Letter concerns the application of the Community Reinvestment Act (CRA) regulations to financial institutions' support of microenterprise lending programs. (06/21/96).

[Company] defines “microenterprise” as an informal business with ten or fewer

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employees and in which the owner actively participates. Financing microenterprises generally

promotes economic development because microenterprises are typically located in low- or

moderate-income areas and include street vendors, seamstresses, artisans, small shops and

restaurants, shoemakers and carpenters. Microentrepreneurs and their employees are also

frequently low- or moderate-income earners.

Office of the Comptroller of the Currency

Federal Deposit Insurance Corporation

Federal Reserve Board

Office of Thrift Supervision

Interpretive Letter #726

July 996

12 U.S.C. 2901

June 28, 1996

[ ]

[ ]

Dear [ ] and [ ]:

This responds to your inquiry regarding the application of the Community Reinvestment Act

(CRA) regulations to a financial institution’s support of [Company]’s small business lending

programs. As you probably know, the four federal financial supervisory agencies finalized

new CRA regulations on May 4, 1995. See 60 Fed. Reg. 22,156 (May 4, 1995) (to be

codified at 12 C.F.R. parts 25, 228, 345 and 563e). The agencies’ regulations are

substantively identical. Therefore, staff from all of the agencies have considered the issues you

raised, and they concur in the opinions expressed in this letter.

I.

BACKGROUND

As your letter explains, [Company] provides access to credit and technical assistance for very

small businesses (microenterprises) in Latin America and the United States. Typically,

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microenterprises have difficulty obtaining credit because they lack collateral and the loans they

require are often too small to be cost effective for most financial institutions. In the United

etter.

I.

BACKGROUND

As your letter explains, [Company] provides access to credit and technical assistance for very

small businesses (microenterprises) in Latin America and the United States. Typically,

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microenterprises have difficulty obtaining credit because they lack collateral and the loans they

require are often too small to be cost effective for most financial institutions. In the United

If the purchase is carried on the institution’s books as a loan, it would qualify as a

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community development loan for the reasons discussed below in the section concerning loans to

microenterprise lenders.

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States, the [Affiliate] acts as an intermediary between microenterprises and financial institutions

to address these problems.

The [Affiliate] issues private placements of promissory notes with various investors. With the

money it receives from these investors, the [Affiliate] issues letters of credit to financial

institutions. The letters of credit guarantee a portion of each loan made by the financial

institutions to [Affiliate 2]. The [Affiliate 2] use the loans from the financial institutions to fund

their microenterprise lending (microlending) programs in New York, New Mexico, Illinois,

Texas, and California. This system allows financial institutions to participate in microlending

without bearing the risk of undersecured loans or incurring the costs of making those loans

directly.

II.

DISCUSSION

Based on the microlending program described above, you have asked whether: 1) a financial

institution’s purchase of a promissory note that funds guarantees of loans to microenterprise

lenders would be a qualified investment under CRA; 2) a financial institution would receive

favorable CRA consideration for a loan to a microenterprise lender; and 3) a financial

institution’s loan to a guarantor, such as the [Affiliate], or microenterprise lender would qualify

under the CRA investment test if the loan had a 10-to-20 year term, low interest rate, and deep

subordination

oenterprise

lenders would be a qualified investment under CRA; 2) a financial institution would receive

favorable CRA consideration for a loan to a microenterprise lender; and 3) a financial

institution’s loan to a guarantor, such as the [Affiliate], or microenterprise lender would qualify

under the CRA investment test if the loan had a 10-to-20 year term, low interest rate, and deep

subordination.

In addition, you have asked whether a financial institution would receive positive CRA

consideration for the following proposed activities: 1) investing funds in a pool that would be

managed by a microenterprise lender and used for microlending; or 2) purchasing a microloan

portfolio from a guarantor or purchasing a security backed by such a portfolio.

Finally, you have asked whether the CRA regulations would place geographic restrictions on a

financial institution’s support of either the existing program or the proposed activities.

A.

Questions Based on [Company]’s existing microlending program

1.

Purchases of Promissory Notes

A financial institution’s purchase of a promissory note that funds guarantees of loans to local

intermediaries that lend to microenterprises to promote economic development would be

considered a qualified investment under the CRA regulations unless the purchase is carried on

the institution’s books as a loan. The new CRA regulations provide a detailed framework for

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Examiners of large institutions, which are evaluated under the lending, investment and

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service tests, consider qualified investments under the investment test. See 12 CFR §§

25.23(a), 228.23(a), 345.23(a), and 563e.23(a). In a small institution examination, examiners

may adjust an institution’s loan-to-deposit ratio, if appropriate, based on lending-related

qualified investments. See 12 CFR §§ 25.26(a)(1), 228.26(a)(1), 345,26(a)(1), and

563e.26(a)(1). Qualified investments may also be considered to determine if a small institution

merits an outstanding CRA rating. See 12 CFR pt. 25 app. A(d)(2), pt. 228 app

). In a small institution examination, examiners

may adjust an institution’s loan-to-deposit ratio, if appropriate, based on lending-related

qualified investments. See 12 CFR §§ 25.26(a)(1), 228.26(a)(1), 345,26(a)(1), and

563e.26(a)(1). Qualified investments may also be considered to determine if a small institution

merits an outstanding CRA rating. See 12 CFR pt. 25 app. A(d)(2), pt. 228 app. A(d)(2), pt.

345 app. A(d)(2), and pt. 563e app. A(d)(2). The community development test, which is

appropriate for wholesale and limited purpose institutions, evaluates, inter alia, the number and

amount of qualified investments. See 12 CFR §§ 25.25(c)(1), 228.25(c)(1), 345.25(c)(1), and

563e.25(c)(1). And, finally, institutions evaluated on the basis of a strategic plan must include

in their plan how they intend to meet the credit needs of their assessment area(s). They may

meet credit needs through lending, investment, and/or services, as appropriate. See 12 CFR §§

25.27(f)(1), 228.27(f)(1), and 563e.27(f)(1) (emphasis added).

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evaluating an institution’s CRA performance. The new rules set out a number of different

evaluation methods for examiners to use, depending on the business strategy and size of the

institution under examination.

Regardless of the evaluation methods used by examiners, however, any financial institution can

receive positive consideration for making a “qualified investment” that benefits its assessment

area or a broader statewide or regional area that includes the assessment area. The new CRA

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regulations define “qualified investment” as “a lawful investment, deposit, membership share or

grant that has as its primary purpose community development.” See 12 CFR §§ 25.12(s),

228.12(s), 345.12(s), and 563e.12(r). “Community development” is defined to include, among

other things, “activities that promote economic development by financing [small] businesses. .

..” See 12 CFR §§ 25.12(h)(3), 228.12(h)(3), 345.12(h)(3), and 563e.12(g)(3)

lawful investment, deposit, membership share or

grant that has as its primary purpose community development.” See 12 CFR §§ 25.12(s),

228.12(s), 345.12(s), and 563e.12(r). “Community development” is defined to include, among

other things, “activities that promote economic development by financing [small] businesses. .

..” See 12 CFR §§ 25.12(h)(3), 228.12(h)(3), 345.12(h)(3), and 563e.12(g)(3).

A purchase of a promissory note that provides credit enhancement on loans to microenterprise

lenders to promote economic development has as its primary purpose community development

because the note enables microenterprise lenders to provide loans to small businesses that are

located in low- or moderate-income areas or that provide jobs for low- or moderate-income

persons. Assuming that the microenterprise lenders serve a regional area that includes a

financial institution’s assessment area, examiners would give positive consideration to a

financial institution’s purchase of promissory notes as a qualified investment under any of the

new performance tests and standards in the new CRA regulations.

2.

Loans to Microenterprise Lenders

If a financial institution makes a loan directly to a microenterprise lender to support the lender’s

financing of small businesses to promote economic development, its loan would be a community

development loan under the CRA regulations. See 12 CFR §§ 25.12(i), 228.12(i), 345.12(i),

er any of the

new performance tests and standards in the new CRA regulations.

2.

Loans to Microenterprise Lenders

If a financial institution makes a loan directly to a microenterprise lender to support the lender’s

financing of small businesses to promote economic development, its loan would be a community

development loan under the CRA regulations. See 12 CFR §§ 25.12(i), 228.12(i), 345.12(i),

In your letter, you also ask whether a financial institution’s investment in the

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[Affiliate]’s loan loss reserve would receive favorable CRA consideration. The staff of the

federal financial supervisory agencies concluded recently that a financial institution would

receive positive CRA consideration for its investments in, or loans to, a reserve fund for

affordable housing loans. See interagency letter published as OCC Interpretive Letter No. 708

(February 16, 1996) (attached). Investments in a reserve fund for small business loans would

receive comparable consideration.

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and 563.12(h). A “community development loan” is a loan that has community development as

its primary purpose and, except in the case of a wholesale or limited purpose bank, benefits the

institution’s assessment area(s) and has not been considered as part of the institution’s

assessment as a home mortgage, small business, small farm, or consumer loan. 12 CFR §§

25.12(i), 228.12(i), 345.12(i), and 563e.12(h).

A large retail institution’s record of helping to meet community credit needs through its lending

activities is evaluated under the lending test. See 12 CFR § 25.22, 248.22, 345.22, and

563e.22. Under the lending test, examiners consider an institution’s originations and purchases

of loans, including community development loans. See 12 CFR § 25.22(a)-(c), 228.22(a)-(c),

345.22(a)-(c), and 563e.22(a)-(c). Community development loans may also be considered

favorably in the evaluations of small institutions, wholesale and limited purpose institutions, and

institutions evaluated based on a strategic plan

ding test, examiners consider an institution’s originations and purchases

of loans, including community development loans. See 12 CFR § 25.22(a)-(c), 228.22(a)-(c),

345.22(a)-(c), and 563e.22(a)-(c). Community development loans may also be considered

favorably in the evaluations of small institutions, wholesale and limited purpose institutions, and

institutions evaluated based on a strategic plan. See 12 CFR §§ 25.25(c), 25.26(a)(1),

25.27(f)(1), g(3)(i), and pt. 25 app. A(d)(2); §§ 228.25(c), 228.26(a)(1), 228.27(f)(1), g(3)(i),

and pt. 228 app. A(d)(2); §§ 345.25(c), 345.26(a)(1), 345.27(f)(1), g(3)(i), and pt. 345 app.

A(d)(2); and §§ 563e.25(c), 563e.26(a)(1), 563e.27(f)(1), g(3)(i), and pt. 563e app. A(d)(2).

Thus, examiners would favorably consider as a community development loan a financial

institution’s loan to a microenterprise lender.

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3.

Loans to a Microenterprise Lender or Guarantor on Favorable

Terms

You have also asked whether a financial institution could receive consideration under the

investment test for a loan to a microenterprise lender or guarantor that had a 10-to-20 year

term, low interest rate, and deep subordination to other lenders. As discussed above, the

investment test considers qualified investments, which are defined as lawful investments,

deposits, membership shares, or grants that have as their primary purpose community

development. As a general rule, the agencies would not view as a qualified investment a

transaction that is carried on a financial institution’s books as a loan.

B.

Questions Related to [Company]’s Proposed Activities

1.

Investments in a Microloan Pool Managed by a Microenterprise

Lender

ned as lawful investments,

deposits, membership shares, or grants that have as their primary purpose community

development. As a general rule, the agencies would not view as a qualified investment a

transaction that is carried on a financial institution’s books as a loan.

B.

Questions Related to [Company]’s Proposed Activities

1.

Investments in a Microloan Pool Managed by a Microenterprise

Lender

For further discussion of the CRA treatment of loans by consortia or third parties, see

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OCC Interpretive Letter No. 673 (June 26, 1995) (investment in a community development

bank) and interagency letter published as OCC Interpretive Letter No. 710 (February 21, 1996)

(treatment of loans made by an affiliate).

Wholesale and limited purpose institutions’ small business lending activities would be

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considered under the community development test if the small business loans qualified as

community development loans. See 12 CFR §§ 25.25, 228.25, 345.25, and 563e.25.

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A financial institution would also receive favorable CRA consideration for its investments in a

pool that would be used to make microloans to promote economic development in a regional

area that includes the institution’s assessment area. Examiners would consider such an

investment to be a qualified investment for the same reasons discussed above regarding

purchases of promissory notes. Thus, for example, a large retail institution would receive

favorable consideration under the investment test for investing in a microloan pool. See 12

CFR §§ 25.23(a), 228.23(a), 345.23(a), and 563e.23(a).

In lieu of consideration for the investment under the investment test, a large retail institution

may elect to have its examiner consider, under the lending test, originations and purchases of

community development loans by a consortium in which the institution participates or by a third

party in which the bank has invested. See 12 CFR §§ 25.22(d), 228.22(d), 345.22(d), and

563e.22(d)

563e.23(a).

In lieu of consideration for the investment under the investment test, a large retail institution

may elect to have its examiner consider, under the lending test, originations and purchases of

community development loans by a consortium in which the institution participates or by a third

party in which the bank has invested. See 12 CFR §§ 25.22(d), 228.22(d), 345.22(d), and

563e.22(d). Thus, a financial institution would be able to claim for CRA purposes its pro-rata

share of the total loans originated from the pool. Id.5

2.

Purchases of a Microloan Portfolio or Portfolio-Backed Security

A financial institution’s purchase of a microloan portfolio would be considered a purchase of

the individual loans that comprise the portfolio. If a loan met the definition of loans to small

businesses contained in the Instructions to the Consolidated Reports of Condition and Income or

Thrift Financial Reports, an institution’s purchase of the loan would be considered a purchase

of a small business loan under the CRA regulations. If a loan did not meet the definition of

small business loans but met the definition of community development loans under the CRA

regulations, an institution’s purchase of the loan would be considered a purchase of a

community development loan. A large retail institution’s record of helping to meet community

credit needs through its purchases of small business loans or community development loans is

evaluated under the lending test. See 12 CFR §§ 25.22(a)(1), 228.22(a)(1), 345.22(a)(1), and

563e.22(a)(1). Small business and community development loans may also be considered in the

evaluations of small institutions and institutions evaluated based on a strategic plan. See 12

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CFR §§ 25.26(a)(1), 25.27(f)(1), g(3)(i), and pt. 25 app. A(d)(2); §§ 228.26(a)(1),

community development loans is

evaluated under the lending test. See 12 CFR §§ 25.22(a)(1), 228.22(a)(1), 345.22(a)(1), and

563e.22(a)(1). Small business and community development loans may also be considered in the

evaluations of small institutions and institutions evaluated based on a strategic plan. See 12

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CFR §§ 25.26(a)(1), 25.27(f)(1), g(3)(i), and pt. 25 app. A(d)(2); §§ 228.26(a)(1),

In addition, a large institution would have to provide the loan documentation described

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in the CRA regulations’ data collection, reporting, and disclosure sections. See 12 CFR §§

25.42, 228.42, 345.42, and 563e.42.

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228.27(f)(1), g(3)(i), and pt. 228 app. A(d)(2); §§ 345.26(a)(1), 345.27(f)(1), g(3)(i), and pt.

345 app. A(d)(2); and §§ 563e.26(a)(1), 563e.27(f)(1), g(3)(i), and pt. 563e app. A(d)(2).7

A financial institution’s purchase of a microloan portfolio-backed security that financed

microenterprises to promote economic development would be a qualified investment for the

reasons set forth above in the discussion of purchases of promissory notes.

C.

Geographic Restrictions on a Financial Institution’s Support for

[Company]’s Existing or Proposed Programs.

Under the CRA regulations, a retail financial institution’s community development loans,

investments, or services must primarily benefit its CRA assessment area but may also benefit a

broader regional area (including a multiple-state area). Thus, a financial institution may receive

favorable consideration for its support of a community development organization that operates

on a statewide or regional basis that extends beyond the institution’s assessment area(s). The

community development organization’s scope must include the financial institution’s assessment

area(s) so that the institution’s investment potentially benefits its assessment area(s). The more

direct or certain the benefit, the more likely it will be viewed as particularly responsive to

community credit needs

atewide or regional basis that extends beyond the institution’s assessment area(s). The

community development organization’s scope must include the financial institution’s assessment

area(s) so that the institution’s investment potentially benefits its assessment area(s). The more

direct or certain the benefit, the more likely it will be viewed as particularly responsive to

community credit needs. Thus, examiners will give greater consideration for investments, loans

or services that more directly benefit the institution’s assessment area(s).

In order to receive consideration for its participation in such a community development

organization, an institution must provide its examiner sufficient documentation to demonstrate

that its investment benefits a regional area that includes the institution’s assessment area. An

institution need not document the location of each community development loan that results

from its investment. See 60 Fed. Reg. at 22,172.

III.

CONCLUSION

I trust this has been responsive to your inquiry. You may also be interested to know that the

staffs of the four financial supervisory agencies are presently developing official guidance for

the public for resolving interpretive questions arising under the new CRA regulations. If you

have any questions in the meantime, please feel free to contact me at (202) 874-5750, Bert Otto

of the Office of the Comptroller of the Currency at (202) 874-5224, Bobbie Jean Norris at the

Federal Deposit Insurance Corporation at (202) 942-3090, Glenn Loney of the Federal Reserve

Board at (202) 452-3585, or Timothy Burniston of the Office of Thrift Supervision at (202)

906-5629.

Sincerely,

/s/

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Matthew Roberts

Director

Community and Consumer Law

Office of the Comptroller of the Currency