CRA: An Examiner's Perspective Eye on 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 into meeting 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 the business needs of their financial institutions.
Regulators evaluate a financial institution's investments for CRA eligibility if the bank is an intermediate small or large bank, or designated as a wholesale, or limited purpose, institution using the appropriate CRA evaluation procedures. These investments are also reviewed as part of a CRA strategic plan at the option of the institution. Under the CRA, qualified investments are defined as lawful investments, deposits, membership shares or grants that have as their primary purpose one or more of the following community development purposes:
- affordable housing (including multifamily rental housing) for low- or moderate-income individuals;
- community services targeted to low- or moderate-income 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 low- or moderate-income geographies, designated disaster areas, and distressed or underserved nonmetropolitan middle-income geographies.
Consistent with the CRA, community development investments (other than grants) fall into one of two categories.2016 CRA Q&A §__.12(t)-8 The first category—current-period investments—includes investments originated since the bank's last CRA evaluation. The second category includes prior-period investments still outstanding at the time of the institution's current CRA evaluation. In qualifying both categories, examiners ensure each investment benefits the assessment area (or broader area that includes the assessment area2016 CRA Q&A §__.23(a)-1) consistent with one of the four primary purposes above. Additionally, for both categories, the examiner will determine the dollar amount of credit the institution will receive based on guidance from the CRA Interagency Questions and Answers and will identify the level of responsiveness the investment has to the area's credit and community development needs. Generally, assigned credit for each category is dependent on the level of benefit received by low- and moderate-income individuals, small businesses or small farms from the investment.
Unlike current-period investments, which receive credit for the bank's level of investment at inception, the aggregate amount of prior-period qualified investments is ongoing and by design is prone to deterioration. The three major reasons for deterioration include maturity of the investment, declining investment balances and changing economic conditions of assessment areas. Banks are required to report a prior-period investment according to its value on the start date of the current CRA evaluation; therefore, balances of prior-period investments may change.2016 CRA Q&A §__.23(e)-2 Additionally, changes in assessment area economic conditions may result in less or no credit being given for a prior-year investment. Upward shifts in area population income, as tracked through the census, may result in the reclassification of low- or moderate-income tracts to middle- or upper-income tracts, or may result in a reduction to the percentage of students eligible for free or reduced lunches—both of which might negatively impact qualification of associated investments. Similarly, prior-year investments that had previously benefited nonmetropolitan distressed and/or middle-income areas may no longer be considered as qualified if the economic conditions of the designated area have improved.
Reviewing the prior-period investment portfolio enables banks to detect possible deterioration and proactively make new investments to maintain or improve their CRA investment positions. Best practices include reviewing the prior-year investments at least annually. Commonly, CRA officers will consult with investment staff regarding all investments in an assessment area, not just those that qualified during its last evaluation, to ensure they identify possible qualified investments that may have been overlooked at the last evaluation. When reviewing, changes in census tract income levels may be monitored using the Federal Financial Institutions Examination Council (FFIEC) Online Census Data System. Similarly, changes in distressed and underserved tracts may be followed through the FFIEC list of Distressed and Underserved Tracts. By adopting periodic monitoring practices of prior-period investments, banks may alleviate unexpected changes to their CRA ratings.