The FDIC, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Office of Thrift Supervision have updated their "Interagency Questions and Answers Regarding Community Reinvestment" (Interagency Q&A) to revise the "primary purpose" test utilized in assessing community development activities and to add new guidance on ways an institution can determine that its community development services are targeted to serving low- and moderate-income persons.
The Community Reinvestment Act
The Community Reinvestment Act (CRA) requires the federal banking regulators to (1) assess an institution’s record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation and (2) take such record into account in its evaluation of an application from such institution for a branch facility or other deposit facility. Each of the banking regulators has adopted identical regulations to implement CRA.
An institution’s CRA rating ("outstanding," "satisfactory," "needs to improve" or "substantial noncompliance") is based in part on its record of making loans whose primary purpose is community development, making qualified investments whose primary purpose is community development and providing services whose primary purpose is community development.
The CRA regulations define "community development" as providing (1) affordable housing for low- and moderate-income individuals, (2) community services targeted to low- or moderate- income individuals, (3) activities that promote economic development by financing small businesses or farms, and (4) activities that revitalize or stabilize low- or-moderate income geographies, designated disaster areas, or distressed or underserved nonmetropolitan middle-income geographies.
The Primary Purpose Test
While the CRA regulations do not define "primary purpose," prior revisions of the Interagency Q&A had focused on (1) whether a majority of the dollars spent on the activity or a majority of the beneficiaries of the activity satisfy one the enumerated community development activities, or alternatively, (2) whether (a) the express, bona fide intent of the activity was primarily community development, (b) the activity was structured to achieve such community development purpose and (c) the activity accomplishes or is reasonably certain to accomplish such community development purpose.
These tests have precluded an institution’s receiving CRA credit where a project had a demonstrable, but not primary, benefit to low- and moderate-income individuals. A common example is an institution making a mortgage loan for a multifamily rental project qualifying for low-income housing tax credits at the minimum qualifying set-aside of 20 percent of the units for tenants whose income is at or below 50 percent of area median income. Under the current interpretation, the bank received no CRA credit because less than 50 percent of the beneficiaries (and presumably, less than 50 percent of the costs) served low- or moderate-income residents, and the project as a whole primarily benefited higher income tenants.
The Expanded Primary Purpose Test
The updated Interagency Q&A provides that mixed-income housing including an affordable housing set-aside can receive pro rata CRA credit. It does not matter whether the set-aside satisfies a federal, state or local government requirement, or is the voluntary inclusion of affordable housing by a private developer. For ease of administration, the Interagency Q&A allocates the CRA credit based on the percentage of units reserved for affordable housing to low- or moderate-income individuals.
In the 20-percent set-aside example under the low-income housing tax credits program, the lender could include 20 percent of the loan as qualifying for the lending test (or 20 percent of any tax credits purchased as qualifying for the investment test).
The provision is limited to affordable housing developments only. Economic development or other community development activities must satisfy the existing "primary purpose" test using either a majority of dollars or a majority of beneficiaries standard, or the alternative primary benefits test. However, the regulatory agencies state that they may revisit this limitation in the future.
Targeting Community Services
The updated Interagency Q&A also provides new guidance for targeting community services where the institution does not know the actual incomes of the persons benefitted. This will be helpful where the institution is assisting a nonprofit organization to serve the nonprofit’s clientele.
The new guidance permits the institution to rely on the nonprofit’s defined mission, or the characteristics of the local community in which the nonprofit is located, or serves to evidence the institution’s benefitting low- or moderate-income clientele of the nonprofit.