# OCC Interpretive Letter No. 726: Letter concerns the application of the Community Reinvestment Act (CRA) regulations to financial institutions' support of microenterprise lending programs. (06/21/96)

> Federal · Agency guidance · In force

URL: https://www.frixlaw.com/law-library/statutes/OCC_INT0726

## Section

- **Citation:** OCC Interpretive Letter No. 726
- **Heading:** Letter concerns the application of the Community Reinvestment Act (CRA) regulations to financial institutions' support of microenterprise lending programs. (06/21/96)
- **Jurisdiction:** Federal
- **Kind:** Agency guidance
- **Status:** In force
- **Text as of:** August 14, 2026
- **Source:** Compiled text
- **Location:** OCC Interpretive Letters / Letter concerns the application of the Community Reinvestment Act (CRA) regulations to financial institutions' support of microenterprise lending programs. (06/21/96).

## Text

[Company] defines “microenterprise” as an informal business with ten or fewer
1
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,
1
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,
1
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
2
community development loan for the reasons discussed below in the section concerning loans to
microenterprise lenders.
2
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
2

Examiners of large institutions, which are evaluated under the lending, investment and
3
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).
3
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
3
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
4
[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.
4
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.
4
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
5
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
6
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.
5
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
6
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
6
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
7
in the CRA regulations’ data collection, reporting, and disclosure sections. See 12 CFR §§
25.42, 228.42, 345.42, and 563e.42.
6
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/

7
Matthew Roberts
Director
Community and Consumer Law
Office of the Comptroller of the Currency

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Source: Frix Law Library, https://www.frixlaw.com/law-library/statutes/OCC_INT0726. Check the current official text before relying on it. Not legal advice.