CRA: An Examiner's Perspective: Updates to Economic Development
This article is part of a series on CRA best practices from an examiner’s perspective. Although this column focuses on CRA best practices for financial institutions, the content may provide insights to community development organizations working with financial institutions to meet credit and community development needs. As a disclaimer, this series is only meant to represent best practices; financial institutions should consider the information presented in context of the requirements or guidance of their primary regulator and the business needs of their financial institution.
In 2016, the Community Reinvestment Act (CRA) Questions and Answers were revised to help clarify what activities (investments, loans and services) examiners may consider as activities that promote economic development. For those activities to qualify, they must meet both the size and purpose test. Bank activities meet the size test if they benefit businesses or farms that meet the size eligibility standards of the Small Business Administration’s Development Company or Small Business Investment Company programs (13 CFR 121.301) or have gross annual revenues of $1 million or less. The activities meet the purpose test if they also promote economic development consistent with the CRA regulation. When evaluating these activities, examiners may only accept those that meet both tests.
The majority of the 2016 revisions impacted the economic development purpose test and were made to address the growing importance of workforce development in communities, as communicated to the agencies during the commenting process. In current competitive economies, the ability of a community to develop and retain a workforce-ready population is essential to attracting and retaining jobs. As such, workforce development programs are key in enabling communities to thrive. In light of these considerations, the requirements for activities to meet the purpose test were expanded to include new federal, state, local or tribal economic development initiatives. These initiatives include provisions for creating or improving access by low- and moderate-income (LMI) persons to jobs, job training or workforce development programs. To qualify activities falling under this current purpose definition, examiners will need evidence of documentation detailing how activities align with the federal, state, local or tribal economic initiative.
The second noticeable change in support of workforce development was the removal of the word “currently” from the original definition of activities that promote economic development. While this definition continues to focus on permanent job creation, retention and improvement for LMI persons and geographies, the removal of the word “currently” allows examiners to consider activities that support the advancement of LMI individuals into higher-wage jobs.
Additionally, the 2016 revisions included changes to the definition of financing that is discussed in the size test; it now includes technical assistance to small businesses and small farms. The resulting new examples highlight financing of intermediaries that lend to, invest in, and provide technical assistance to recently formed small businesses and farms, as well as technical assistance and supportive services the bank may supply directly.
While the 2016 guidance provides a higher degree of flexibility to examiners when reviewing activities that promote economic development, examiners’ acceptance of activities will remain highly dependent on the documentation provided by financial institutions to demonstrate that the activity’s purpose, mandate or function aligns with CRA’s economic development purpose tests. Additionally, an institution will need to continue providing documentation to attest to the number/percentage of LMI individuals, families, jobs or small businesses and small farms that benefit from these activities in order for examiners to assess level of responsiveness.