I need some clarification on determining a small business loan or small farm loan for the Lending Test. Some of my training materials state if the loan amount is under $1 million it is considered a small business loan (or under $500,000 for small farm) but other training materials state gross annual revenues of $1 million or less. Which one is it?

Furthermore, I have created a form for our borrowers to fill out if they have a employee/s that would be considered LMI based on the MFI and their hourly rate. I don't necessarily want to take away small business loans in our AA from the lending test but is it fair to take those only out of our area and put them as a CD loan which would make our in/out ratio better? Is that not ethical? Can I pick and choose based on whether it is in or out? Obviously loans over $1 million would have to be on the CD test but just looking for other options.

Thank you!

TL;DR: A loan amount that is equal to or less than 1MM is not CD if you are anything except a wholesale or limited purpose institution because the loan will be reported on the call report. Further, there are 3 methods of determining if a business is appropriate in size and that is if they have equal to or less than 1MM in revenue, meet the size eligibility standards of the SBDC, or SBIC for the primary purpose of economic development. So I think you are confusing call reporting requirements and the size and purpose test for economic development.

To be considered a small business loan, a loan must meet the definition of ‘‘loans to small businesses’’ in the instructions in the Call Report. In general, a loan to a nonprofit organization, for business or farm purposes, where the loan is secured by nonfarm nonresidential property and the original amount of the loan is $1 million or less, if a business loan, or $500,000 or less, if a farm loan, would be reported in the Call Report as a small business or small farm loan. If a loan to a nonprofit organization is reportable as a small business or small farm loan, it cannot also be considered as a community development loan, except by a wholesale or limited purpose institution. Loans to nonprofit organizations that are not small business or small farm loans for Call Report purposes may be considered as community development loans if they meet the regulatory definition of ‘‘community development.’’

What you are talking about is the test to determine if a CD Activity qualifies for the Primary Purpose of Economic Development. To meet the size eligibility standard a banks activity whether it be a loan, investment, or service must:

• meet the size eligibility standards of the Small Business Administration’s Development Company (SBDC)
• or Small Business Investment Company (SBIC) programs
• or have gross annual revenues of $1 million or less.

To define Gross Annual Revenue we look at all income before expenses, deductions, amortization, depreciation, and distributions. To define simply, it is the amount of money coming into the business through all means.

The second test is the "Purpose Test" which means that your activity must promote economic development, the following examples are assumed to support economic development:

1. permanent job creation, retention, and/or improvement
   1. for low- or moderate-income persons;
   2. in low- or moderate-income geographies;
   3. in areas targeted for redevelopment by Federal, state, local, or tribal governments;
   4. by financing intermediaries that lend to, invest in, or provide technical assistance to start-ups or recently formed small businesses or small farms; or
   5. through technical assistance or supportive services for small businesses or farms, such as shared space, technology, or administrative assistance; or
2. Federal, state, local, or tribal economic development initiatives that include provisions for creating or improving access by low- or moderate-income persons to jobs or to job training or workforce development programs.

Only wholesale and limited purpose institutions can decide to use Small Business loans as CD if they choose. Small business loans are governed by the Call report if you are not those aforementioned institution types. So if a loan is equal to or less than 1MM, or 500M for small farm it is to be reported on the Call Report. If a loan is greater than 1MM or 500M for small farm it has to meet the size standard of the SBIC, SBDC, or earn less than 1MM a year in gross revenue. The other way to get around this is designate a loan as RS, and claim that the loan is attracting people, or businesses to the area, and stabilizing the job market.

I have the same question, however, our institution is a ISB. I am trying to wrap my head around Small Business Lending Test and Community Development Loans. As I understand it, a small business loan as defined by call report with a community development purpose can be used under the lending test or CD loan. You would place in the bucket where you need the points. This assumes that the loan is not HMDA reportable. With HMDA reportable and multi-family, you would have the option to report as CD loan also. I, too, am confused about the $1 million in revenues as it pertains to CD loans. To recap what you are saying - eligible CD loans include loans to small businesses with a CD purpose. If over $1 million in revenue, take the revitalization and stabilization tack. Is that correct?

As an ISB if you have chosen to be tested as a large institution then small business loans cannot be considered as CD loans. Also, If a 1-4 family residence is taken in abundance of caution then that loan will be considered as both HMDA and small business as long as the loan is less than or equal to 1MM

The purpose of the Small Business test, and the CD Test allows examiners to look at how you lend to small businesses vs. large businesses. When you are subject to the small business test, the regulators don't want you to be double counting loans. That's why when a loan qualifies as small business it cannot be also considered as CD. Some ISBs aren't subject to the small business test, and so those ISBs can report those loans less than 1MM as CD because there is no double counting in the exam.

I would refer to the CRA Loan Data Collection Grid when engaging in your review as that will lay it out easiest (https://www.dallasfed.org/~/media/documents/cd/pubs/craloan.pdf). The small business test is only concerned with small business loans that have non-real estate collateral less than 1MM, permanent loans with non-farm nonresidential real estate as collateral less than 1MM, and the abundance of caution deal (excluding farm from example).

Let's say a loan is made to a small business that is for construction/temporary/development then as long as it has a CD Purpose you can qualify the loan as CD. There are 4 CD Purposes, and the only strict one is Economic Development which requires the loan to meet a size, and purpose test.

In regards to the above 1MM in revenue tact is if the loan is over 1MM meeting the above criteria in the CRA Loan Data Collection Grid is because of the size test in Economic Development where Revitalization and Stabilization does not have a size test so as long as the record posses the requirements for RS.

Remember the only time you can double count loans between the Call Report, the Lending Test, and HMDA is for Multifamily housing (5+ unit) or the refinance abundance of caution scenario.