New CRA Questions & Answers Released by FFIECNovember 20, 2013

The FFIEC has just released answers to 5 new or revised Questions to help clarify issues under the Community Reinvestment Act. The clarifications provided in the Q&A's which will supplement the previously issued Q&A's published in 2009 don't include any major changes.

In fact, the new Q&A's are disappointing in that they leave open many significant questions and outdated parts of CRA. For example, the Q&A's don't address technical deficiencies in the definition of what constitutes a "small business loan" which cause the omission of a significant volume of small business lending by leaving out renewed loans that are callable on demand. Nor do the new Q&A's clarify the status of small business loans that are indirectly (by virtue of guarantee) secured by residential real estate. Moreover, the growing problem related to Assessment Area delineation caused by the failure of the CRA to recognize the implications of the enormous developments in banking technology was not addressed leaving many banks with non-traditional bricks and mortar strategy (Internet banks, banks funding via secondary market sales, etc) hanging.

Finally, the enormous advantage enjoyed by banks undergoing CRA examinations conducted under Large Bank examination standards as opposed to Intermediate-Small Bank (ISB) standards was not significantly affected. Effectively, Large Banks can continue to have substandard Community Development performance and still pass a CRA exam whereas ISB's are held to a higher standard that requires "satisfactory" Community Development activities performance.

The new Q&A's touch upon the following five issues:

  1. Community Development activities outside a bank's Assessment Area
  2. will be accepted even if they don't benefit the AA as long as the institution has been responsive to community development needs and opportunities inside the AA
  3. attempt to clarify what is a regional area stating that it may include an intrastate or multistate area of which the AA is a part
  4. investment in nationwide funds - a side letter or earmark is not required but are allowed. Institutions should review CRA investment funds record with respect to geographic focus to determine if it is likely to benefit their Assessment Area
  5. Determination of LMI qualifications of community service beneficiaries (proxies)
  6. students and their families in schools with majority eligible for free or reduced price lunch
  7. Medicaid-eligible recipients are deemed qualified
  8. persons eligible for programs with income qualifications equivalent or stricter than LMI CRA definitions are reasonable proxies for LMI qualification. This includes HUD Section 8, 202, 515 and 811 programs and USDA section 514 and 516 Supplemental Nutrition Assistance programs
  9. Technical assistance activities related to Community Development organizations
  10. service on Boards is an explicit example of qualified service - it does not have to be financial in nature
  11. providing services related to technical expertise such as human resources, IT and legal services will be considered eligible for CRA community service credit even though the services provided are not financial in nature as long as the expertise is related to the volunteer's area of expertise at the financial institution
  12. Treatment of Community Development Lending in Large Bank CRA examinations
  13. Community Development lending may affect Lending Test performance rating positively or negatively (before this Q&A weak Community Development Lending could not negatively affect the Lending Test rating) or neutrally). Strong retail lending performance may offset weak community development lending results. This still leaves a large advantage to banks examined as Large Banks because "strong performance in retail lending may compensate for weak performance in community development lending" - this is not a luxury afforded to banks examined under ISB standards
  14. Consideration of certain types of CD investments
  15. Investments or loans wherein money is invested in a non-CRA community development purpose and only the income from the investment or loan is used for CD purpose- no longer total amount will be considered for CD credit - only the funds used for CD purpose - but examiners will accept situations in which the funds are only temporarily placed in non CD qualified activity. This will affect programs such as the Senior Citizens Crime Prevention Program that used this type of structure
  16. MWLI's (Minority, Women-owned and Low Income credit unions) treatment versus CDFI treatment regarding benefit to AA. Activity need not benefit the investing institution's AA but must help meet credit needs of local community in which MWLI is chartered. Lending or investing in a CDFI must help meet the community needs of the investing bank

Contact Bob Suzio at 203-245-2750 to learn how we can help you be better prepared for your next examination.