The FDIC has issued guidance for community banks on strategies to meet community credit and development needs and receive consideration under the Community Reinvestment Act (“CRA”) through collaboration with community development financial institutions (“CDFIs”). The guidance, published in FDIC Financial Institution Letter 26-2014 (May 8, 2014) provides information to help community banks identify and evaluate opportunities to collaborate with CDFIs to provide financial products and services to underserved markets. The guidance describes different types of partnership arrangements that banks can enter into with CDFIs. For example, the guidance notes that banks can make various types of equity investments to build the equity capital of CDFIs, such as stock purchases, grants, and ownership interests in CDFI venture capital funds, depending on the type of CDFI. According to the guidance, the Interagency Questions and Answers Regarding Community Reinvestment (the guidance on CRA issued by the federal banking agencies) explicitly recognize loans to and investments in CDFIs as examples of community development loans and qualified investments because CDFIs, which are certified by the U.S. Treasury Department’s CDFI Fund, are required primarily to serve a community development purpose.
Nutter Notes: The guidance recommends that community banks interested in partnering with a CDFI take certain steps to identify and evaluate CDFIs, and mitigate risks associated with CDFI partnership activities. The guidance recommends that a community bank consider whether a proposed partnership with a CDFI will be valuable to the bank in the context of the bank’s business strategy and target geographic area. A bank can consult the list of certified CDFIs by type and state that is available on the CDFI Fund’s website to help identify CDFIs serving the bank’s CRA assessment area or the broader statewide or regional area that includes the assessment area. The guidance suggests that a bank consider a partnership with a CDFI that can support the bank’s business lines. For example, a commercial bank may partner with a CDFI that specializes in microloans with the expectation that the CDFI may help to grow businesses that could later become commercial customers of the bank. The guidance recommends that a bank’s evaluation of a CDFI include traditional credit and financial performance reviews of the CDFI. The guidance also recommends that banks consider information provided by one or more CDFI technical assistance providers, such as the National Community Investment Fund or the Opportunity Finance Network. According to the guidance, community banks should consider risks associated with a CDFI partnership and how to mitigate them, such as through traditional credit enhancements or by investing through an intermediary like a CDFI technical assistance provider.