CRA: An Examiner's Perspective A Rundown of Community Development Investments
This article is part of a series on Community Reinvestment Act (CRA) best practices from an examiner's perspective. Although this column focuses on CRA best practices for financial institutions, the content may provide insights for community development organizations working with financial institutions to meet credit and community development needs. As a disclaimer, this series is meant only to represent best practices; financial institutions should consider the information presented in context of the requirements or guidance of their primary regulators and their own business needs.
Under the CRA, financial institutions are evaluated under various performance tests, which are dependent on the asset size of the institution. One way in which a financial institution's performance may be assessed is through its community development qualified investments.
To be a community development qualified investment, the activity must meet the definition in the CRA regulation. The CRA defines a qualified investment as a lawful investment, deposit, membership share or grant that has as its primary purpose one or more of the following community development purposes:
- affordable housing (including multifamily rental housing) for low- or moderate-income (LMI) individuals;
- community services targeted to LMI individuals;
- activities that promote economic development by financing businesses or farms that meet the size eligibility standards as outlined under the CRA; and
- activities that revitalize or stabilize LMI geographies, designated disaster areas, and distressed or underserved nonmetropolitan middle-income geographies.
There are several ways financial institutions can receive credit for qualified investments. Examiners' reviews encompass not only qualified investments made within the institution's assessment area(s), but investments made in a broader statewide or regional area and in nationwide funds, which include the institution's assessment area(s). Examiners may also consider qualified investments made within a broader statewide or regional area that do not benefit the institution's assessment area(s) provided the institution has been responsive to community development needs and opportunities in its assessment area(s). All qualified investments must have been made since the previous evaluation or must be made prior to the current evaluation but still be outstanding. Furthermore, examiners will review qualifying grants, donations and in-kind contributions of property since the previous evaluation that are for community development purposes.
Common types of community development investments include mortgage-backed securities that finance affordable housing for LMI residents, as well as municipal bonds. Examples of common municipal bonds include investments that fund projects to renovate schools in which the majority of students are eligible for free or reduced-price lunches, and investments that fund infrastructure improvements to redevelop LMI neighborhoods. Less-common but perhaps more-innovative investments include those made in financial intermediaries, such as community development financial institutions and community development corporations, small-business investment companies, and low-income housing tax credit funds. Common qualified donations consist of monetary contributions in community development organizations, including those that provide education, housing and other essential needs targeted to LMI individuals.
Considering the institution's capacity, constraints and other information obtained through the performance context review, examiners form conclusions about community development qualified investments. Specifically, examiners consider the dollar amount of investments, the innovativeness or complexity of investments, and the degree to which the investments are not routinely provided by private investors.
Examiners also consider the responsiveness of qualified investments to credit and community development needs. In addition to reviewing outside performance context, examiners will consider the results of any assessment of community development needs and opportunities provided by the financial institution. Therefore, the responsiveness of investments can vary significantly among different geographic areas. While unique to each area, responsive qualified investments could include investments in infrastructure - such as new or rehabilitated sewer lines or improved access to highways - and communication services - such as providing access to the internet. These investments are evaluated as responsive because they are likely to help attract and/or retain a significant number of businesses and residents.
Overall, financial institution investment in community development initiatives is a critical component of the CRA and of thriving communities. To achieve success, a best practice for financial institutions is to continually assess the needs of their communities and strategically engage in community development qualified investments to meet those needs.