CRA: New Q&As Proposed

The agencies have proposed new and revised CRA questions and answers designed to elaborate on and clarify the changes to CRA that took effect on September 1, 2005. The primary topic of the new Q&As is community development. Other Q&As deal with how examiners should consider investments when made in a prior exam cycle or after a disaster designation is lifted, and how specific interpretations will apply to intermediate small banks and large banks.

Community Development
The meaning of community development is the largest topic in the proposal. The revised definition is worth your attention no matter what the size of your institution as the new definition applies to all categories of institutions.

Under the proposal, community development activities in distressed non-metropolitan areas would not need to be restricted to low- and moderate-income individuals or locations. There is an assumption underlying the distressed area concept that most development efforts would provide improved resources and opportunities for everyone. However, the examiners would be instructed to give greater weight to projects that show direct or measurable positive impact on low- or moderate-income individuals.

Projects that do not show a targeted or direct positive impact on low- or moderate-income individuals would be considered as long as the project, such as housing, helps to stabilize the community. The impact would be measured by the likelihood that the project would respond to existing needs or make the area more attractive to other economic development, such as retaining or attracting a new business or employer.

Consideration of qualified projects in distressed areas should be fairly broad as long as the institution can demonstrate two things. The project must have a primary purpose of community development and the project must have a positive (although not exclusive) impact on low- or moderate-income individuals. The purpose of community development would include attracting and retaining residents and businesses or providing jobs. Or the project can be part of a plan to revitalize and stabilize the geography. The impact should be long-term and may benefit the entire community including low- and moderate-income individuals.

The proposed answers appear to provide more latitude for finding loans and investments that would get favorable treatment. However, the answers retain the tie to low- and moderate-income benefits or impact. One issue to consider is whether the proposed answers provide the right balance between CRA's stated goal with respect to low- and moderate-income and the reality of most development projects. Many excellent development loans and investments have been excluded in the past because the institution could not show a sufficiently direct positive impact on low- or moderate-income individuals.

The positions taken on community development give recognition to the role that economic development plays in the overall health of a community. Thus, the emphasis on low- or moderate-income impact is somewhat lightened as long as the institution can show the connection to economic development that will benefit all income levels in its community. However, this position also opens the door to subjective considerations such as process and effort. If that door is opened wide, we may again be facing the documentation game as well as the measurement tests.

Designated Disaster Areas
To qualify for CRA treatment as a disaster area, the area must be so designated by a state or federal agency. No other designation, such as by a local government, would qualify. The agencies are not proposing to undertake any special notification or list of disaster areas because the designations are publically available.

The agencies have agreed that for purposes of CRA community development projects, the eligibility of the area continues to run for a 12-month period after the designation has been officially lifted by the state or federal agency. This lag period would enable institutions to earn favorable consideration for projects that may have been begun during the designation but took longer to develop to the funding or investment stage.

A similar lag period would be applied to areas that have been removed from the distressed area list. The agencies have asked for comment on whether 12 months is a sufficient period of time to accommodate projects in disaster areas or distressed areas.

The purpose of the lag time is to provide flexibility in how institutions respond to disaster needs and plan their investments. The idea is flexibility. The question is whether flexibility will work.

The proposal recognizes that not all responses to rebuilding disaster areas have equal CRA significance. This reintroduces the challenge of evaluating the quality of loans or investments. Examiners will give more weight to the projects that are most responsive to community needs. Projects that meet needs of low- or moderate-income individuals may be given more weight than others.

Service Test
A revised Q&A would clarify that providing international money remittances for low- and moderate-income individuals would be positively considered as a service. (Be sure, of course that all BSA and OFAC compliance is in place.)

Also, branches are back. While examiners will look at the products and services that you provide to low- and moderate income individuals and geographies, they will also look at how these products and services are made available. The emphasis is on branches - the location of facilities in low- and moderate-income areas.

Comments on this proposal are due by January 9, 2006.

ACTION STEPS

Study the proposed Q&As in the context of your CRA program and comments made in your last CRA examination.
Determine whether there are any distressed areas or designated disaster areas in or near your assessment area and consider how the proposed Q&As would affect your CRA program.
Review your services, giving special attention to how products and services are delivered. Be sure that you have effective delivery methods, including branches or on-site services.