If our Bank is financing a working capital loan for a company that provides medical assistance to mentally ill patients and the majority of these patients are recipients of Medicare/Medicaid benefits, would this qualify for CRA credit? If so, what type of documentation should we obtain?
Thank you for your help!

Is the company a nonprofit organization? If so, you could count it as community development. If not, then it would be as small business loan. I would get documentation about the company and make the examiners aware that you are counting a community development type loan as a business loan (because of dumb rules).

It may qualify as a Small Business loan if its $1 Million or less, but it may not be a Community Development loan.

CD loans need to show that Low and Moderate income Individuals receive a benefit "primarily" for housing or jobs. While this cause may be worthy the mental capacity of their clients is not a consideration.

You need to show the service is provided to LMI individuals.

I'm going to disagree with you on that one Don. If the entity provides services to LMI people or neighborhoods it would qualify for CD credit if it's not otherwise reportable. (Ie borrower, collateral, etc., need to make it a type 9 loan not a 1 or 2 for CRA reporting purposes).

Housing and jobs are important, but the category services is also available for CD lending qualifications. This loan (again if it qualifies otherwise) would fall under CD Services to LMI individuals. And Anon, I use these worksheets for all of my writeups:

http://www.bankersonline.com/tools/compliance/cdforms.html

I haven't updated them since my name was Lowrie heh heh, but they're still on target for use in reporting during an exam.

Welcome back Dawnie. Hope you and your baby are doing well.

This is another one of those really confusing areas of CRA. The Q & A's address the issue of "Are community development activities limited to those that promote economic development?"
The answer is "no" and goes on to explain that, "Community development also includes community or tribal-based child care, educational, health or social services targeted to low- or moderate income persons . . . "
However, the definition of Community Development Services (rendered by a reporting lender) as explained in the Q & A mandates they be financial in nature. But this limitation applies to the reporting lender, not the borrower who may be providing CD services.

So the loan in question (which involves a borrower who renders services that may qualify as community development activity) potentially could be considered a CD loan (assuming proper documentation and the loan hasn't been reported as a small business loan) if the organization's services "target" low- or moderate income people. In many cases Medicare beneficiaries (who are retired) would meet the LMI definition. Medicaid beneficiaries, by definition I believe, are people with very limited incomes who may be considered as qualified LMI beneficiaries of the borrower's services. So there is a real potential of a qualified CD loan, subject to development of the facts as qualified above. I would get a clear statement of purpose from the borrower stipulating who the beneficiaries of their services are and how they determined that a majority are low- or moderate-income people. If you can establish that the Medicare/Medicaid income limits and/or the income of the patients is within the LMI range you've passed the first hurdle. Is the borrower a non-profit company? If so, and the loan is not secured by non-residential non-farm property you are past another hurdle. However, if the company is for-profit you may have to report the loan as a small business loan if it is $1 million or less and unsecured or secured by commercial real estate. In that case you can't report as a CD loan, although you may present the loan to examiners for CD credit during a CRA PE based on CD characteristics of the loan.
Simple, isn't it?!
Wait to you read the proposed CRA Q&A's!!

Thanks Dawnie & Len. I didn't think I was off base with my answer. I just said it in a lot less words.

Dawnie, hope your little monkey is letting you get some sleep.

Just figures that Dawnie would sneak back in the CRA Forum! Welcome back you mommy you!

Original anon here.
The company is not a non-profit and the collateral will most likely be accounts receivable. The company says it will give us a written statement that 95% of their patients are Medicare/Medicaid recipients. It's looking like one to add to the small loan report, right, and still bring up its services the auditors.

Thanks to all of you for your comments on my question.

As a non-profit you would probably report this as a small business loan unless it is over $1million. If you are giving a line of credit for $1 million and you prefer to report as a CD loan, why not increase the line by $1 to disqualify it as SB reportable and then report it with the CD loan with your other CD loans? One reason the mega lenders report much more CD lending than community banks is this arbitrary limit. They not only are bigger than their community bank counterparts, many of their "small business" loans are over $1 million and are not reportable. This means the ones that have CD characteristics get reported as CD loans while the community bankers under $1 million loans are reported as SB loans even though they have CD characteristics.

Ok, I was just being lazy and not logging in and then, wow, where did that reply button go? Looks like we have to log in now to post/reply.

I should have asked this in my first post...our Bank falls into the new category for CRA exams. We have not completely decided which way to go for the fear of the weight community development has in the new exam and we've traditionally not had a lot of luck with community development activities. If we do choose the new approach, we would not have the small business/farm report to get credit for the loan, would the community development application be the same and we would get no credit for the loan?

Dabba I'm not sure of your question and this may not be what you are asking but here goes.

In an ISB exam you still have the CRA Test to pass which would consider your Small Business and Small Farm loan activity. You may not have a report like you have had in the past and examiners will do what they term as a "Sampling" (This has been covered in other posts Basically they will pull a few loans and apply a formula to determine your CRA activity. See post dated 8/20/2005 Understanding Sampling For Intermediate Size Banks)

It is recommended that you do periodic analysis of your CRA activity. Selecting the Large bank exam criteria generall requires a self assessment whose data can be used by examiners if you choose to provide it. Nothing like giving them data you have alrady seen the results of.

Under an ISB exam a seperate Test is given for Community Development. (Criteria also posted in other threads) You have to pass both test in order to pass the CRA exam.

So yes under ISB exam procedures you would get credit for your Small Business/Farm activity all be it a "sampling" and you have to pass both tests in order to pass the CRA exam with an acceptable rating.

Thank you for being so patient with me. You understood my question as well as I did!! It's obvious I need to dig in and get a better understanding of the new rules. I have just gotten myself thoroughly confused and I need to step back, re-read and regroup and try not to panic.

Dabba, some bankers think that they will get credit for community development loans as an ISB that they won't get credit for as a "Large Bank" (because they would report some CD loans as small business loans as a large bank). The rules for defining community development are essentially the same for all banks. It doesn't matter what your size is when it comes to determing what is a community development loan. However, the new wrinkle in the ISB situation is the requirement that you must pass a separate community development activities test in order to get an overall satisfactory PE.

The revised regulation uses language that emphasizes the regulators' expectation that a bank will develop a community development needs assessment using the type of information you would have in a business or marketing plan. So a serious effort will have to be put into the project to demonstrate you are serious about your community development responsibilities. It all boils down to "Am I willing to bet my bank's CRA Performance Evaluation on my community development activity?"

Quote:

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If you are giving a line of credit for $1 million and you prefer to report as a CD loan, why not increase the line by $1 to disqualify

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Thanks for the kind words all I was missing work I guess and had to visit! Then of course the little darling gave me a scare and sent us back to the doctors so I couldn't play CRA anymore.

SO...Len...Umm when you say what you said up above you mean to do it in the best interests of the client right? Not to structure your lending in any way to benefit your CRA outcome right? Cuz ummm that's against the rules (sure it's done of course, but we don't talk about it)

So anon...if you do umm happen to provide the credit at the higher dollar amount (one million one) be sure it's in the client's best interest, and don't mention ummm well don't say a darned thing or even think about perhaps doing this because you wanted CD credit for it (Is that vague enough?) If an examiner saw a statement like "We wanted CD credit for the loan to enhance our CRA examination and booked the loan for one million one dollar and one cent with this in mind" The examiner might get out his or her ugly stick* and beat you with it

*small print....examiners are rarely ugly. The writer of this post should not be penalized for mentioning the ugly stick. Unnamed sources have confirmed that examiners have been reported to engage in the possible use of ugly sticks to use as weapons of mass distraction (WMD's) against silly banker's who try to trick them. This will not be confirmed or denied prior to the end of your examination cycle or the end of this post, whichever comes last.

LOL!!! I have to say that Dawnie cracks me up! You are so clever with your words. I just wanted to say Congratulations on your new precious baby boy and hope that this little scare you had is over. I pray he is okay!;) Have a Happy Thanksgiving to all!!!!:)