or less); and (ii) a “purpose test,” which is intended to ensure that a financial institution's activities promote economic development consistent with the CRA regulations. Existing Q&A § __.12(g)(3)-1 stated that activities promote economic development if they “support permanent job creation, retention, and/or improvement for persons who are currently low- or moderate-income, or support 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 Q&A further explained, “[t]he 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.”

The Agencies proposed to revise existing Q&A § __.12(g)(3)-1 to clarify what is meant by the phrase “promote economic development,” and to better align this Q&A with other guidance provided in existing Q&As § __.12(i)-1 and § __.12(i)-3 regarding consideration of economic development activities undertaken by financial institutions. Further, the Agencies proposed to revise the guidance to add additional examples that would demonstrate a purpose of economic development, such as workforce development and technical assistance support for small businesses. In addition, the Agencies requested public comment on seven questions regarding the proposed revisions to the Q&A.

The Agencies received 40 comments addressing proposed revised Q&A § __.12(g)(3)-1. Most commenters provided general comments about the proposed revised Q&A, with relatively few responding to the seven specific questions posed by the Agencies. Commenters generally supported the Agencies' efforts to clarify the types of activities that promote economic development. One industry commenter mentioned that changing the format to a bulleted list of activities that demonstrate a purpose of economic development is helpful.

A few industry commenters suggested eliminating the purpose test altogether, asserting that the regulations require only that activities relate to businesses that meet Small Business Administration (SBA) size-eligibility requirements. However, the Agencies note the intent of the purpose test is to explain what is meant by the phrase “promote economic development.” The purpose test ensures that examiners consider only activities that promote economic development as activities with a primary purpose of community development. Other loans to small businesses and small farms are considered as retail loans if they meet certain loan-size standards (
see
12 CFR

__.12(v) and (w)); larger loans to small businesses and small farms that do not meet the purpose test would not be considered in a CRA evaluation as small business or small farm loans. Furthermore, they would not be considered as community development loans, unless they have an alternate community development purpose as defined in 12 CFR __.12(g).

The Agencies specifically asked what information is available to demonstrate that an activity meets the size and purpose tests. One community organization commenter suggested that examiners consider the size of the business by revenues or, alternatively, the mission statement of the intermediary lender, if the statement provides sufficient detail on the types of businesses served, to demonstrate an activity meets the size test. A few industry commenters suggested that all activities that support small businesses should be presumed to qualify and meet the purpose test.

As noted above, existing Q&A § __.12(g)(3)-1 explained that 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. The Agencies proposed a revision to the Q&A to add the following presumption: For loans to or investments in a Community Development Financial Institution (CDFI) that finances small businesses or small farms. As discussed below, the Agencies are adopting this proposed amendment to Q&A § __.12(g)(3)-1 regarding CDFIs.

The Agencies also proposed to revise the existing Q&A § __.12(g)(3)-1 by removing the reference to persons who are “currently” low- or moderate-income in order to clarify that banks can focus on community development activities that extend beyond support for low-wage jobs. The Agencies specifically requested input on whether the proposed revision would help to clarify what is meant by job creation, retention, or improvement for low- or moderate-income individuals. Commenters generally agreed with removing the reference to persons who are “currently” low- or moderate-income. However, most commenters indicated that the proposal did not sufficiently clarify what is meant by job creation, retention, or improvement for low- or moderate-income persons beyond the creation of low-wage jobs. Industry commenters reiterated concerns that the primary method to demonstrate that activities benefit low- or moderate-income individuals is to provide evidence of low-wage jobs, which is not consistent with the spirit or intent of the CRA. These commenters also expressed concerns that the proposal did not include examples of methods that could be used to demonstrate that the persons for whom jobs are created, retained, or improved are low- or moderate-income, and asked that the Agencies incorporate examples into the final Q&A.

The Agencies are adopting revisions to existing Q&A § __.12(g)(3)-1 largely as proposed, but with additional clarifications.

First, the Agencies recognize that financial institutions may rely on a variety of methods to demonstrate that activities promote economic development. To make clear that financial institutions may provide various types of information to demonstrate that an activity meets the purpose test, the Agencies have added a statement in the final Q&A clarifying that examiners will employ appropriate flexibility in reviewing any information provided by a financial institution that reasonably demonstrates that the purpose, mandate, or function of an activity meets the purpose test.

In addition to the above revisions, the Agencies had proposed to add examples of types of activities that would meet the purpose test of promoting economic development. The Agencies are adopting these examples largely as proposed, but with some clarifications and revisions to address commenters' concerns, as discussed more fully below. Accordingly, the Agencies are adopting this final Q&A with reference to activities that are considered to promote economic development if they support permanent job creation, retention, and/or improvement:

• For low- or moderate-income persons;

• in low- or moderate-income geographies;

• in areas targeted for redevelopment by Federal, state, local, or tribal governments;

• by financing intermediaries that lend to, invest in, or provide technical assistance to start-ups or recently formed small businesses or small farms; or

• through technical assistance or supportive services for small businesses or farms, such as shared space, technology, or administrative assistance.

The final Q&A also recognizes that Federal, state, local, or tribal economic development initiatives that include provisions for creating or improving access by low- or moderate-income persons to jobs, or job training or workforce development programs, promote economic development.

The Agencies note that only one of the examples in the final Q&A explicitly refers to permanent job creation, retention, and/or improvement for low- or moderate-income persons. The Agencies encourage activities that promote economic development through opportunities for low- and moderate-income individuals to obtain higher wage jobs, such as through private industry collaborations with workforce development programs for unemployed persons and are clarifying that examiners will consider the qualitative aspects of performance related to all activities that promote economic development. In particular, activities will be considered more responsive to community needs if a majority of jobs created, retained, and/or improved benefit low- or moderate-income individuals.

The Agencies also note that Q&A § __.12(g)(2)-1 provides examples of ways in which an institution could determine that community services and, therefore, other types of community development activities, including economic development, are targeted to low- or moderate-income individuals. In particular, the example explaining that an institution may use readily available data for the average wage for workers in a particular occupation or industry could be useful when determining whether an activity promotes economic development.

The Agencies specifically asked whether the proposed examples demonstrating that an activity promotes economic development for CRA purposes were appropriate, and whether there are other examples the Agencies should include. Most commenters generally agreed the proposed examples were appropriate. Several community organization commenters, as well as a state bank supervisory agency commenter, suggested the Q&A should also include a reference to the “quality of jobs” created, retained, or improved. Industry commenters, however, opposed a “quality of jobs standard,” expressing concerns related to increased subjectivity by examiners and the Agencies and documentation burden on institutions, small businesses or small farms, and examiners. The Agencies recognize that the term “quality” is subjective, not easily defined, and heavily influenced by local economic conditions, needs, and opportunities. The amount of time, resources, and expertise needed to fairly evaluate the quality of jobs created, retained, and/or improved for low- or moderate-income individuals could be overly burdensome

for examiners, financial institutions, and small businesses or small farms. However, the Agencies note that examiners are not precluded from considering qualitative factors relative to a particular financial institution's performance context, including, at the institution's option, any information provided on the quality of jobs created, retained, or improved through any of the types of activities listed in the Q&A's description of the purpose test as promoting economic development.

The Agencies proposed that permanent job creation, retention, and/or improvement is supported “through the creation or development of small businesses or farms” and, therefore, such activity would be considered to promote economic development and meet the “purpose test.” The Agencies proposed this example in an effort to recognize the impact small businesses have on job creation in general, and to address industry concerns that activities in support of intermediary lenders or other service providers, such as business incubators that lend to start-up businesses and help businesses become bankable and sustainable, are often not considered under the purpose test. Industry commenters have previously indicated that such activities are not considered because it is not clear under the purpose test that these activities help promote economic development since any job creation, retention, or improvement would occur in the future—after the businesses are organized or more established. However, there were concerns that the proposed guidance stating that permanent job creation, retention, and/or improvement “through the creation or development of small business or farms” may be overly broad and could result in diffuse potential benefit to low- or moderate-income persons or geographies. The Agencies are adopting this example with revisions to clarify that examiners will consider activities that support permanent job creation, retention, and/or improvement by financing intermediaries that lend to, invest in, or provide technical assistance to
start-up or recently formed
small businesses or small farms. This example applies to loans to, investments in, or services to intermediaries that, in turn, lend to, invest in, or provide technical assistance to small businesses or small farms, and not to activities provided directly by an institution to small businesses or small farms. A loan to a small business or small farm would be considered under the lending test applicable to a particular institution—for example, for large institutions, under the retail lending evaluation criteria.

The Agencies also proposed to add activities that support permanent job creation, retention, and/or improvement “[t]hrough workforce development and/or job or career training programs that target unemployed or low- or moderate-income persons” to the list of activities that are considered to promote economic development under the purpose test. Two government agency commenters expressed concerns that these activities, in and of themselves, may not involve financing small businesses or small farms and, therefore, would not meet the size test. To address these concerns, the final Q&A does not incorporate this example in the list of those types of activities that promote economic development under the purpose test. However, the Agencies are amending existing Q&As § __.12(g)-1 and § __.12(t)-4 to clarify that activities related to workforce development or job training programs for low- or moderate-income or unemployed persons are considered qualified community development activities.

The last example of a type of activity that would be considered to promote economic development that the Agencies proposed referred to “Federal, state, local, or tribal economic development initiatives that include provisions for creating or improving access by low- or moderate-income persons, to jobs, affordable housing, financial services, or community services.” Industry and community organization commenters suggested amending or eliminating this proposed activity altogether because it blurs the line between activities that support economic development and those that support other types of community development and could create confusion. Although the Agencies' original intention was to recognize all Federal, state, local, or tribal economic development initiatives, the Agencies agree with these commenters and have eliminated references to affordable housing, financial services, and community services, which would receive consideration under other prongs of the definition of “community development.” However, the Agencies have otherwise retained the example in the final Q&A being adopted, and have added a reference to governmental economic development initiatives that include job training or workforce development programs, because those initiatives are closely related to job creation, retention, and/or improvement.

Commenters overwhelmingly supported adding CDFIs that finance small businesses or small farms to the list of entities for which loans or investments are presumed to promote economic development; even so, some questioned limiting the presumption to CDFIs that finance small businesses or small farms. The Agencies are adopting this revision as proposed. In order for a CDFI to promote economic development by financing small businesses and small farms, it follows that any CDFI presumed to promote economic development would need to finance small businesses or small farms. Additionally, the Agencies are further revising the statement granting presumptions for activities related to the specified entities to include services provided to these entities, as well loans and investments.

Several commenters representing the Historic Tax Credit (HTC) industry suggested changes to the proposed Q&A that would expand and clarify the circumstances under which CRA consideration would be available for loans and investments related to projects involving HTCs. These commenters suggested the Agencies amend Q&A § __.12(g)(3)-1 to create a presumption that activities related to HTC projects qualify for CRA consideration as promoting economic development by financing small businesses and small farms. Because not all HTC projects would meet the requirements to qualify for CRA consideration under 12 CFR __.12(g)(3), the Agencies believe it would be inappropriate to grant such a presumption. Nonetheless, in instances in which loans to, or investments in, projects that receive HTCs do meet the regulatory definition of community development, including the geographic restrictions, the Agencies concur that CRA consideration should be provided. For example, a loan to, or investment in, an HTC project that does, in fact, relate to a facility that will house small businesses that support permanent job creation, retention, or improvement for low- or moderate-income individuals, in low- or moderate-income areas, or in areas targeted for redevelopment by Federal, state, local, or tribal governments may receive CRA consideration as promoting economic development. Further, a loan to or investment in an HTC project that will provide affordable housing or community services for low- or moderate-income individuals would meet the definition of community development as affordable housing or a community service targeted to low- or

moderate-income individuals, respectively. Similarly, loans to or investments in HTC projects may also meet the definition of community development when the project revitalizes or stabilizes a low- or moderate-income geography, designated disaster area, or a designated distressed or underserved nonmetropolitan middle-income geography. Greater weight will be given to those HTC-related activities that are most responsive to community credit needs, including the needs of low- or moderate-income individuals or geographies.
See
Q&As § __.12(g)-1, § __.12(g)(2)-1, § __.12(g)(4)-2, § __.12(g)(4)(i)-1, and § __.12(g)(4)(ii)-2 through-4.

In response to the Agencies' request for input on the types of information examiners should review when determining the performance context of an institution, some community organizations suggested consulting local studies and Federal Reserve Bank credit surveys; talking with CDFIs, local municipalities, and community organizations that work directly with small businesses; reviewing municipal needs assessments; and evaluating business and local demographic data. One industry commenter suggested examiners could review financial institution Consolidated Reports of Condition and Income (Call Reports) and academic or governmental economic development reports or adopted plans. Another industry commenter suggested that existing Q&As explain that an institution may provide examiners with any relevant information and, therefore, provide sufficient guidance without overlaying prescriptive changes that could be counter-productive to an institution's efforts to balance innovativeness and responsiveness with its unique business strategy. Also regarding performance context, community organization commenters called for examiners to conduct “robust” analyses of local needs, including localized data on employment needs and opportunities for low- or moderate-income individuals. The Agencies will consider commenters' suggestions going forward.

Finally, one community organization commenter noted that activities that support technical assistance may not involve “financing” small businesses or small farms and, therefore, may not be consistent with the size test. Providing technical assistance on financial matters to small businesses is currently cited as an example of a community development service in Q&A § __.12(i)-3 and involves the provision of financial services. The Agencies long ago recognized that many small businesses, particularly start-up companies, are not immediately prepared for, or qualified to engage in, traditional bank financing and, therefore, included providing technical assistance to small businesses and small farms as a community development activity. However, the Agencies understand that reasoning may not be clear to examiners or financial institutions. To address this issue, the Agencies have amended the description of the “size test” in the final Q&A to explain that the term “financing” in this context is considered broadly and includes technical assistance that readies a business that meets the size eligibility standards to obtain financing. The Agencies intend this explanation to ensure that technical assistance that readies a small business or small farm to obtain financing is an activity that promotes economic development and, thus, would receive consideration as a community development activity.

ii. Revitalize or Stabilize Underserved Nonmetropolitan Middle-Income Geographies

The definition of “community development” includes “activities that revitalize or stabilize . . . underserved nonmetropolitan middle-income geographies . . . .”
See
12 CFR __.12(g)(4)(iii). The CRA regulations further provide that activities revitalize or stabilize underserved nonmetropolitan middle-income geographies if they help to meet essential community needs, including the needs of low- or moderate-income individuals.
See
12 CFR __.12(g)(4)(iii)(B). Existing Q&A § __.12(g)(4)(iii)-4 provided further guidance by listing examples of activities that would be considered to help to revitalize or stabilize underserved nonmetropolitan middle-income geographies. The Agencies proposed to revise this guidance by adding a new example describing an activity related to a new or rehabilitated communications infrastructure in recognition that the availability of reliable communications infrastructure, such as broadband Internet service, is important in helping to revitalize or stabilize underserved nonmetropolitan middle-income geographies.

The Agencies received 66 comments addressing the proposed addition of the new example involving communications infrastructure. Commenters' views on whether the new example should be added to Q&A § __.12(g)(4)(iii)-4 were mixed.

A number of commenters expressed concern regarding the addition of a new or rehabilitated communications infrastructure as an example of an activity that would be considered to revitalize or stabilize a nonmetropolitan middle-income geography. These commenters, primarily representing community organizations, generally expressed the view that CRA consideration should be used as a means of encouraging financial institutions to find more direct ways to meet the needs of low- or moderate-income individuals and geographies. One individual commenter that opposed the addition of the example expressed concern that “regulatory creep” was moving the focus of the CRA away from its original mission of helping to meet community credit needs.

In contrast, most industry commenters, as well as a few community organization commenters, supported the addition of the new example addressing communications infrastructure. These commenters stated that such an example would provide further clarity regarding what constitutes an activity that could revitalize or stabilize underserved nonmetropolitan middle-income geographies. Many commenters who supported the addition of the new example noted the importance of communications infrastructure, and in particular broadband access, to the economic viability of underserved nonmetropolitan middle-income geographies' residents and businesses in the current marketplace. Further, many of these commenters noted that the addition of the new example also may help to improve access to alternative systems of delivering retail banking services, which require reliable access to broadband.

The Agencies are adopting the new example describing a new or rehabilitated communications infrastructure because they continue to believe that, consistent with the CRA regulatory definition of “community development,” communications infrastructure is an essential community service. Specifically, the definition of “community development” provides that activities that help meet “essential community needs” revitalize and stabilize underserved nonmetropolitan middle-income geographies. Further, existing Q&A § __.12(g)(4)(iii)-4 clarifies that “financing for the construction, expansion, improvement, maintenance, or operation of essential infrastructure” may qualify for revitalization or stabilization consideration. As noted above, in the Agencies' view, reliable communications infrastructure is increasingly essential to the economic

viability of all residents of underserved nonmetropolitan middle-income geographies, including low- and moderate-income individuals.

Several industry and community organization commenters, as well as a commenter representing a state banking supervisor, sought clarification regarding the extent to which the new or rehabilitated communications infrastructure must benefit low- or moderate-income individuals or geographies. The Agencies considered whether to provide additional clarification addressing these comments and determined that additional guidance was not necessary. First, existing Q&A § __.12(g)(4)(iii)-4 states that, to receive CRA consideration on the basis of revitalizing or stabilizing an underserved nonmetropolitan middle-income geography, a project must meet essential community needs, including the needs of low- or moderate-income individuals. Although the geographies (a term defined at 12 CFR __.12(k) as census tracts) addressed by Q&A § __.12(g)(4)(iii)-4 are designated as middle-income, there typically are low- and moderate-income individuals and neighborhoods interspersed throughout these nonmetropolitan geographies.

Second, the CRA regulations
10

and Q&A § __.12(g)(4)(iii)-4 do not require that financial institutions demonstrate that projects primarily benefit the low- and moderate-income individuals or neighborhoods in these geographies in order to receive CRA consideration for revitalizing or stabilizing the underserved nonmetropolitan middle-income geographies. The Agencies believe that the current explanation in Q&A § __.12(g)(4)(iii)-4 is clear regarding the benefits to an underserved nonmetropolitan middle-income geography and the low- and moderate-income individuals within that geography.

10

See
12 CFR __.12(g)(4)(iii).

Two industry commenters and one community organization commenter requested that the proposed new example not be limited to Q&A § __.12(g)(4)(iii)-4, asserting that communications infrastructure should also be considered to be an activity that revitalizes or stabilizes distressed nonmetropolitan middle-income, and low- or moderate-income, geographies. One industry commenter stated that it should be made clear that investments in new or rehabilitated communications infrastructure, and not just loans related to such activities, would receive CRA consideration. In addition, a few commenters requested generally that the Agencies clarify that the list of examples included in Q&A § __.12(g)(4)(iii)-4 is not exhaustive.

In response to these comments, the Agencies are adopting a new Q&A § __.12(g)-4. This new Q&A explains that examples included throughout the Questions and Answers are not exhaustive; rather, the Agencies provide examples to illustrate the types of activities that may qualify for consideration under a particular provision of the regulations. Nonetheless, the Agencies emphasize that the examples that are expressly provided are not the only activities that might receive CRA consideration. In addition, new Q&A § __.12(g)-4 explains that financial institutions may receive consideration for a community development activity, such as a qualified investment, if it serves a similar community development purpose as an activity described in an example related to a different type of community development activity, such as a community development loan. If a financial institution can demonstrate that an activity it has undertaken has a primary purpose of community development and meets the relevant geographic requirements, that activity should receive CRA consideration.

The Agencies considered whether the example pertaining to a new or rehabilitated communications infrastructure should be added to any other Q&As, such as Q&A § __.12(g)(4)(iii)-3, but declined to add the example to any other Q&As. The Agencies believe that new Q&A § __.12(g)-4, described above, should provide guidance as to whether a new or rehabilitated communications infrastructure might receive CRA consideration in other contexts. The Agencies do not believe it is necessary to add the same example to any other Q&As.

Some industry and community organization commenters, as well as the U.S. Environmental Protection Agency (EPA), requested that the Agencies add additional examples of activities that qualify for consideration as activities that revitalize or stabilize underserved nonmetropolitan middle-income geographies. For example, the EPA suggested expanding Q&A § __.12(g)(4)(iii)-4 to address renewable energy facilities, which it posited could be considered “public services.” (As discussed below, loans to finance certain renewable energy facilities has been added to the examples of community development loans in Q&A § __.12(h)-1.) Consistent with the explanation in new Q&A § __.12(g)-4, if a financial institution were to submit information demonstrating that financing or investing in renewable energy facilities qualifies for CRA consideration under, for example, 12 CFR __.12(g)(4)(iii), or any of the other provisions within the definition of community development, then the financial institution would receive consideration for the activity. Therefore, the Agencies are not expressly adding a reference to renewable energy facilities to the list of examples in Q&A § __.12(g)(4)(iii)-4.

Other commenters suggested that loans enabling flood control measures should be considered as an example of a community development loan. Although these comments were offered as a suggestion for an example of a community development loan in connection with Q&A § __.12(h)-1, the Agencies believe that the commenters' suggestion of a new or rehabilitated flood control measure is another example of essential infrastructure that could qualify as an activity that revitalizes or stabilizes an underserved nonmetropolitan middle-income geography. As such, the Agencies have added the following new example in Q&A § __.12(g)(4)(iii)-4: “a new or rehabilitated flood control measure, such as a levee or storm drain, that serves the community, including low- and moderate-income residents.”

iii. Community Development Loans

The Agencies' CRA regulations define “community development loan” to mean a loan that has community development as its primary purpose.
See
12 CFR __.12(h). Existing Q&A § __.12(h)-1 provides examples of community development loans. The Agencies proposed to add a new example of loans to finance certain renewable energy or energy-efficient technologies. The proposed example was intended to clarify that such loans may be considered as community development loans when the renewable energy or energy-efficiency improvements help reduce operational costs and maintain the affordability of single-family or multifamily housing or community facilities that serve low- and moderate-income individuals.

The Agencies received 43 distinct comments and 917 form letters addressing the proposed example in Q&A § __.12(h)-1. Industry and community organization commenters, as well as commenters representing environmental organizations, generally supported adding the proposed example to the Q&A. However, a few community organization commenters expressed differing opinions regarding how the Agencies proposed to describe that an indirect benefit from renewable energy

improvements would be considered. A few community organization commenters believed that the benefit to low- or moderate-income households or geographies should be more clear and direct. These commenters asserted that loans financing renewable energy or energy-efficiency initiatives should be required to result in a demonstrable reduction in the operating or maintenance cost for affordable housing or community facilities serving low- or moderate-income individuals in order to qualify for CRA consideration as community development loans. In response to these comments, the Agencies agree that there should be a discernible benefit to the affordable housing or community facilities serving low- or moderate-income individuals. Thus, the Agencies have revised the example in Q&A § __.12(h)-1 to remove the reference to “indirect benefit.” However, to provide further clarification, the Agencies have added an example illustrating how renewable energy facilities could benefit low- or moderate-income individuals by reducing a tenant's utility cost or the cost of providing utilities to common areas in an affordable housing development.

In addition, a number of commenters representing the renewable energy industry asked the Agencies to consider renewable energy facilities that are not attached directly on the affordable housing or community services facility, explaining that this approach could be more efficient, technologically simpler, or less costly if a particular building site is not oriented to optimize renewable energy generation. In response to these comments, the Agencies have revised the example in the final Q&A to clarify that a renewable energy project may be located on-site or off-site. This clarification would apply, for example, to a community-scale or micro-grid renewable energy facility or solar panels placed on carports instead of being physically mounted on the main building, so long as the benefit from the energy generated is provided to an affordable housing project or a community facility that has a community development purpose. To demonstrate that activities related to a renewable energy facility or project have a primary purpose of community development, an institution may provide a copy of the contractual agreement, such as a lease, power purchase agreement, or energy service contract, that allocates energy or otherwise reduces energy cost to benefit affordable housing or a community facility that serves low- or moderate-income individuals.

The EPA suggested adding “revitalizing a contaminated property by installing renewable energy” to the list of examples of community development loans in the revision of Q&A § __.12(h)-1. A community development loan must have a primary purpose of community development (
see
Q&A § __.12(h)-8). The Agencies do not believe it is clear that revitalizing a contaminated property by installing renewable energy facilities would always have a primary purpose of community development, as defined in 12 CFR __.12(g). Therefore, the Agencies have not added this particular example.

Several renewable energy-related industry commenters discussed the job creation and job training aspects of installing renewable energy improvements and requested greater CRA consideration of the impact of jobs during the construction phase. The agencies note that Q&A § __.12(h)-5, in offering guidance on community development activities that revitalize or stabilize a low- or moderate-income geography, states that some activities provide only indirect or short-term benefits to low- or moderate-income individuals and, as such, do not receive CRA consideration. Construction jobs are used as an illustration of this type of short-term benefit. Consistent with this guidance, the Agencies do not believe that additional consideration should be given to short-term job creation related to the installation of renewable energy improvements benefitting affordable housing or a community facility that serves low- or moderate-income individuals and are not amending the Q&A as suggested by the commenters.

A few renewable energy-related industry commenters suggested that CRA consideration should be given for loans to low- or moderate-income homeowners to install renewable energy facilities or energy-efficient improvements. A loan to a homeowner for these purposes would be considered as a consumer loan or home mortgage loan. Under the existing regulation and guidance, these loans may be considered in an institution's CRA evaluation under the lending test relevant to the particular institution, so the Agencies have not made any additional revisions to the Questions and Answers in response to this comment.

One environmental organization suggested broadening the proposed language in Q&A § __.12(h)-1 to expressly cover energy efficiency improvements in schools. The Agencies believe that inclusion of this language in Q&A § __.12(h)-1 is unnecessary. A school that primarily serves low- or moderate- income students could be considered as a community facility, and a loan for energy efficiency improvements at that school would qualify as a community development loan, consistent with the example in the revised Q&A.

A number of community organization commenters suggested broadening the language in Q&A § __.12(h)-1 to include water conservation improvements. The Agencies agree that water conservation improvements can promote sustainable affordable housing or community facilities serving low- or moderate-income individuals by lowering operating costs and, accordingly, have modified the example to include water conservation. In addition, activities related to water conservation improvements may also qualify as having a different community development purpose if an institution were to maintain information demonstrating that the activity meets the applicable community development definition as explained in new Q&A § __.12(g)-4.

Although some commenters also suggested adding flood control improvements to the example in Q&A § __.12(h)-1, the Agencies concluded that financing for flood control improvements may more appropriately be considered as essential infrastructure addressing the need for revitalization and stabilization of underserved nonmetropolitan middle-income geographies.
See
Q&A § __.12(g)(4)(iii)-4.

The final paragraph of existing Q&A § __.12(h)-1 stated that the rehabilitation and construction of affordable housing or community facilities may include the abatement or remediation of environmental hazards, and provided lead-based paint as an example. The Agencies received many comments from community and environmental organizations suggesting the inclusion of more explicit enumeration of several additional examples of environmental hazards and have added to the example “asbestos, mold, or radon” as other examples of environmental hazards that may be abated or remediated as part of a rehabilitation or construction project.

One renewable energy-related industry commenter noted that the discussion in the preamble of the September 2014
Federal Register
notice addressing the proposed revision to Q&A § __.12(h)-1 may affect certain energy financing programs. The

Agencies reiterate that all loans considered in an institution's CRA evaluation, including loans that finance renewable energy or energy-efficient technologies, must be consistent with the safe and sound operation of the institution and should not include features that could compromise any lender's existing lien position.

The Agencies want to make clear that the addition of this example does not expand the definition of community development, but rather clarifies that consideration will be given for loans financing renewable energy facilities or energy-efficient improvements in affordable housing or community facilities that otherwise meet the existing definition of community development.

B. Lending Test—Innovative or Flexible Lending Practices

The CRA regulations provide that a financial institution's lending performance is evaluated by, among other things, an institution's “use of innovative or flexible lending practices in a safe and sound manner to address the credit needs of low- or moderate-income individuals or geographies.”
See
12 CFR __.22(b). Existing guidance contained in Q&A § __.22(b)(5)-1 provides two examples that illustrate the range of practices that examiners may consider when evaluating the innovativeness or flexibility of an institution's lending practices. The Agencies believed that the current guidance would benefit from additional examples of innovative or flexible lending practices and therefore, proposed to expand the list of examples.

First, the Agencies proposed to revise Q&A § __.22(b)(5)-1 to emphasize that an innovative or flexible lending practice is not required to obtain a specific rating, but rather is a qualitative consideration that, when present, can enhance a financial institution's CRA performance. Second, the Agencies proposed to explain that examiners will consider whether, and to what extent, the innovative or flexible practices augment the success and effectiveness of the institution's lending program. Third, the Agencies proposed two new examples of innovative or flexible lending practices. The first example described small dollar loan programs as an innovative or flexible practice when such loans are made in a safe and sound manner with reasonable terms, and are offered in conjunction with outreach initiatives that include financial literacy or a savings component. A small dollar loan program currently receives consideration under the lending test and, therefore, the guidance already acknowledges these programs as a type of lending activity that is likely to be responsive in helping to meet the credit needs of many communities.
See
Q&A § __.22(a)-1. However, the Agencies believed that outreach initiatives offered in conjunction with small dollar loan programs improve the success of those affiliated lending programs in meeting the credit needs of low- and moderate-income individuals and communities and, therefore, merit qualitative consideration as an example of an innovative or flexible lending practice.

The second example proposed by the Agencies described mortgage or consumer lending programs that utilize alternative credit histories in a manner that would benefit low- or moderate-income individuals. The Agencies believed that considering alternative credit histories to supplement conventional trade line information with additional information about the borrower, such as rent and utility payments, could provide some additional creditworthy low- or moderate-income individuals an opportunity to gain access to credit, consistent with safe and sound underwriting practices. The Agencies also solicited comment on whether the proposed guidance was sufficient to encourage institutions to design more innovative and flexible lending programs that are responsive to community needs; whether the benefits of using alternative credit histories outweighed any concerns; and if this additional guidance would better enable examiners and institutions to identify those cases in which alternative credit histories benefit low- or moderate-income individuals.

The Agencies received 87 comments addressing the proposed revisions and the three related questions the Agencies posed for comment. Because commenters' more general observations also addressed the three questions, their responses to the questions are integrated into the broader discussion of the comments received by the Agencies.

Most commenters were supportive of the Agencies' intent to clarify how examiners evaluate an institution's innovative or flexible lending practices. However, several commenters representing both the banking industry and community organizations expressed some concerns about the revisions, as discussed more fully below.

A few industry commenters asked the Agencies to further clarify that innovative activities, such as small dollar lending programs and alternative credit histories, are not required to obtain a specific CRA rating, and had concerns despite the revision proposed by the Agencies intended to address this issue. The Agencies have revised the introductory paragraph of the final Q&A to make clearer that innovative or flexible lending practices are not required to obtain a specific CRA rating. In addition, the final Q&A is revised to cross-reference Q&A § __.28-1, which explains how innovativeness is considered in the rating process. Current Q&A § __.28-1 explicitly states, among other things, that the lack of innovative lending practices will not result in a “Needs to Improve” CRA rating. Rather, the guidance notes that the use of innovative lending practices may augment the consideration given to an institution's performance under the quantitative criteria, resulting in a higher performance rating.

One industry commenter addressed the Agencies' proposed language stating that examiners will consider whether, and the extent to which, innovative or flexible practices augment the success and effectiveness of an institution's lending program. This commenter questioned whether the proposed guidance would be sufficient to help examiners or bankers understand and identify innovative or flexible lending activities since examiner discretion determines what is considered “innovative” or “flexible.” The Agencies recognize that the terms “innovative” and “flexible” are qualitative in nature and, thus, examiner judgment is needed to assess the unique characteristics and differences in an institution's lending programs. However, the Agencies believe additional guidance concerning what constitutes an innovative activity would be helpful to the review process undertaken by examiners. Bankers and examiners may also find additional guidance in new Q&A § __.21(a)-4, discussed in further detail below, which explains, among other things, that “innovative activities are especially meaningful when they emphasize serving, for example, low- or moderate-income consumers or distressed or underserved nonmetropolitan middle-income geographies in new or more effective ways.” Although examiner judgment and discretion remain in determining what lending practices are deemed innovative or flexible, the Agencies believe the additional guidance in Q&A § __.21(a)-4 provides further clarification on when an activity should be considered innovative or flexible.

Most commenters addressing proposed Q&A § __.22(b)(5)-1 commented on the two examples proposed by the Agencies. Concerning the small dollar loan example, most

community organization commenters recognized that such programs could be a feasible alternative to higher-cost loans offered by payday lenders. Industry commenters were also supportive of small dollar lending programs. For example, one industry commenter stated that small dollar loans are a path for a bank's clients with thin credit files or a lack of credit history to build or establish a credit score. Nevertheless, some community organization commenters expressed concern that the proposed example on small dollar loans did not make reference to any consumer protection standards.

In particular, one state agency expressed concern that the small dollar loan example did not sufficiently emphasize consumer protection and the safety and soundness aspects of individual small dollar loans. This commenter suggested that the Agencies consider adding the phrase “based on a borrower's ability to repay” to the small dollar loan example because it would emphasize that small dollar loans made in a safe and sound manner are evaluated with respect to individual loans and not the entire portfolio. Similarly, several community organization commenters asked that the Agencies give CRA consideration for small dollar loan programs only if the loans are safe and sound alternatives to high-cost predatory programs.

In response to these comments, the Agencies are adopting the small dollar loan program example largely as proposed with a revision to ensure consistency with Q&A § __.22(a)-1.

Finally, one industry commenter requested that the Agencies clarify the term “reasonable terms” in the context of small dollar lending programs. This commenter expressed concern that “reasonable terms” was undefined and, thus, would add confusion as to what would receive CRA consideration. The Agencies note that whether a lending program has “reasonable terms” would depend on the facts and circumstances and, therefore, defining the term would not be practicable.

Most community organization commenters were supportive of the proposed new example addressing consideration of alternative credit histories as an innovative or flexible lending practice. Several community organization commenters, however, expressed concern over the risk of using certain alternative data sources, such as social media, checking account history, voter registration records, and criminal convictions, to establish credit history. According to these commenters, such data sources provide no predictive value, but could have a disproportionately negative impact on low- or moderate-income individuals and people of color. These commenters suggested that the Agencies clarify the types of data sources that should be used in alternative credit history reports that could be considered innovative, but that would not have a negative impact on low- or moderate-income individuals.

Industry commenters were also supportive of the proposed example concerning alternative credit histories. A few industry commenters acknowledged that the use of alternative credit histories could be effective in expanding access to credit to low- or moderate-income individuals. However, these industry commenters believed that access to credit should be balanced against safety and soundness considerations. These industry commenters urged the Agencies to work closely with each other to provide a consistent message regarding the activities that could be innovative and flexible while ensuring delivery in a safe and sound manner.

The Agencies are finalizing the example addressing consideration of alternative credit histories largely as proposed with clarifying revisions based on comments received. The Agencies agree with commenters that certain data sources provide little or no predictive value. Hence, the Agencies intend to consider an institution's use of alternative credit histories that are consistent with safe and sound banking practices and that would benefit
otherwise creditworthy
low- or moderate-income individuals who would otherwise be denied credit. Individuals that may benefit from such programs are those who may not qualify for credit based on the use of conventional credit bureau reports because they have little, or no, reportable credit history with the national credit bureaus (hence a credit denial due to a low, or no, credit score with the national credit bureaus), but have a timely and consistent record of paying obligations (such as rent and utility bills). The Agencies believe that the use of alternative credit histories to supplement (not substitute for) the institution's traditional underwriting programs, may open opportunities to some creditworthy low- or moderate-income individuals to gain access to credit. Accordingly, the Agencies have modified the example to clarify that alternative credit histories should be used to evaluate low- or moderate-income individuals who lack sufficient conventional credit histories and who would be denied credit based on the institution's traditional underwriting standards. Further, when such a program is used to demonstrate that consumers have a timely and consistent record of paying their obligations, the program may be considered an innovative or flexible practice that augments the success and effectiveness of the lending program. The Agencies note that, similar to the small dollar loan program example and the other examples in this Q&A, the use of alternative credit histories as an innovative or flexible lending practice is not required for the financial institution to obtain a specific CRA rating.
See
Q&A § __.28-1.

Finally, the Agencies revised the introductory paragraph of this Q&A to make clear that, although many financial institutions have used innovative or flexible lending practices, such as a small dollar loan program or consideration of alternative credit histories, to customize loans to their customers' specific needs in a safe and sound manner and consistent with statutes, regulations, and guidance, such practices are not required to obtain a specific CRA rating. Further, the CRA regulations provide that a financial institution is not required to make loans or investments or to provide services that are inconsistent with safe and sound operations. Financial institutions are permitted and encouraged to develop and apply flexible underwriting standards for loans that benefit low- or moderate-income geographies or individuals only if consistent with safe and sound operations.
See
12 CFR __.21(d).

C. Service Test

i. Availability and Effectiveness of Retail Banking Services

The CRA regulations provide that the Agencies evaluate the availability and effectiveness of a financial institution's systems for delivering retail banking services under the service test pursuant to four criteria: (1) The current distribution of the institution's branches among low-, moderate-, middle-, and upper-income geographies; (2) the institution's record of opening and closing branches, particularly those located in low- or moderate-income geographies or primarily serving low- or moderate-income individuals; (3) the availability and effectiveness of alternative systems for delivering retail banking services in low- and moderate-income geographies and to low- and moderate-income individuals; and (4) the range of services provided in low-, moderate-, middle-, and upper-income geographies and the degree to which the

services are tailored to meet the needs of those geographies.

The Agencies proposed to revise current Q&A § __.24(d)-1, which addresses how examiners should evaluate the availability and effectiveness of an institution's systems for delivering retail banking services. Specifically, the Agencies proposed to delete the statements that “performance standards place primary emphasis on full-service branches” and that alternative delivery systems are considered “only to the extent” that they are effective alternatives in providing needed services to low- or moderate-income geographies and individuals. The proposal was intended to encourage broader availability of alternative delivery systems to low- or moderate-income geographies and individuals without diminishing the value full-service branches offer to communities.

The Agencies received 41 comments on proposed revisions to Q&A § __.24(d)-1. Nearly all of the industry commenters supported the revision, including commenters that stressed the continued importance of branches to the communities they serve. Some industry commenters, however, voiced concern about how the Agencies would implement the revision and asked for further clarification on how examiners would weigh branches and alternative delivery systems and utilize performance context considerations in rating the different delivery systems' performance under the service test. In contrast, almost all community organization commenters opposed the proposed revisions, asserting that branches continue to be uniquely important to low- and moderate-income neighborhoods and individuals, elderly customers, and local businesses. Many of these community organization commenters highlighted the importance of face-to-face contact in order to overcome language barriers and effectively provide essential financial services, such as opening accounts, applying for loans, and explaining terms and conditions. These commenters believed the proposed changes regarding how examiners should weigh branches and alternative delivery systems would result in more branches being closed. Moreover, these commenters stated that the proposed revisions to Q&A § __.24(d)-1 would not resolve the CRA regulations' outdated definition of assessment area.

In consideration of the comments received, the Agencies are withdrawing the proposed revisions to Q&A § __.24(d)-1 to avoid the unintended inference that branches are less important in providing financial services to low- and moderate-income geographies. However, the Agencies are making a minor revision to the Q&A to remove references to automated teller machines (“ATMs”) as the only example of alternative delivery systems to acknowledge that many other alternative delivery channels are utilized by financial institutions. The Agencies note that other Q&As being finalized in this document provide additional guidance on how examiners will evaluate criteria under the retail service test to ensure that appropriate consideration is given to branches, alternative delivery systems, and financial services tailored to meet the needs of low- and moderate-income individuals or geographies.
See
Q&As § __.24(d)(3)-1 and § __.24(d)(4)-1.

ii. Alternative Systems for Delivering Retail Banking Services

The Agencies proposed to revise Q&A § __.24(d)(3)-1, which addresses how examiners evaluate the availability and effectiveness of alternative delivery systems in the context of the retail service test. The proposed revisions were responsive to suggestions that the Agencies update the guidance to reflect technological advances used to deliver retail banking services by: (1) Adding examples of such technologically advanced systems, even though the examples were not, and are not, intended to limit consideration of new methods as technology evolves; and (2) providing additional guidance on how examiners will evaluate the availability and effectiveness of alternative delivery systems.

Proposed Q&A § __.24(d)(3)-1 identified additional factors that examiners may consider when evaluating whether a financial institution's alternative delivery systems are available and effective in delivering retail banking services in low- and moderate-income geographies and to low- and moderate-income individuals. These proposed factors included: (1) Ease of access, whether physical or virtual; (2) cost to consumers, as compared to other delivery systems; (3) range of services delivered; (4) ease of use; (5) rate of adoption; and (6) reliability of the system. The proposed Q&A further explained that examiners will consider any information an institution maintains and provides to examiners to demonstrate that the institution's alternative delivery systems are available to, and used by, low- and moderate-income individuals, such as data on customer usage or transactions.

The Agencies received 41 comments on the proposed Q&A § __.24(d)(3)-1. Commenters generally believed the proposed factors were reasonable and sufficiently flexible. Community organization commenters emphasized the importance of determining whether alternative services and products were not just offered, but adopted and used consistently by consumers. These commenters suggested that the cost of products is most relevant in the consideration of whether an alternative delivery system is available to, and used by, low- and moderate-income individuals.

Some community organization commenters suggested that the Agencies refrain from placing too much emphasis on alternative delivery systems until usage data can be accessed and used by the public to independently monitor the industry's performance. Furthermore, these commenters suggested that the Agencies clarify that financial institutions will
not
receive CRA consideration for serving low- or moderate-income individuals or areas outside of their assessment areas using online or mobile technology. Conversely, industry commenters focused on the difficulty of evaluating the availability and effectiveness of services based on the income of the recipient because such information is collected only in the context of a loan application.

The Agencies specifically sought comment on whether the factors proposed were sufficiently flexible to be used by examiners as the financial services marketplace evolves, and if other factors should be included. Commenters that addressed this question were largely supportive. Industry commenters indicated that the factors were sufficiently flexible, but noted that additional guidance was needed regarding the use of proxies for income and how the criteria would be weighted. Community organization commenters were also generally supportive of the proposed factors but offered suggestions on how to implement them.

One industry commenter opposed the proposed factor that would evaluate the comparative cost of alternative delivery systems to the consumer because it would give examiners broad discretion when evaluating the pricing of banking services. Other industry commenters suggested that the Agencies provide more clarity regarding how the factors would be weighted. Yet another industry commenter suggested that the Agencies clearly specify that the list of factors is not intended to be exhaustive and requested that the guidance clearly state that there is no regulatory requirement to provide banking services

at a reduced cost. Finally, another industry commenter suggested that consideration should be given to the continuum of access channels that an institution provides, rather than comparing services within delivery channels. This commenter further stated that financial institutions providing a full range of access channels should receive greater consideration than mono-line or limited-channel institutions.

Community organization commenters focused on the importance of evaluating the actual impact of financial services on low- and moderate-income communities. These commenters suggested evaluating the sustainability of accounts opened, the range of services offered through alternative delivery systems, and the degree to which they are tailored to meet the needs of low- or moderate-income individuals. In addition, some community organization commenters suggested that the Agencies provide additional explanation on the “ease of access” factor to include consideration of language access, disability accommodation, and ability to use a system with alternative forms of identification.

One commenter, a public policy organization, supported the proposed factors, but suggested that they be applied to determine the effectiveness of branches as well as alternative delivery systems. This commenter stated that high-cost or inconvenient branches are no more beneficial than poorly utilized alternative delivery platforms, and asserted that the Agencies' objective should be to encourage high-quality service delivery through both branches and alternative channels. This commenter also stated that the use of intermediaries, such as community-based organizations that provide face-to-face interaction with customers, should be considered as an effective substitute for branch activity.

In general, the commenters agreed that the factors proposed are reasonable and sufficiently flexible. The Agencies are finalizing the proposed factors in final Q&A § __.24(d)(3)-1 largely as proposed, but with two modifications. First, to address commenters' concern that availability of alternative delivery systems alone does not demonstrate a system's responsiveness to community needs, the Agencies have revised the factor regarding the rate of adoption to read “the rate of adoption
and use”
(emphasis added). Second, the Agencies clarified the language regarding the cost to consumers as compared with
the bank's
other delivery systems, as discussed more fully below.

The Agencies did not include additional explanation to the “ease of access” factor, as suggested by some commenters, but note that evaluation of “ease of access” could include consideration of language access, disability accommodation, and the ability to use a system with alternative forms of identification. Similarly, the Agencies did not revise the final Q&A to address how the various factors will be weighted since the availability and applicability of information regarding each factor will vary depending on the type of delivery system under consideration and the performance context of the institution. The factors cited in the final Q&A are examples of information that is relevant to the evaluation of whether alternative delivery systems are available and effective, and they are meant to be flexible.

The Agencies did not revise the guidance to address the comment suggesting that the proposed measures of availability and effectiveness of alternative delivery systems should be made applicable to branches and third-party service providers. The Agencies share the commenter's view that financial institutions should provide high-quality service delivery overall; however, the measures of availability and effectiveness in Q&A § __.24(d)(3)-1 were designed to evaluate alternative delivery systems. As provided in the Interagency CRA Examination Procedures, examiners assess the quantity, quality, and accessibility of the financial institution's service delivery systems provided in low-, moderate-, middle-, and upper-income geographies. Examiners also consider the degree to which services are tailored to the convenience and needs of each geography (
e.g.,
extended business hours, including weekends, evenings, or by appointment, providing bilingual services in specific geographies, etc.).

The second question on which the Agencies requested comment asked about the types of information routinely maintained by financial institutions that would be useful to demonstrate the availability and effectiveness of its alternative delivery systems to low- or moderate-income individuals. One industry commenter described the data that it has begun to collect and retain to comprehensively assess all delivery systems, including customer complaint metrics, cost of delivery (including third-party costs), new account/product volume, account/product closure volume, current accounts/product volume, and Service Level Agreements metrics (uptime/downtime). Other industry commenters stated that financial institutions do not collect income information from customers and most suggested that the income level of the census tract where the customer resides is the best available proxy for income. Another industry commenter counseled against any effort to collect income information when opening deposit accounts, asserting that opening a bank account needs to be as simple as possible to increase access to banking services. This commenter believed that the more questions a financial institution asks, the fewer people would finish the process and, more importantly, that income information collected in this way would quickly become stale and statistically invalid.

One industry commenter suggested that some financial institutions may maintain information, such as internal operations reports, industry rankings, and customer surveys, that would be helpful in understanding their performance context, but, since the types of information that institutions maintain vary widely, such information would be difficult to use for anything other than context. A community organization commenter suggested that examiners evaluate the frequency of transactions, adoption and attrition rates, as well as any geographic and income data available.

Two commenters addressed the information available regarding the reliability of alternative delivery systems. The first, representing a community organization, suggested that examiners evaluate the alternative delivery systems' ability to handle peak transaction volumes, the frequency of system crashes, the number of service shut downs for system maintenance, and the information security of systems. The other comment, from a financial institution, suggested that the Agencies provide specific guidance on, and examples of, the types of information that might be relevant to the evaluation of a system's reliability.

The comment letters indicated that the types of information collected and maintained by financial institutions that would be relevant to an evaluation of the availability and effectiveness of alternative delivery systems vary widely. The Agencies, therefore, are retaining the proposed language stating that examiners will consider any information that an institution maintains and provides to demonstrate the availability and effectiveness of its alternative delivery systems to low- or moderate-income individuals.

Third, the Agencies asked what other sources of data and quantitative information examiners could use to

evaluate the proposed factors and whether financial institutions have such data readily available for examiners to review. One industry trade association commenter suggested that market studies be used to determine alternative delivery systems' usage because income data is not available. Another industry commenter suggested that the interagency examination procedures be modified to require that examiners gather cost data from advertisements, brochures, online product lists, and similar sources to compare service costs across banks and within broad geographic areas. This commenter also suggested that examiners should gather information from the community regarding the cost of services locally in the course of examinations.

A community organization commenter noted the lack of useful data regarding the actual geographic location of a person or business holding deposits and suggested that the Summary of Deposits
11

information collected by the FDIC be improved to provide better data regarding depositor location. Another community organization commenter suggested that examiners evaluate punitive fees, prohibitive minimum balances, and narrow risk assessments associated with bank products. A third community organization commenter suggested that examiners refer to online sources to provide cost comparisons of products across providers. This commenter also suggested that examiners consider a comparison of costs relative to other banks in the assessment area and the industry overall. Still another community commenter focused on how prepaid cards could be evaluated for effectiveness, suggesting that examiners evaluate whether the cardholder's credit score had improved as a measure of whether the card helped accountholders save money, build credit, and improve financial literacy. This commenter also suggested that income could be estimated from direct deposits of employment checks.

11
The Summary of Deposits (SOD) is the annual survey of branch office deposits as of June 30 for all FDIC-insured institutions, including insured U.S. branches of foreign banks. This survey has been conducted since 1934. Instructions, survey results, market share reports, contact information, and survey facsimiles are available through the FDIC's Summary of Deposits Web site at
https://www2.fdic.gov/sod/
.

The Agencies found these comments helpful in thinking about the types of information that may be useful in evaluating the availability and effectiveness of alternative delivery systems. Moreover, the Agencies noted that the comments, particularly those related to determining the relative cost of alternative delivery systems, suggest that the distinction between delivery systems and financial products is not clear. For example, many commenters focused on how the costs of financial products tailored to meet the needs of low- and moderate-income customers, such as prepaid cards and low-cost checking accounts, should be evaluated, rather than addressing information that could be used to determine the relative costs of delivery systems, such as usage or access fees for online accounts and mobile banking platforms.

In order to more clearly distinguish between delivery systems and financial products tailored to meet the needs of low- or moderate-income individuals, the Agencies have revised Q&A § __.12(i)-3, which lists examples of community development services, to remove from that list any examples of retail banking services that are tailored to meet the needs of low- or moderate-income individuals. This revised Q&A is discussed more fully below under III.A.i. However, these examples of retail services will continue to be given consideration under the service test as provided pursuant to 12 CFR __.24(d)(4).

The Agencies have also added a new Q&A § __.24(d)(4)-1 addressing how examiners evaluate whether retail services are tailored to meet the needs of geographies of different income levels. The Agencies are adopting Q&A § __.24(d)(4)-1 in response to the many comments received regarding how examiners evaluate alternative delivery systems. Many of these commenters indicated that some confusion exists in distinguishing alternative delivery systems from financial products that are tailored to meet the needs of low- or moderate-income geographies and individuals. The Agencies believe that this new guidance makes clear that, in addition to evaluating the range of services provided in geographies of different incomes, examiners will also review any other information provided by the institution to demonstrate that its services are tailored to meet the needs of its customers in the various geographies of its assessment area(s). The final guidance further explains that this information may include data regarding the costs and features of loan and deposit products, account usage and retention, geographic location of accountholders, the availability of information in languages other than English, and any other relevant information maintained by the institution.

Fourth, the Agencies asked whether examiners should evaluate the cost of alternative delivery systems to consumers as compared with other delivery systems, as well as the range of services delivered relative to other delivery systems, (i) offered by the institution, (ii) offered by institutions within the institution's assessment area(s), or (iii) offered by the banking industry generally. Two industry commenters stated that an evaluation of the cost to consumers compared to other delivery systems is best evaluated within the specific context of each financial institution. One of these commenters suggested that it would be unreasonably burdensome to expect an institution to survey and monitor costs related to other institutions' delivery systems. One industry commenter suggested that it would be preferable to evaluate the cost to consumers within each assessment area, recognizing that examiners are required to reach a conclusion on a financial institution's performance in each of its assessment areas. One community organization commenter stated that the cost to consumers of a particular delivery system should not be considered along with other factors, such as the rate of adoption and sustained use. Another community organization commenter asserted that examiners should consider the total cost of products because fees are a primary factor preventing households from obtaining bank products and retaining banking relationships.

After reviewing the comments received in response to this question, the Agencies agree that it would be most appropriate to compare the costs of a financial institution's alternative delivery systems with its other delivery systems because of significant differences in size, capacity, and business strategy among institutions. As a result, the Agencies have revised the final Q&A to clarify that costs of alternative delivery systems will be compared to the financial institution's other delivery systems.

Lastly, the Agencies asked whether the proposed revisions adequately address changes in the way financial institutions deliver products in the context of assessment area(s) based on the location of a financial institution's branches and deposit-taking ATMs. While most commenters noted that the proposed Q&A offered helpful guidance on how examiners would evaluate the availability and effectiveness of alternative delivery systems, they also observed that the proposed guidance did not adequately address the trend in the financial services industry toward non-branch delivery systems and its impact on financial institutions'

performance within their branch-based assessment areas. Similarly, one industry commenter and one community organization commenter noted that the Agencies should clarify that the evaluation of alternative delivery systems is conducted strictly within the assessment areas defined by branches and emphasize that CRA evaluations do not consider alternative delivery systems outside of an institution's assessment area. Currently, the regulations provide for consideration of alternative delivery systems to the extent that they meet the needs of low- and moderate-income individuals within an institution's assessment area.

III. New Questions and Answers Proposed in 2014

A. Community Development Services

i. Evaluating Retail Banking and Community Development Services

The Agencies proposed a new Q&A § __.24(a)-1 to clarify how examiners evaluate retail and community development services under the large institution service test to improve consistency and reduce uncertainty regarding the performance criteria in the service test, and to encourage additional community development services.

For retail banking services, the proposed new Q&A stated that “examiners consider the availability and effectiveness of an institution's systems for delivering banking services, particularly in low- and moderate-income geographies and to low- and moderate-income individuals; the range of services provided in low-, moderate-, middle-, and upper-income geographies; and the degree to which the services are tailored to meet the needs of those geographies.” With regard to community development services, the proposed Q&A stated that examiners would consider the extent of community development services offered.

The proposed Q&A sought to differentiate retail services that are also considered community development services under existing Q&A § __.12(i)-3 (such as low-cost banking accounts targeted to low- or moderate-income individuals) from other retail banking services by stating that examiners would consider whether these retail banking services are responsive and effective in that they “improve or increase access to financial services by low- and moderate-income individuals or in low- or moderate-income geographies.” In addition, the proposed Q&A stated that examiners will consider any information provided by the institution that demonstrates community development services are responsive to those needs in order to address concerns that examiners have refused to consider certain types of documentation.

The Agencies solicited comment on all aspects of this proposed new Q&A and specifically requested commenters' views on two questions, as discussed below. The Agencies received 26 comments that were generally supportive of the intent of the Q&A; however, most of these commenters did not believe that the proposed Q&A would achieve its stated purpose. A number of commenters asserted that the proposal did not elevate the relative importance of community development services compared to retail banking services as the Agencies had intended.

The Agencies specifically requested comment on whether the proposed guidance provided sufficient clarity regarding how examiners evaluate retail and community development services under the large institution service test and if not, suggestions that would make the Q&A clearer. Community organization and industry commenters responded generally that the proposed Q&A did not clarify how retail services that benefit low- and moderate-income individuals or geographies and that are described as community development services under existing Q&A § __.12(i)-3 (such as low-cost transaction accounts and electronic benefit transfer accounts) are evaluated. Rather, at least one commenter believed the proposed Q&A exacerbated the confusion that currently exists. One community organization commenter contended that the Agencies incorrectly labelled low-cost transaction and savings accounts as community development services, rather than as retail banking services. This sentiment was shared by a few other commenters who asserted that basic transaction savings and checking accounts should be considered retail banking services. Commenters noted that, under existing guidance, these services could be classified as either retail banking or community development services.

These commenters and others urged the Agencies to more clearly demarcate the boundaries between retail banking services and community development services in the Questions and Answers. They requested that the Agencies provide specific examples or additional explanation that more clearly identifies which products and services will be evaluated under the retail banking services criteria and which will be considered as community development services.

In reviewing the comments, the Agencies noted that much of the confusion surrounding the distinction between retail banking services and community development services can be traced to the inclusion of retail services or products that are tailored to meet the needs of low- or moderate-income individuals in existing Q&A § __.12(i)-3, which lists examples of community development services. Of the 11 examples of community development services listed in Q&A § __.12(i)-3, five are related to branch delivery systems and retail products or services. They involve: (i) providing financial services to low- or moderate-income individuals through branches and other facilities located in low- or moderate-income geographies; (ii) 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; (iii) providing electronic benefits transfer and point of sale terminal systems; (iv) providing international remittance services; and (v) providing other financial services with the primary purpose of community development, such as low-cost savings or checking accounts, including electronic transfer accounts, individual development accounts, or free or low-cost government, payroll, or other check cashing services.

The Agencies have revised Q&A § __.24(a)-1 in response to these comments. The final Q&A incorporates, as examples, most of the retail banking services currently listed as community development services under Q&A § __.12(i)-3. These examples demonstrate retail banking services that improve access to financial services, or decrease costs, for low- or moderate-income individuals. The examples include: low-cost deposit accounts; electronic benefit transfer accounts and point of sale systems; individual development accounts; free or low-cost government, payroll, or other check cashing services; and reasonably priced international remittance services.

In turn, as mentioned above, the Agencies have deleted all of the retail banking services from the list of examples of community development services in Q&A § __.12(i)-3. This conforming change is intended to address commenters' concerns that including examples of retail banking services, even when such services increase access by, or reduce costs for, low- or moderate-income individuals or geographies, in the list of examples for

community development services leads to confusion and inconsistencies regarding how retail services are considered during the evaluation process.

The Agencies are also adopting conforming revisions to existing Q&A § __.26(c)(3)-1 to ensure these activities are appropriately evaluated in intermediate small institutions. This Q&A addresses what activities examiners consider when evaluating the provision of community development services by an intermediate small institution. To ensure that intermediate small institutions continue to receive consideration under their community development test for retail banking services that increase access by, or reduce costs for, low- or moderate-income individuals, the Agencies are revising existing Q&A § __.26(c)(3)-1. Although the revised Q&A labels services such as electronic benefit transfer accounts, individual development accounts, and free or low-cost government, payroll, or other check cashing services as retail services, examiners will continue to consider these services when evaluating the provision of community development services for an intermediate small institution when the services increase access by, or reduce costs for, low- or moderate-income individuals. This Q&A is revised to clarify also that branches and other facilities in low- or moderate-income geographies, designated disaster areas, or distressed or underserved nonmetropolitan middle-income geographies are considered as providing community development services under the community development test applicable to intermediate small institutions.

The Agencies made one additional revision based on these comments. Because all of the examples of community development services that now remain in revised Q&A § __.12(i)-3 are more direct examples of community development services, the Agencies added a cross-reference to Q&A § __.12(i)-3 in the discussion of community development services in new Q&A § __.24(a)-1.

In addition to addressing the confusion between retail and community development services, some commenters asserted that proposed Q&A § __.24(a)-1 did not adequately emphasize the importance of community development services or address concerns that community development services are not given sufficient consideration in the service test relative to retail banking services. A few commenters contended that it remained unclear how the Agencies planned to weigh the relative importance of retail banking and community development services under the service test pursuant to the proposed Q&A. For instance, one industry commenter urged the Agencies to state that community development services will be reflected in the total “score” that is attributed to the service test. Other commenters noted that the Agencies appear to give more consideration to branches than other services when evaluating a large institution's service test performance.

In response to these comments, the Agencies have revised Q&A § __.24(a)-1 to stress that both retail banking and community development services are important factors under the large institution service test. The revision to the Q&A now states: “Retail banking services and community development services are two components of the service test and are both important in evaluating a large institution's performance.” The Agencies note that, as with other aspects of the CRA evaluation process, the relative weighting of retail banking and community development services will depend on the financial institution's performance context.

Several commenters asserted that the proposed Q&A did not sufficiently explain how qualitative factors, such as “effectiveness” and “availability,” would be evaluated in the context of retail banking and community development services. These commenters urged the Agencies to provide more specificity by defining key terms or providing concrete examples of the metrics for the key concepts of “availability and effectiveness” and “responsiveness.” The Agencies did not revise Q&A § __.24(a)-1 to address the qualitative factors associated with retail banking and community development services because the Agencies believe other Q&As adequately discuss what is meant by “availability and effectiveness” and “responsiveness.” See Q&As § __.24(d)-1 and § __.21(a)-3, respectively.

The proposed Q&A stated that examiners will consider any information provided by the institution that demonstrates its community development services are responsive to the needs of low- or moderate-income individuals and low- or moderate-income geographies. Industry commenters were particularly supportive of this proposal. These commenters opined that examiners often impose excessive and unreasonable documentation requirements on institutions to demonstrate that particular products and services offered are responsive to community needs. A few industry and community organization commenters, however, sought further clarification regarding the types of information that would be considered to ensure consistency.

The Agencies specifically requested comment on what types of information financial institutions are likely to maintain that may demonstrate that an institution's community development services are responsive to the needs of low- or moderate-income individuals or in low- or moderate-income geographies. In response to this question, both community organization and industry commenters provided several examples of the types of information that are or should be maintained to demonstrate such responsiveness, including: (i) Documentation evidencing attendance at and involvement in applicable community events; (ii) surveys completed by the financial institution to ascertain community needs; (iii) an institution's records of discussions with community contacts; and (iv) publicly available market research data that support the importance to low- or moderate-income families for a particular type of service, such as financial literacy education services or Volunteer Income Tax Assistance (VITA) tax preparation. Some commenters suggested that the examples would be useful and effective additions to the final Q&A.

The examples offered by commenters are practical suggestions of the types of information institutions could collect or maintain to demonstrate the responsiveness of a community development service. However, the Agencies have chosen not to include the above suggested examples in the final Q&A because some examiners and bankers may view examples as requirements, which could lead to unintended burden on financial institutions. The Agencies remind institutions that they can provide any information to examiners that demonstrates responsiveness.

One community organization commenter opined that community development services are currently defined too narrowly and urged the Agencies to broaden the definition of community development services to include access for small businesses. This commenter contended that financial institutions should receive CRA consideration when loan officers refer a small business applicant to an intermediary when the applicant does not qualify for a bank loan. The Agencies note that Q&A § __.12(i)-3

already addresses bank referral programs for small businesses and provides that they may qualify for community development service consideration when the financial institution “[provides] 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.”

Finally, to reflect more closely the regulatory factors used to evaluate community development services, the Agencies have revised final Q&A § __.24(a)-1 to state clearly that examiners evaluate the extent of community development services and their innovativeness and responsiveness to community needs.

ii. Quantitative and Qualitative Measures of Community Development Services

The Agencies proposed new Q&A § __.24(e)-2 to clarify how community development services are quantitatively and qualitatively evaluated. The new Q&A is meant to address inconsistencies in how community development services have been evaluated quantitatively and to respond to concerns that qualitative factors, such as whether community development services are effective or responsive to community needs, receive inadequate consideration. Thus, the proposed Q&A noted that both quantitative and qualitative aspects of community development services are considered during an institution's evaluation.

With regard to quantitative factors, the proposed Q&A stated that examiners assess the extent to which community development services are offered and used by the community. This review is not limited to a single quantitative factor, such as the number of hours that financial institution staff devotes to a particular community development service. Rather, an evaluation of community development services assesses the degree to which those services are responsive to community needs. Finally, the proposed Q&A stated that examiners would consider any relevant information provided by the institution and from third parties to quantify the extent and responsiveness of community development services.

Overall, the Agencies received 19 comments addressing this proposed Q&A. Commenters unanimously supported the Agencies' intent to clarify the quantitative and qualitative factors that examiners review when evaluating community development services to determine whether these services are effective and responsive. However, commenters disagreed on whether the proposed Q&A fully achieved its stated goal of clarifying the assessment of qualitative and quantitative factors or explaining the importance of qualitative factors.

The Agencies specifically requested feedback on whether the proposed guidance sufficiently explained the importance of the qualitative factors related to community development services. Commenters addressing this question were divided, with a slight majority stating the proposed Q&A sufficiently explained the importance of the qualitative factors related to community development services. For example, one community organization commenter found the guidance on examiners taking into consideration the degree to which community development services are responsive to community needs helpful. Other commenters, representing both the industry and community organizations, noted that clarifying that examiners should not rely solely on quantitative factors, such as hours spent by employees conducting financial literacy workshops, was adequate guidance and would help give examiners needed direction to consider other factors besides hours worked when making evaluations of community development services. Other commenters viewed that statement as inadequate. These commenters noted the proposed Q&A mentioned only that the review “is not limited to a single quantitative factor” rather than listing examples of the qualitative factors that examiners could consider. Commenters further noted that the proposed Q&A did not adequately explain qualitative factors, such as responsiveness, and asserted that the proposal could benefit from the inclusion of specific examples of how examiners assess the degree to which services are responsive to community needs.

The Agencies have revised Q&A § __.24(e)-2 to address some of these comments. The final Q&A incorporates language that, consistent with regulatory factors, more explicitly states that examiners will consider community development services qualitatively by assessing the degree to which those services are innovative or responsive to community needs. The proposed Q&A did not include a reference to “innovativeness,” although it is a qualitative factor included in the regulation.
See
12 CFR __.24(e). In addition, the Agencies added cross-references to Q&As § __.21(a)-4 and § __.21(a)-3, which discuss the qualitative factors “innovativeness” and “responsiveness,” respectively, to direct readers to additional guidance regarding these criteria.

Further, the final Q&A discusses how qualitative performance criteria augment the consideration given to community development services by recognizing that community development services sometimes require special expertise and effort on the part of the financial institution and provide benefit to the community that would not otherwise be possible. The final Q&A states that these assessments will depend on the impact of a particular activity on community needs and the benefits received by a community and illustrates this point with an example of a community development service that would be considered responsive to credit and community needs.

In addition, some commenters, representing both the industry and community organizations, asserted that the proposed Q&A did not provide sufficient guidance regarding how the quantitative and qualitative factors would be comparatively weighted under the service test. Some commenters expressed support for a balanced approach to how qualitative and quantitative factors are evaluated in assessing community development service performance, while others indicated a preference for weighting one factor over the other. For instance, one industry commenter preferred using the hours spent by employees performing community development services as the baseline measure, augmented with a review of responsiveness, innovation, leadership, complexity, and flexibility, to the extent that the institution chooses to provide such information. State financial regulator commenters took an opposing position, suggesting that qualitative aspects of community development services should serve as the primary driver in determining whether services are effective and responsive.

The Agencies do not believe it is necessary to revise the Q&A to address these comments. First, the Agencies note that examiners do not use a specific formula when quantitatively and qualitatively evaluating community development services. As with all aspects of an institution's CRA performance evaluation, the performance context of the institution will affect how the qualitative and quantitative factors are considered under the service test. Similarly, some industry commenters asserted that the Q&A should specify how many community development services would be needed in order to obtain a rating of “outstanding” or

“satisfactory.” However, examiners do not utilize specific benchmarks. Instead, the nature of each community development service and the performance context of the institution are considered.

The proposed Q&A stated that examiners will consider any relevant information provided by the institution or from a third party to quantify the extent and responsiveness of community development services. Industry commenters were particularly supportive of this aspect of the proposal because they viewed it as a flexible policy.

With regard to relevant information, the Agencies specifically asked what types of information financial institutions and third parties would be likely to maintain that may be used to demonstrate the extent to which community development services are offered and used. In response, commenters provided several examples of relevant information that may be available, including: (i) data on the number of low- and moderate-income individuals attending counseling sessions; (ii) demographic information on clients or customers benefitting from a service; (iii) records of the number and types of community development service provided; and (iv) attestations collected via a survey of employees, directors, and officers that tracks hourly involvement in community development services.

Rather than referring to only a single quantitative factor as an example, final Q&A § __.24(e)-2 includes a list of examples of quantitative factors that examiners may assess to determine the extent to which community development services are offered and used. The expanded list should provide additional clarity and address concerns that examiners and institutions may default to “the number of hours financial institution staff devotes to a particular community development service” as the only quantitative measure of community development services. The final Q&A includes the following additional examples of quantitative factors: (i) The number of low- and moderate-income individuals participating in a community development activity; (ii) the number of organizations served by a community development activity; and (iii) the number of sessions of a community development service activity.

Finally, a community organization commenter suggested that the Agencies revise the proposed Q&A to explicitly state that institutions' funding of community organizations to enable them to collect quantitative data will receive favorable CRA consideration. The commenter asserted that, while quantitative information is necessary in assessing whether a community development service is effective in assisting low- or moderate-income individuals and families to access the financial system, obtaining this information can be very expensive and resource intensive. The commenter maintained that providing an incentive to finance data collection systems in nonprofit organizations would increase the availability and quality of this much needed information. The Agencies note that the CRA regulations allow for the consideration of grants or other funding to nonprofit organizations with a community development purpose as qualified investments or community development loans. Such funding could be used by these recipients for a variety of purposes, including data collection.

B. Responsiveness and Innovativeness

i. Responsiveness

The term “responsiveness” is found throughout the CRA regulations and the Questions and Answers. Generally, the Agencies' regulations and guidance promote an institution's responsiveness to credit and community development needs by providing that the greater an institution's responsiveness to credit and community development needs in its assessment area(s), the higher the CRA rating that is assigned to that institution.
See, e.g.,
12 CFR __, appendix A, section (b)(2)(i). Responsiveness is generally a consideration in all of the ratings that the Agencies assign.

The Agencies' Questions and Answers address responsiveness in various contexts. For example, Q&A § __.21(a)-2 explains that responsiveness is meant to lend a qualitative element to the rating system. Other Q&As state that examiners should give greater weight to those activities that are most responsive to community needs, including the needs of low- or moderate-income individuals and geographies.
See, e.g.
,
Q&A § __.12(g)(4)(ii)-2.

Because the concept of “responsiveness” is utilized in the CRA regulations and Questions and Answers applicable to all covered institutions, the Agencies proposed a new Q&A § __.21(a)-3 to set forth general guidance on how examiners evaluate whether a financial institution has been responsive to credit and community development needs. The Agencies intended the proposed Q&A to encourage institutions to think strategically about how to best meet the needs of their communities based on their performance context. The proposed new Q&A indicated that examiners would look at not only the volume and types of an institution's activities, but also how effective those activities have been. The proposed Q&A noted that examiners always evaluate responsiveness in light of an institution's performance context. The proposed new Q&A also suggested several information sources that could inform examiners' evaluations of performance context and responsiveness.

The Agencies received 28 public comments addressing the proposed new Q&A. With few exceptions, the commenters were supportive of the Agencies' intent to clarify how examiners evaluate an institution's responsiveness to credit and community development needs. However, a number of commenters, representing both the industry and community organizations, questioned whether the proposed new Q&A would help examiners or bankers understand that a project or program has been responsive to credit and community development needs.

The Agencies requested comment on three questions relating to proposed new Q&A § __.21(a)-3. First, the Agencies asked whether the proposed new Q&A appropriately highlighted the importance of responsiveness to credit and community development needs and provided a flexible, yet clear, standard for determining how financial institutions would receive consideration. An industry commenter and a community organization commenter agreed that the importance of responsiveness to credit and community development needs was highlighted, but that there was also an increase in subjectivity in the evaluation process and burden to institutions, as well as a shortage of detail. To help clarify how the Agencies review responsiveness and the flexible approach taken, a new sentence was added at the beginning of the answer to provide a road map of the three factors that examiners consider when evaluating responsiveness: quantity, quality, and performance context. The answer then describes each of the three factors.

The Agencies also asked whether there were other sources of information that examiners should consider when evaluating an institution's responsiveness to credit and community development needs. Commenters representing both the industry and community organizations suggested a number of information sources, including targeted outreach to local

organizations; local, state, and Federal information compilations; reports and studies by academic institutions; and the Consumer Financial Protection Bureau's (CFPB) complaint database. Two community organization commenters asserted that examiners should be required to review information from all of the sources cited in the proposed Q&A. An industry commenter stated that, although the Agencies should accept information from financial institutions, care must be taken not to require institutions to perform needs assessments or evaluate the institutions on the quality of information they provide, consistent with Q&A § __.21(b)(2)-1. Another industry commenter suggested that the Agencies should ensure that regulatory requirements, guidelines, and actions by examiners are flexible and do not create unnecessary burden. Two other commenters, one representing the industry and the other a community organization, stated that they appreciated the clarification that examiners should not rely so heavily on quantitative factors. They noted that the unique needs and opportunities in an institution's local community should be the basis for evaluating the institution's performance.

In response to these comments, the Agencies expanded the list of sources of information about credit and community development needs and opportunities that examiners may consider by adding “consumer complaint information.” To address commenters' concern that a formal needs assessment will be expected from financial institutions, the Agencies have deleted the reference to an assessment prepared by the institution and have clarified that examiners will consider any relevant information provided to examiners by the financial institution that is maintained by the institution in its ordinary course of business.

Finally, the Agencies asked whether the new Q&A would help a financial institution in making decisions about the community development activities in which it will participate, particularly if those activities benefit individuals or geographies located somewhere in the broader statewide or regional area that includes the institution's assessment area(s), but that may not benefit the institution's assessment area(s).
See
Q&A § __.12(h)-6. Of the six commenters who addressed this question, five commenters (two representing the industry and three representing community development funds) believed that proposed Q&A § __.21(a)-3 would not help bankers to determine which community development activities to support. In support of their views, commenters asserted that (i) the requirement to first demonstrate responsiveness to assessment area needs is too vague to cause a change in institutions' investment strategies; (ii) due to increased subjectivity and additional burden of proof in the evaluation process, institutions will likely maintain their focus on assessment area activities; (iii) the proposed Q&A does not provide insight to help institutions make determinations on which community development activities to support; and (iv) a bright line test would be preferable to an evaluation of whether the financial institution has been responsive to credit and community development needs and opportunities. On the other hand, the sixth commenter, representing the industry, stated that the proposed Q&A may encourage financial institutions to focus on community development activities that benefit low- and moderate-income individuals or geographies, disaster areas, and distressed or underserved nonmetropolitan middle-income geographies. This commenter believed that recognizing responsiveness rather than placing all the emphasis on quantitative benchmarks will encourage financial institutions to engage in various community development activities.

To respond to commenters' ass

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-16693. Public record. Not legal advice.