In 1977, Congress passed the Community Reinvestment
Act (the CRA) to encourage financial institutions to help meet the credit needs
of their local communities, consistent with the safe and sound operation of the
institutions. The CRA regulations, which establish the framework and criteria
for assessing a financial institution's CRA record, were substantially revised
Under the current CRA regulations, financial institutions—except
those defined by the regulations as "small" 1/—are
evaluated on their participation in local community development activities. The
regulations specifically define community development under the CRA. That definition,
which has spurred discussion since 1995, encourages financial institutions to
focus on serving the community development needs of low- or moderate- income (LMI)
individuals or areas.
When substantial changes were made to the CRA regulations in 1995,
the federal financial supervisory agencies 2/ (the agencies)
agreed to review the CRA regulations in 2002. As the first step in this review,
the agencies have published an advance notice of proposed rulemaking (ANPR) that
seeks public comment on a wide range of questions.
One issue that the agencies
raise for comment in the ANPR is the definition of community development activities
under the CRA. The agencies ask the industry and the public the following questions:
- Are the definitions of "community development" and related terms
in the CRA appropriate? If so, why? If not, how should the regulations be changed?
the CRA, "large" 3/ financial institutions are evaluated
under lending, investment and service tests. Do the provisions relating to those
institutions' community development activities effectively assess their performance
in helping to meet the credit needs of their entire communities? If so, why? If
not, how should the regulations be revised?
To foster discussion of
this important aspect of the regulations, we offer the following overview of the
current definition of community development under the CRA. (Please note that this
article is based on information from the CRA regulations and the Interagency
Questions and Answers Regarding Community Reinvestment, or the Q&A. The
regulations and the Q&A are the authoritative documents regarding the CRA,
and this article should not be construed as an interpretation of those documents.)
Income category definitions
regulations specifically define "low" and "moderate" according
to criteria defined by the U.S. Census Bureau. The definitions, as they appear
in the CRA, are listed below.
Low income means an individual income
that is less than 50 percent of the area median income, or a median family income
that is less than 50 percent, in the case of a geography.
means an individual income that is at least 50 percent and less than 80 percent
of the area median income, or a median family income that is at least 50 and less
than 80 percent, in the case of a geography.
Area median income means
1) the median family income for the metropolitan statistical area (MSA), if a
person or geography is located in an MSA; or 2) the statewide nonmetropolitan
median family income, if a person or geography is located outside an MSA.
Community development versus community development under the CRA
its most basic level, community development is any activity that promotes the
welfare of a community, from providing adequate housing and creating good jobs
to fixing streets and building parks and libraries. Community development can
also include the financing of such activities.
For financial institutions,
community development takes the form of loans, investments and services. Financial
institutions participate in community development when they lend to businesses
and homebuyers, invest in local municipal bonds, give grants to community development
organizations, provide broad access to banking services or offer their financial
expertise to community organizations.
The agencies recognize this wide range
of community development activities. However, they wrote the CRA regulations to
encourage financial institutions to focus their community development efforts
on the needs of LMI individuals and areas. As a result, the CRA regulations set
out a very specific definition of the loans, investments and services that the
agencies consider "community development."
Lending, investments and services under the CRA
Community development lending
Community development loans might
include financing for:
- Rehabilitation of affordable multifamily housing
to abate lead-based paint hazards.
- A loan pool that targets small and
emerging businesses in an LMI geography.
- Community development activities
of state, local or tribal governments such as construction of a library to serve
an LMI geography.
- Environmental clean up of an industrial site in an LMI
- A daycare center targeted to moderate-income parents.
Financial institutions must be certain that
any investment is lawful under banking laws and regulations and obtain any required
regulatory approval. Under the CRA, community development investments might include
investments, membership shares, deposits, donations or grants, such as:
- Investments in projects eligible for low-income housing tax credits.
of municipal bonds issued to fund construction of assisted-living apartments for
LMI senior citizens.
- Certificate of deposit in a credit union owned by
an Indian tribe located in a low-income area.
- Investment in a Community
Development Financial Institution, or CDFI.
- Grant to a local homeless
Community development services
services, which must be related to providing a financial service or use the financial
expertise of the banker, might include:
- Low-cost checking accounts
that make deposit services accessible to LMI individuals.
- Financial literacy
programs for school children.
- Accounting services for a food bank.
planning services for a small business owner who is hiring and training minimum
Four types of community development
According to the definition in the CRA, "community development"
- Affordable housing for LMI individuals;
services targeted to LMI individuals;
- Activities that promote economic
development by financing small businesses or small farms; or
that revitalize or stabilize LMI geographies. 4/
Affordable housing activities must
benefit or be likely to benefit LMI individuals. Further, the regulations specifically
define "low" and "moderate" income using definitions from
the U.S. Census Bureau. (Please see the box on page 7 for a list of these definitions.)
income definitions apply whether the financial institution is making a community
development loan or investment or providing a community development service. If
a financial institution wants a program to be considered as community development
under the CRA, the banker needs to know the income limits affecting participants'
eligibility for the program. Some "affordable" housing programs, for
example, target families with incomes up to 100 percent or 115 percent of the
area median family income, and such housing would not necessarily fit the definition
of affordable housing for LMI individuals used by the CRA.
Community services must be targeted to LMI individuals. For
example, to be considered as community development under the CRA, a daycare service
must be targeted to LMI families and not just serve LMI families by chance.
Activities that promote economic development by financing small businesses
or small farms
To be considered as community development under the CRA,
the agencies have specified that activities that promote economic development
by financing small businesses or small farms must meet both size and purpose tests.
To meet the size test, a business or farm must have gross annual revenues of no
more than $1 million or qualify under the U.S. Small Business Administration's
Small Business Investment Company or Small Business Development Company programs.
Many smaller financial institutions find this definition broad enough to meet
the size test with all of their agricultural and business customers.
the agencies also established a purpose test to focus the benefits of these activities
on LMI people, LMI areas or redevelopment areas. Under the purpose test, the activity
must promote economic development by supporting permanent job creation, retention
and/or improvement for persons who currently have low or moderate incomes or by
supporting permanent job creation, retention and/or improvement in low- or moderate-income
areas or in areas targeted for redevelopment by federal, state, local or tribal
Activities that revitalize or stabilize LMI areas
many activities may revitalize or stabilize LMI areas, to qualify under the CRA,
the activity must offer direct and long-term benefits to the LMI area. Activities
that provide only indirect or short-term benefits to LMI areas or individuals
are not considered community development under the CRA. Financing construction
of upper-income housing in an LMI area may bring temporary jobs to LMI individuals
or increase the local tax base, but these benefits are not enough to qualify the
activity as community development under the CRA.
Interestingly, under the
CRA, an activity can revitalize or stabilize an LMI area without taking place
there. A grocery store that is built to serve the residents of a low-income area
but is located in a middle-income area may qualify under the CRA if it provides
needed services that are not otherwise available to residents of the low-income
area. Especially in rural areas, many communities may consider themselves LMI,
but unless the median family income in a geography meets the U.S. Census Bureau's
definitions of LMI, activities that revitalize or stabilize that geography are
not considered community development under the CRA.
the purchase of general obligation bonds is considered a community development
activity by many financial institutions in smaller communities, where the market
for these bonds is thin. Unless the bonds are issued by a community that is primarily
a low- or moderate-income area, as defined by the regulations, or are otherwise
targeted to fulfill one of the four types of activities outlined above, the investment
is not considered community development for CRA purposes.
addition to specifying these definitions, the regulations restrict the services
that are considered community development under the CRA. A service must be related
to services that are generally provided by the financial services industry to
be considered community development under the CRA. Such services may include providing
information to community members on how to get or use credit or otherwise providing
credit services or information to the community.
However, any services
provided by employees of the financial institution must stem from the employees'
financial expertise. For example, if a bank officer lends her financial expertise
to the local Habitat for Humanity by serving as its treasurer and fundraiser,
the service would qualify for consideration under the CRA. But if the same officer
helps to build Habitat houses, her bank would receive no CRA credit for that service.
Once a project meets the definition of one
of the four types of community development activities, financial institutions
must consider three other important issues. Does the primary purpose of the activity
fit the definition? Does the project benefit the financial institution's assessment
area? And does it meet the "no double counting" rule?
Under the CRA, a community development loan, investment or service
must be designed for the express purpose of one of the four types of community
development defined in the regulations. The agencies set out two approaches for
determining if an activity meets this primary-purpose test.
First, if the
majority of dollars applied or beneficiaries of the activity are identifiable
to one of the four community development purposes, then the activity is considered
to have a primary purpose of community development. Alternatively, if the activity
does not meet this standard, the regulations allow that the activity may still
be considered community development if:
- The express, bona fide intent
of the activity is one of the four community development purposes;
activity is specifically structured to achieve this intent; and
- The activity
accomplishes or is reasonably certain to accomplish this intent.
example, a financial institution might finance a housing project that consists
mostly of units for middle-income families but includes a number of units for
low-income families. If the express intent of the project is to provide affordable
housing to LMI individuals, as defined by the regulations, it may qualify as community
development under the CRA although the majority of beneficiaries are not LMI.
In fact, a housing project for middle-income families, built in a low-income area,
may qualify as community development under the CRA—as revitalizing the area—if,
for example, the express intent of the project is to establish an economically
diverse community as part of a community-based revitalization plan.
final note on this topic: if an activity—such as a loan—meets the primary-purpose
test, even if less than half the dollars or beneficiaries qualify as community
development under the CRA, the entire activity—in this case, the loan—counts as
Benefit to assessment area
of the CRA is geographically based. Each financial institution delineates one
or more assessment areas in which the institution's federal regulator evaluates
the institution's record of helping to meet credit needs.
To count as community
development, an activity must benefit the financial institution's assessment area
or benefit a larger regional or statewide area that includes the assessment area.
For example, a bank's investment in a Small Business Investment Company (SBIC)
that serves the entire state in which the bank is located qualifies as community
development. This is true even if the SBIC currently serves no clients in the
bank's assessment area.
Also, community development activities that are
not structured to benefit a financial institution's assessment area may qualify
under the CRA if the activities benefit geographies or individuals located somewhere
within a broader statewide or regional area that includes the institution's assessment
area and the financial institution has adequately addressed the community
development needs of its assessment area.
"No double counting"
The agencies wanted to ensure that loans and services are considered
only once under the CRA. Thus, the regulations stipulate that the loans a financial
institution makes that count under the CRA lending test, which include home mortgage,
small business and small farm loans and may include consumer loans, cannot be
considered again as community development loans.
For example, temporary
construction loans required by a developer of single-family affordable housing
would not be reported under the lending test and so would potentially qualify
as a community development loan, while the permanent mortgages made to the homebuyers,
since they would be reported under the lending test, would not. Similarly, any
retail banking services considered under the retail banking service test are not
considered again as community development services.
There is one exception
to the "no double counting" rule: loans made to finance the purchase
or rehabilitation of multifamily housing are counted under both the lending and
the community development tests. This exception recognizes the importance of multifamily
housing finance to community development.
Implications for community groups
When a financial institution
weighs participating in a project, the CRA is generally not the only consideration.
The project's overall fit with the financial institution's mission, as well as
its benefit to the community, degree of profitability and tax issues are likely
to weigh heavily in the decision.
But if a community organization demonstrates
that its development activities provide a good fit with a financial institution's
CRA program, this can help persuade the financial institution to participate.
Therefore, community organizations should be prepared to respond to questions
that a participating financial institution might have about the exact type of
population or area served by the proposed community development activity. If a
mixed-income population will be served, the extent of service to LMI individuals
or areas needs to be quantified. Also, the community organization will need to
know if its own service area includes the assessment area of the participating
When evaluating a financial institution's CRA activities, regulators
consider the complexity and innovativeness of community development activities.
Activities that require a good deal of effort to complete or that demonstrate
a new approach to community development are considered more favorably than those
that do not. When asking a financial institution to participate in a new or challenging
activity, a community organization might find it worthwhile to emphasize these
Similarly, the agencies assess the degree to which a financial
institution's community development activities are responsive to local needs.
If a program responds to a critical need, this may be a good selling point with
the financial institution. If the community development organization has information
on the degree of this need, the financial institution likely will find it useful
to share the information with its regulator at examination time.