How Banks Get CRA Credit for Investments May Change, But Will it Matter?

Published on Friday, March 22, 2013 - 12:00am

Many financial institutions invest in low-income housing, new markets, historic and renewable energy tax credits, in part, to generate Community Reinvestment Act (CRA) investment test credit.  However, this has led to differential pricing depending on whether an institution believes it will receive CRA consideration for its investment.

Earlier this week, the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC) released a notice and request for comment regarding proposed updates to their Interagency Questions and Answers regarding Community Reinvestment. The updates address several community development issues, including the treatment of community development activities outside an institution’s assessment areas and investment in nationwide funds.

Current Q&A

The current Q&A addresses community development activities that, although located in the broader statewide or regional area in which the institution’s assessment area(s) is located, will benefit individuals or areas that are not within the institution’s assessment area(s).

The current Q&A specifically states that, if an institution has, ‘‘adequately addressed the community development needs of its assessment area(s),’’ (emphasis added) then, it will also receive consideration for those activities, even if those activities will not benefit the institution’s assessment area(s).

Financial institutions are unclear as to what is meant by ‘‘adequately addressed the community development needs of its assessment area(s).(emphasis added)  As a consequence, many financial institutions have been unwilling to make certain investments without having a better understanding to what extent they will receive consideration for such activities in their CRA evaluations.

Revision

The proposed revisions to the Q&A reaffirm that an institution’s activity will be considered a community development loan or service or a qualified investment if it supports an organization or activity that covers a statewide or regional area that is larger than, but includes, the institution’s assessment area(s).   The institution’s assessment area(s) need not receive an immediate or direct benefit from the institution’s participation in the organization or activity, provided that the purpose, mandate, or function of the organization or activity includes serving geographies or individuals located within the institution’s assessment area(s).

The proposed revision removes the phrase ‘‘adequately addressed the community development needs of its assessment area(s).’’

Instead, the proposed guidance states that community development activities located in the broader statewide or regional area that includes an institution’s assessment area(s) but that will not benefit those assessment area(s):

‘‘must be performed in a safe and sound manner, consistent with the institution’s capacity to oversee those activities and may not be conducted in lieu of, or to the detriment of, activities in the institution’s assessment area(s). When evaluating whether community development activities are being conducted in lieu of, or to the detriment of, activities in the institution’s assessment area(s), examiners   will consider an institution’s performance context, including the community development needs and opportunities in its assessment area(s), its business capacity and focus, and its past performance.’’

In short, the rule would move from a test of demonstrating an institution has already “adequately addressed” needs in its assessment area(s), to one of demonstrating that an investment is not “in lieu of, or to the detriment of,” activities in an institution’s assessment areas.

This rule certainly is progress, but the degree of progress will be highly dependent on how the change in the rule is further interpreted and implemented.

Nationwide Funds

The proposed revisions also address how financial institutions receive CRA consideration if they invest in nationwide funds.  The proposal would continue to state that there may be several ways to demonstrate that an institution’s investment in a nationwide fund meets its geographic requirements.

The proposed rule would highlight that information about where a fund’s investments are expected to be made or targeted usually will be found in the fund’s prospectus, or other documents provided by the fund prior to or at the time of the institution’s investment.

The proposal would no longer suggest that written documentation by the fund demonstrating earmarking, side letters, or pro-rata allocations may be provided at an institution’s option. There is a concern by some that earmarking and side letters may be burdensome and may provide disincentives to invest.

The proposed rule stresses that investments in nationwide funds may be suitable investment opportunities, particularly for large financial institutions with a nationwide branch footprint or for other financial institutions with a nationwide business focus, including wholesale or limited purpose institutions. Large institutions with a nationwide branch footprint typically have many assessment areas in many states; thus, investments in nationwide funds are likely to benefit such an institution’s assessment area(s), or the broader statewide or regional area that includes its assessment area(s), and provide that institution with the opportunity to match its investments with the geographic scope of its business. The proposed rule further notes that, nationwide funds may be an effective means of engaging in community development activities for other financial institutions with a nationwide business focus, including wholesale or limited purpose institutions, which are evaluated under the community development test.

Further, the proposed revised Q&A states that other financial institutions may find such funds to be   efficient investment vehicles to help meet community development needs in their assessment area(s) or the broader statewide or regional area that includes their assessment area(s).

Reaffirmation of the benefits of investments in nationwide funds is certainly a plus. The removal of side letters, though, may actually discourage some institutions from investing in nationwide funds, for fear that there is insufficient overlap with its assessment areas, and a concern as to how the degree of CRA consideration will be determined.

Speaking to the National Community Reinvestment Coalition on Wednesday, Comptroller of the Currency Thomas J. Curry said, “We must engage in a serious discussion regarding how to define assessment areas and achieve the right balance to ensure that CRA keeps pace with the banking industry that we have today.”

Comments on the proposed questions and answers are due on or before May 17, 2013.

Please share your thought as to the potential impact of these changes in the comment section below. Will this change encourage banks to look into more opportunities to make more LIHTC, NMTC, historic or energy investments in rural and underserved areas in their broader statewide and regional areas?  Will this proposed rule lead to more or less investment in national funds?