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Daily Rules, Proposed Rules, and Notices of the Federal Government

FEDERAL DEPOSIT INSURANCE CORPORATION

Office of Thrift Supervision

[Docket ID OTS-2010-0004]

RIN--3064-AC97

Community Reinvestment Act; Interagency Questions and Answers Regarding Community Reinvestment; Notice

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS).
ACTION: Notice.
SUMMARY: The OCC, Board, FDIC, and OTS (the agencies) are adopting as final the Interagency Questions and Answers Regarding Community Reinvestment (Questions and Answers) that were proposed on January 6, 2009. In response to comments received, the agencies made minor clarifications to the new and revised questions and answers that were proposed.
DATES: Effective Date:March 11, 2010.
FOR FURTHER INFORMATION CONTACT: Board:Cathy Gates, Senior Project Manager, (202) 452-3946; or Brent Lattin, Attorney, (202) 452-3667, Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551.

FDIC:Janet R. Gordon, Senior Policy Analyst, Division of Supervision and Consumer Protection, Compliance Policy Branch, (202) 898-3850; or Susan van den Toorn, Counsel, Legal Division, (202) 898-8707, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.

OTS:Stephanie M. Caputo, Senior Compliance Program Analyst, Compliance and Consumer Protection, (202) 906-6549; or Richard Bennett, Senior Compliance Counsel, Regulations and Legislation Division, (202) 906-7409, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION: Background

The OCC, Board, FDIC, and OTS implement the Community Reinvestment Act (CRA) (12 U.S.C. 2901et seq.) through their CRA regulations.See12 CFR parts 25, 228, 345, and 563e. The agencies' regulations are interpreted primarily through the “Interagency Questions and Answers Regarding Community Reinvestment” (Questions and Answers), which provide guidance for use by agency personnel, financial institutions, and the public. The Questions and Answers were first published under the auspices of the Federal Financial Institutions Examination Council (FFIEC) in 1996 (61 FR 54647), and were last revised on January 6, 2009 (2009 Questions and Answers) (74 FR 498).

Thesupplementary informationpublished with the 2009 Questions and Answers also proposed for comment one new question and answer (Q&A) and two revised Q&As. 74 FR 504-06. Together, the agencies received comments from 19 different parties. The commenters represented financial institutions and their trade associations, community development advocates and organizations, and others.

As discussed below, this document adopts the three new and revised Q&As that were proposed in January 2009, with minor clarifications, as appropriate, in response to comments received. The agencies are also adopting conforming revisions to an existing Q&A.

The Interagency Questions and Answers are grouped by the provision of the CRA regulations that they discuss, are presented in the same order as the regulatory provisions, and employ an abbreviated method of citing to the regulations. For example, the small bank performance standards for national banks appear at 12 CFR 25.26; for Federal Reserve System member banks supervised by the Board, they appear at 12 CFR 228.26; for state nonmember banks, they appear at 12 CFR 345.26; and for thrifts, the small savings association performance standards appear at 12 CFR 563e.26. Accordingly, the citation would be to 12 CFR __.26. Each Q&A is numbered using a system that consists of the regulatory citation and a number, connected by a dash. For example, the first Q&A addressing 12 CFR __.26 would be identified as § __.26—1.

Although a particular Q&A may provide guidance on one regulatory provision,e.g.,12 CFR __.22, which relates to the lending test applicable to large institutions, its content may also be applicable to, for example, small institutions, which are evaluated pursuant to small institution performance standards found at 12 CFR __.26. Thus, readers with a particular interest in small institution issues, for example, should also consult the guidance that describes the lending, investment, and service tests.

The Questions and Answers are indexed to aid readers in locating specific information in the document. The index contains keywords, listed alphabetically, along with numerical indicators of questions and answers that relate to that keyword. The list of Q&As addressing each keyword in the index is not intended to be exhaustive.

New and Revised Q&As New Q&A: Community Services Targeted to Low- or Moderate-Income Individuals

The agencies proposed a new Q&A, § __.12(g)(2)—1, that would provide examples of ways an institution that provides community services could determine that the community services are targeted to low- and moderate-income individuals when the institution does not know the actual income of the individuals. Several comments were received from community groups and banking organizations that supported the examples in the proposal. In addition, one suggestion was made to clarify that community services can include those provided by an entity with a broad mission, provided that the activities themselves qualify as community services. This suggestion was incorporated into the Q&A examples as a new fourth bullet.

Another commenter suggested that the definition of community services be broadened to cover financial literacy programs provided to school children of any income level in any school. Financial literacy programs are an example of community development services.SeeQ&A § __.12(i)—3. The commenter's suggestion was not adopted because community development services must have a primary purpose of community development, which would require the financial literacy programs to be targeted to low- or moderate-income individuals.

The new Q&A is being adopted as revised.

Revised Q&A § __.12(h)—8: Primary Purpose of Community Development

The regulations require community development activities to have a “primary purpose of community development.”See12 CFR __.12(h), __.12(i), and __.12(t). Q&A § __.12(h)—8 historically has provided two methods of determining whether an activity has a primary purpose of community development: (1) If a majority of the dollars or beneficiaries of the activity are identifiable to one or more of the enumerated community development purposes, then an activity will be considered to possess the requisite primary purpose; and (2) if the express, bona fide intent of the activity, as stated, for example, in a prospectus, loan proposal, or community action plan, is primarily one or more of the enumerated community development purposes; the activity is specifically structured (given any relevant market or legal constraints or performance context factors) to achieve the expressed community development purpose; and the activity accomplishes, or is reasonably certain to accomplish, the community development purpose involved, then the requisite primary purpose may be found.

To date, the agencies have generally indicated that if an activity has a primary purpose of community development (determined by either method above), the entire investment, loan, or service would be considered in an institution's CRA evaluation. However, if an activity does not have a primary purpose of community development applying these standards, then it would not be considered as a qualified investment, community development loan, or community development service.

The agencies proposed to revise Q&A § __.12(h)—8 to allow pro rata consideration for an activity that provides some affordable housing targeted to low- or moderate-income individuals, but when it would not be deemed to have a primary purpose of community development measured by a majority of the entire activity's beneficiaries or dollar value, or by relying on the express purpose of the activity. The proposed Q&A would specifically allow activities related to the provision of mixed-income housing, such as in connection with a development that has a mixed-income housing component or an affordable housing set-aside required by federal, state, or local government, to be eligible for consideration as an activity that has a “primary purpose” of community development at the election of the institution. In those cases, the proposed Q&A would allow an institution to receive pro rata consideration for the portion of the activity that provides affordable housing to low- or moderate-income individuals.

Commenters generally supported the proposed revision. One commenter suggested that the agencies should allow only pro rata treatment in all situations where less than a majority of an activity's dollars will be used for community development. This commenter further suggested that the agencies should eliminate full consideration of activities that have an “express, bona fide intent” of community development when the measurable portion of any benefit bestowed or dollars applied is less than a majority of the entire activity's benefits or dollar value. The agencies decline to adopt this suggestion. If the express, bona fide intent of an activity is community development, even though the measurable portion of any benefit bestowed or dollars applied is less than a majority of the entire activity's benefits or dollar value, the agencies continue to believe that it is important that such activities, such as projects involving low-income housing tax credits, receive full consideration.

Several commenters were concerned that the proposal would result in a reduction of the amount of CRA consideration provided to financial institutions' loans or investments in mixed-income properties. The agencies do not intend this result. In fact, the proposed revision should increase the amount of consideration available to institutions. Some commenters believed that all activities in connection with properties with a set-aside for affordable units received total quantitative CRA consideration. Although this is true if the express, bona fide intent of the entire project is community development, that is not always the intent. For example, a private development in which a developer is required to set aside a small percentage of the units as affordable housing in order to receive zoning approval would not have the requisite express, bona fide intent. As a result of the revision, however, the financial institution could receive consideration for the pro rata amount of the affordable housing set-aside.

The agencies had asked whether allowing pro rata consideration would spur the construction and rehabilitation of housing for low- or moderate-income persons. Commenters provided mixed responses. A number of commenters believed that allowing pro rata consideration may provide an added incentive to financial institutions. A couple of commenters, however, believed that the revision would not spur additional construction and rehabilitation because, for example, the development of local housing is based on a local agency's determination of its community housing needs and is not influenced by a financial institution's CRA requirements.

Commenters responded nearly unanimously that the pro rata treatment should not be restricted only to instances where a governmental entity requires a set-aside. Commenters believed that the voluntary inclusion of affordable housing components in development by private developers should also receive consideration. As one commenter stated, “Affordable housing is affordable housing.” The final question and answer would allow pro rata treatment in connection with any project that provides affordable housing, regardless of whether a governmental entity requires a set-aside.

In response to the agencies' question about how the amount of the pro rata share should be determined for reporting purposes (by units or by loan proceeds), several commenters urged flexibility. Several commenters believed that the entire amount of the loan should be reported. Other commenters suggested that when the actual amount of funds attributed to the affordable units is readily apparent, for example in connection with a construction loan, the actual dollar amount should be considered. However, in other cases, where the actual amount of funds is not readily apparent, the pro rata share should be determined based on the percentage of set-aside units.

The final question and answer has been clarified. Institutions will determine the pro rata share of the activity that provides affordable housing to low- or moderate-income individuals based on the percentage of units set-aside for affordable housing for low- or moderate-income individuals. The Agencies believe that this method of determining the portion of a loan or investment that provides affordable housing for low- or moderate-income individuals imposes the least amount of burden on developers and lenders to differentiate the construction costs, including the proportional share of costs related to infrastructure, common areas, and site amenities, between market and affordable units.

The proposed revision restricted the pro rata treatment only to affordable housing activities by financialinstitutions. The agencies asked whether the pro rata treatment should apply only to affordable housing or whether the pro rata treatment should also apply to loans or investments with other community development purposes.

Since the CRA regulations were revised in 1995, affordable housing initiatives have included more and more mixed-income housing. Fewer new or rehabilitated housing projects provide primarily low-income housing. Mixed-income housing is an important goal in government housing assistance programs. Because of the compelling public interest in affordable housing programs, the agencies believe that it is appropriate that the pro rata treatment be adopted with regard to affordable housing. However, the agencies decline to expand the coverage of this treatment to activities other than those providing affordable housing at this time. The agencies will keep abreast of developments in other types of community development activities and evaluate the effectiveness of the pro rata treatment in connection with affordable housing programs. We will reassess whether such treatment should be afforded other types of community development activities at a later date. The agencies have added clarifying language to the final answer to emphasize that the pro rata treatment applies only to affordable housing activities.

Finally, the agencies asked for comment on whether the adoption of pro rata treatment would lead to unjustifiable inflation of community development activities. Commenters unanimously asserted that it would not.

The agencies are adopting the revised Q&A with the clarifications described above.

Revised Q&A § __.42(b)(2)—3: Data Collection

The agencies explained in January 2009 that if the proposed revision to Q&A § __.12(h)—8, described above, were adopted, the agencies would also revise Q&A § __.42(b)(2)—3 to address data collection and reporting of the pro rata share of the mixed-income housing loans described in the Q&A. The agencies proposed that, if an institution were to elect to have the portion of mixed-income housing loans that were set aside for low- or moderate-income housing considered as community development loans, in order to receive consideration for such loans, the institution would need to collect and report data on only the portions of the loans that provide housing that is affordable for low- or moderate-income individuals.

Three commenters addressed the proposed revision to this Q&A. The general concern addressed by the commenters was the potential for confusion in reporting the pro rata share of an affordable housing activity. As in the past, the full amount of the loan should be collected and reported if the majority of the dollars or beneficiaries are identifiable to a community development purpose. Similarly, the full amount of the loan should be collected and reported if the express, bona fide intent of the loan or investment is community development, even though a majority of the dollars or beneficiaries are not identifiable with a community development purpose. In connection with affordable housing projects that provide mixed-income housing, but where a majority of the dollars or units do not have a community development purpose and the express, bona fide intent of the loan is not community development, the institution must report only the pro rata dollar amount of the portion of the loan that provides affordable housing to low- or moderate-income individuals. The pro rata dollar amount of the total activity will be based on the percentage of units set-aside for affordable housing for low- or moderate-income individuals. The agencies are adopting the proposed revision to the Q&A, but have added a sentence to the final answer to clarify this guidance.

Conforming Revision to Q&A § __.22(a)(2)—4: Other Loan Data

Q&A § __.22(a)(2)—4, as adopted in January of 2009 (74 FR 517), stated that loans that do not have a primary purpose of community development, but where a certain amount or percentage of units is set aside for affordable housing, should be submitted by the financial institution for consideration as “other loan data.” In the supplementary information published with the proposed revisions to the interagency questions and answers, the agencies advised that, if the proposed revision to Q&A § __.12(h)—8 were adopted, a conforming change to Q&A § __.22(a)(2)—4 would be made. The answer to Q&A § __.22(a)(2)—4 has been revised to remove the reference to “loans that do not have a primary purpose of community development, but where a certain amount or percentage of units is set aside for affordable housing” as an example of “other loan data” because such activities are eligible for pro rata treatment.

The text of the final Interagency Questions and Answers follows:

Interagency Questions and Answers Regarding Community Reinvestment § __.11—Authority, purposes, and scope § __.11(c) Scope §§ __.11(c)(3) & 563e.11(c)(2) Certain special purpose institutions

§§ __.11(c)(3) & 563e.11(c)(2)—1:Is the list of special purpose institutions exclusive?

A1. No, there may be other examples of special purpose institutions. These institutions engage in specialized activities that do not involve granting credit to the public in the ordinary course of business. Special purpose institutions typically serve as correspondent banks, trust companies, or clearing agents or engage only in specialized services, such as cash management controlled disbursement services. A financial institution, however, does not become a special purpose institution merely by ceasing to make loans and, instead, making investments and providing other retail banking services.

§§ __.11(c)(3) & 563e.11(c)(2)—2:To be a special purpose institution, must an institution limit its activities in its charter?

A2. No. A special purpose institution may, but is not required to, limit the scope of its activities in its charter, articles of association, or other corporate organizational documents. An institution that does not have legal limitations on its activities, but has voluntarily limited its activities, however, would no longer be exempt from Community Reinvestment Act (CRA) requirements if it subsequently engaged in activities that involve granting credit to the public in the ordinary course of business. An institution that believes it is exempt from CRA as a special purpose institution should seek confirmation of this status from its supervisory agency.

§ __.12—Definitions § __.12(a) Affiliate

§ __.12(a)—1:Does the definition of “affiliate” include subsidiaries of an institution?

A1. Yes, “affiliate” includes any company that controls, is controlled by, or is under common control with another company. An institution's subsidiary is controlled by the institution and is, therefore, an affiliate.

§ __.12(f) Branch

§ __.12(f)—1:Do the definitions of “branch,” “automated teller machine (ATM),” and “remote service facility(RSF)” include mobile branches, ATMs, and RSFs?

A1. Yes. Staffed mobile offices that are authorized as branches are considered “branches,” and mobile ATMs and RSFs are considered “ATMs” and “RSFs.”

§ __.12(f)—2:Are loan production offices (LPOs) branches for purposes of the CRA?

A2. LPOs and other offices are not “branches” unless they are authorized as branches of the institution through the regulatory approval process of the institution's supervisory agency.

§ __.12(g) Community development

§ __.12(g)—1:Are community development activities limited to those that promote economic development?

A1. No. Although the definition of “community development” includes activities that promote economic development by financing small businesses or farms, the rule does not limit community development loans and services and qualified investments to those activities. Community development also includes community- or tribal-based child care, educational, health, or social services targeted to low- or moderate-income persons, affordable housing for low- or moderate-income individuals, and activities that revitalize or stabilize low- or moderate-income areas, designated disaster areas, or underserved or distressed nonmetropolitan middle-income geographies.

§ __.12(g)—2:Must a community development activity occur inside a low- or moderate-income area, designated disaster area, or underserved or distressed nonmetropolitan middle-income area in order for an institution to receive CRA consideration for the activity?

A2. No. Community development includes activities, regardless of their location, that provide affordable housing for, or community services targeted to, low- or moderate-income individuals and activities that promote economic development by financing small businesses and farms. Activities that stabilize or revitalize particular low- or moderate-income areas, designated disaster areas, or underserved or distressed nonmetropolitan middle-income areas (including by creating, retaining, or improving jobs for low- or moderate-income persons) also qualify as community development, even if the activities are not located in these areas. One example is financing a supermarket that serves as an anchor store in a small strip mall located at the edge of a middle-income area, if the mall stabilizes the adjacent low-income community by providing needed shopping services that are not otherwise available in the low-income community.

§ __.12(g)—3:Does the regulation provide flexibility in considering performance in high-cost areas?

A3. Yes, the flexibility of the performance standards allows examiners to account in their evaluations for conditions in high-cost areas. Examiners consider lending and services to individuals and geographies of all income levels and businesses of all sizes and revenues. In addition, the flexibility in the requirement that community development loans, community development services, and qualified investments have as their “primary” purpose community development allows examiners to account for conditions in high-cost areas. For example, examiners could take into account the fact that activities address a credit shortage among middle-income people or areas caused by the disproportionately high cost of building, maintaining or acquiring a house when determining whether an institution's loan to or investment in an organization that funds affordable housing for middle-income people or areas, as well as low- and moderate-income people or areas, has as its primary purpose community development. See also Q&A § __.12(h)—8 for more information on “primary purpose.”

§ __.12(g)—4:The CRA provides that, in assessing the CRA performance of non-minority- and non-women-owned (majority-owned) financial institutions, examiners may consider as a factor capital investments, loan participations, and other ventures undertaken by the institutions in cooperation with minority- or women-owned financial institutions and low-income credit unions (MWLIs), provided that these activities help meet the credit needs of local communities in which the MWLIs are chartered. Must such activities also benefit the majority-owned financial institution's assessment area?

A4. No. Although the regulations generally provide that an institution's CRA activities will be evaluated for the extent to which they benefit the institution's assessment area(s) or a broader statewide or regional area that includes the institution's assessment area(s), the agencies apply a broader geographic criterion when evaluating capital investments, loan participations, and other ventures undertaken by that institution in cooperation with MWLIs, as provided by the CRA. Thus, such activities will be favorably considered in the CRA performance evaluation of the institution (as loans, investments, or services, as appropriate), even if the MWLIs are not located in, or such activities do not benefit, the assessment area(s) of the majority-owned institution or the broader statewide or regional area that includes its assessment area(s). The activities must, however, help meet the credit needs of the local communities in which the MWLIs are chartered. The impact of a majority-owned institution's activities in cooperation with MWLIs on the majority-owned institution's CRA rating will be determined in conjunction with its overall performance in its assessment area(s).

Examples of activities undertaken by a majority-owned financial institution in cooperation with MWLIs that would receive CRA consideration may include:

• Making a deposit or capital investment;

• Purchasing a participation in a loan;

• Loaning an officer or providing other technical expertise to assist an MWLI in improving its lending policies and practices;

• Providing financial support to enable an MWLI to partner with schools or universities to offer financial literacy education to members of its local community; or

• Providing free or discounted data processing systems, or office facilities to aid an MWLI in serving its customers.

§ __.12(g)(1) Affordable housing (including multifamily rental housing) for low- or moderate-income individuals

§ __.12(g)(1)—1:When determining whether a project is “affordable housing for low- or moderate-income individuals,” thereby meeting the definition of “community development,” will it be sufficient to use a formula that relates the cost of ownership, rental, or borrowing to the income levels in the area as the only factor, regardless of whether the users, likely users, or beneficiaries of that affordable housing are low- or moderate-income individuals?

A1. The concept of “affordable housing” for low- or moderate-income individuals does hinge on whether low- or moderate-income individuals benefit, or are likely to benefit, from the housing. It would be inappropriate to give consideration to a project that exclusively or predominately houses families that are not low- or moderate-income simply because the rents or housing prices are set according to a particular formula.

For projects that do not yet have occupants, and for which the income of the potential occupants cannot be determined in advance, or in other projects where the income of occupants cannot be verified, examiners willreview factors such as demographic, economic, and market data to determine the likelihood that the housing will “primarily” accommodate low- or moderate-income individuals. For example, examiners may look at median rents of the assessment area and the project; the median home value of either the assessment area, low- or moderate-income geographies or the project; the low- or moderate-income population in the area of the project; or the past performance record of the organization(s) undertaking the project. Further, such a project could receive consideration if its express, bona fide intent, as stated, for example, in a prospectus, loan proposal, or community action plan, is community development.

§ __.12(g)(2) Community services targeted to low- or moderate-income individuals

§ __.12(g)(2)—1:Community development includes community services targeted to low- or moderate-income individuals. What are examples of ways that an institution could determine that community services are offered to low- or moderate-income individuals?

A1: Examples of ways in which an institution could determine that community services are targeted to low- or moderate-income persons include:

• The community service is targeted to the clients of a nonprofit organization that has a defined mission of serving low- and moderate-income persons, or, because of government grants, for example, is limited to offering services only to low- or moderate-income persons.

• The community service is offered by a nonprofit organization that is located in and serves a low- or moderate-income geography.

• The community service is conducted in a low- or moderate-income area and targeted to the residents of the area.

• The community service is a clearly defined program that benefits primarily low- or moderate-income persons, even if it is provided by an entity that offers other programs that serve individuals of all income levels.

• The community service is offered at a workplace to workers who are low- and moderate-income, based on readily available data for the average wage for workers in that particular occupation or industry (see, e.g., http://www.bls.gov/bls/blswage.htm(Bureau of Labor Statistics)).

§ __.12(g)(3) Activities that promote economic development by financing businesses or farms that meet certain size eligibility standards

§ __.12(g)(3)—1:“Community development” includes activities that promote economic development by financing businesses or farms that meet certain size eligibility standards. Are all activities that finance businesses and farms that meet these size eligibility standards considered to be community development?

A1. No. The concept of “community development” under 12 CFR __.12(g)(3) involves both a “size” test and a “purpose” test. An institution's loan, investment, or service meets the “size” test if it finances, either directly or through an intermediary, entities that either 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 meet the “purpose test,” the institution's loan, investment, or service must promote economic development. These activities are considered to promote economic development if they support permanent job creation, retention, and/or improvement for persons who are currently low- or moderate-income, or supports permanent job creation, retention, and/or improvement either in low- or moderate-income geographies or in areas targeted for redevelopment by Federal, state, local, or tribal governments. The agencies will presume that any loan to or investment in a SBDC, SBIC, Rural Business Investment Company, New Markets Venture Capital Company, or New Markets Tax Credit-eligible Community Development Entity promotes economic development. (But also refer to Q&As § __.42(b)(2)—2, § __.12(h)—2, and § __.12(h)—3 for more information about which loans may be considered community development loans.)

In addition to their quantitative assessment of the amount of a financial institution's community development activities, examiners must make qualitative assessments of an institution's leadership in community development matters and the complexity, responsiveness, and impact of the community development activities of the institution. In reaching a conclusion about the impact of an institution's community development activities, examiners may, for example, determine that a loan to a small business in a low- or moderate-income geography that provides needed jobs and services in that area may have a greater impact and be more responsive to the community credit needs than does a loan to a small business in the same geography that does not directly provide additional jobs or services to the community.

§ __.12(g)(4) Activities that revitalize or stabilize certain geographies

§ __.12(g)(4)—1:Is the revised definition of community development, effective September 1, 2005 (under the OCC, Board, and FDIC rules) and effective April 12, 2006 (under OTS's rule), applicable to all institutions or only to intermediate small institutions?

A1. The revised definition of community development is applicable to all institutions. Examiners will not use the revised definition to qualify activities that were funded or provided prior to September 1, 2005 (under the OCC, Board, and FDIC rules) or prior to April 12, 2006 (under OTS's rule).

§ __.12(g)(4)—2:Will activities that provide housing for middle-income and upper-income persons qualify for favorable consideration as community development activities when they help to revitalize or stabilize a distressed or underserved nonmetropolitan middle-income geography or designated disaster areas?

A2. An activity that provides housing for middle- or upper-income individuals qualifies as an activity that revitalizes or stabilizes a distressed nonmetropolitan middle-income geography or a designated disaster area if the housing directly helps to revitalize or stabilize the community by attracting new, or retaining existing, businesses or residents and, in the case of a designated disaster area, is related to disaster recovery. The Agencies generally will consider all activities that revitalize or stabilize a distressed nonmetropolitan middle-income geography or designated disaster area, but will give greater weight to those activities that are most responsive to community needs, including needs of low- or moderate-income individuals or neighborhoods. Thus, for example, a loan solely to develop middle- or upper-income housing in a community in need of low- and moderate-income housing would be given very little weight if there is only a short-term benefit to low- and moderate-income individuals in the community through the creation of temporary construction jobs. (Except in connection with intermediate small institutions, a housing-related loan is not evaluated as a “community development loan” if it has been reported or collected by the institution or its affiliate as a home mortgage loan,unless it is a multifamily dwelling loan.See12 CFR __.12(h)(2)(i) and Q&As § __.12(h)—2 and § __.12(h)—3.) An activity will be presumed to revitalize or stabilize such a geography or area if the activity is consistent with a bona fide government revitalization or stabilization plan or disaster recovery plan.SeeQ&As § __.12(g)(4)(i)—1 and § __.12(h)—5.

Inunderservednonmetropolitan middle-income geographies, activities that provide housing for middle- and upper-income individuals may qualify as activities that revitalize or stabilize such underserved areas if the activities also provide housing for low- or moderate-income individuals. For example, a loan to build a mixed-income housing development that provides housing for middle- and upper-income individuals in an underserved nonmetropolitan middle-income geography would receive positive consideration if it also provides housing for low- or moderate-income individuals.

§ __.12(g)(4)(i) Activities that revitalize or stabilize low- or moderate-income geographies

§ __.12(g)(4)(i)—1: What activities are considered to “revitalize or stabilize” a low- or moderate-income geography, and how are those activities considered?

A1. Activities that revitalize or stabilize a low- or moderate-income geography are activities that help to attract new, or retain existing, businesses or residents. Examiners will presume that an activity revitalizes or stabilizes a low- or moderate-income geography if the activity has been approved by the governing board of an Enterprise Community or Empowerment Zone (designated pursuant to 26 U.S.C. § 1391) and is consistent with the board's strategic plan. They will make the same presumption if the activity has received similar official designation as consistent with a federal, state, local, or tribal government plan for the revitalization or stabilization of the low- or moderate-income geography. For example, foreclosure prevention programs with the objective of providing affordable, sustainable, long-term loan restructurings or modifications to homeowners in low- or moderate-income geographies, consistent with safe and sound banking practices, may help to revitalize or stabilize those geographies.

To determine whether other activities revitalize or stabilize a low- or moderate-income geography, examiners will evaluate the activity's actual impact on the geography, if information about this is available. If not, examiners will determine whether the activity is consistent with the community's formal or informal plans for the revitalization and stabilization of the low- or moderate-income geography. For more information on what activities revitalize or stabilize a low- or moderate-income geography, see Q&As § __.12(g)—2 and § __.12(h)—5.

§ __.12(g)(4)(ii) Activities that revitalize or stabilize designated disaster areas

§ __.12(g)(4)(ii)—1:What is a “designated disaster area” and how long does it last?

A1. A “designated disaster area” is a major disaster area designated by the federal government. Such disaster designations include, in particular, Major Disaster Declarations administered by the Federal Emergency Management Agency (FEMA) (http://www.fema.gov), but excludes counties designated to receive only FEMA Public Assistance Emergency Work Category A (Debris Removal) and/or Category B (Emergency Protective Measures).

Examiners will consider institution activities related to disaster recovery that revitalize or stabilize a designated disaster area for 36 months following the date of designation. Where there is a demonstrable community need to extend the period for recognizing revitalization or stabilization activities in a particular disaster area to assist in long-term recovery efforts, this time period may be extended.

§ __.12(g)(4)(ii)—2:What activities are considered to “revitalize or stabilize” a designated disaster area, and how are those activities considered?

A2. The Agencies generally will consider an activity to revitalize or stabilize a designated disaster area if it helps to attract new, or retain existing, businesses or residents and is related to disaster recovery. An activity will be presumed to revitalize or stabilize the area if the activity is consistent with a bona fide government revitalization or stabilization plan or disaster recovery plan. The Agencies generally will consider all activities relating to disaster recovery that revitalize or stabilize a designated disaster area, but will give greater weight to those activities that are most responsive to community needs, including the needs of low- or moderate-income individuals or neighborhoods. Qualifying activities may include, for example, providing financing to help retain businesses in the area that employ local residents, including low- and moderate-income individuals; providing financing to attract a major new employer that will create long-term job opportunities, including for low- and moderate-income individuals; providing financing or other assistance for essential community-wide infrastructure, community services, and rebuilding needs; and activities that provide housing, financial assistance, and services to individuals in designated disaster areas and to individuals who have been displaced from those areas, including low- and moderate-income individuals (see, e.g.,Q&As § __.12(i)—3; § __.12(t)—4; § __.22(b)(2) & (3)—4; § __.22(b)(2) & (3)—5; and § __.24(d)(3)—1).

§ __.12(g)(4)(iii) Activities that revitalize or stabilize distressed or underserved nonmetropolitan middle-income geographies

§ __.12(g)(4)(iii)—1:What criteria are used to identify distressed or underserved nonmetropolitan, middle-income geographies?

A1. Eligible nonmetropolitan middle-income geographies are those designated by the Agencies as being in distress or that could have difficulty meeting essential community needs (underserved). A particular geography could be designated as both distressed and underserved. As defined in 12 CFR __.12(k), a geography is a census tract delineated by the United States Bureau of the Census.

A nonmetropolitan middle-income geography will be designated as distressed if it is in a county that meets one or more of the following triggers: (1) An unemployment rate of at least 1.5 times the national average, (2) a poverty rate of 20 percent or more, or (3) a population loss of 10 percent or more between the previous and most recent decennial census or a net migration loss of five percent or more over the five-year period preceding the most recent census.

A nonmetropolitan middle-income geography will be designated as underserved if it meets criteria for population size, density, and dispersion that indicate the area's population is sufficiently small, thin, and distant from a population center that the tract is likely to have difficulty financing the fixed costs of meeting essential community needs. The Agencies will use as the basis for these designations the “urban influence codes,” numbered “7,” “10,” “11,” and “12,” maintained by the Economic Research Service of the United States Department of Agriculture.

The Agencies publish data source information along with the list of eligible nonmetropolitan census tracts on the Federal Financial InstitutionsExamination Council Web site (http://www.ffiec.gov).

§ __.12(g)(4)(iii)—2:How often will the Agencies update the list of designated distressed and underserved nonmetropolitan middle-income geographies?

A2. The Agencies will review and update the list annually. The list is published on the Federal Financial Institutions Examination Council Web site (http://www.ffiec.gov).

To the extent that changes to the designated census tracts occur, the Agencies have determined to adopt a one-year “lag period.” This lag period will be in effect for the twelve months immediately following the date when a census tract that was designated as distressed or underserved is removed from the designated list. Revitalization or stabilization activities undertaken during the lag period will receive consideration as community development activities if they would have been considered to have a primary purpose of community development if the census tract in which they were located were still designated as distressed or underserved.

§ __.12(g)(4)(iii)—3:What activities are considered to “revitalize or stabilize” a distressed nonmetropolitan middle-income geography, and how are those activities evaluated?

A3. An activity revitalizes or stabilizes a distressed nonmetropolitan middle-income geography if it helps to attract new, or retain existing, businesses or residents. An activity will be presumed to revitalize or stabilize the area if the activity is consistent with a bona fide government revitalization or stabilization plan. The Agencies generally will consider all activities that revitalize or stabilize a distressed nonmetropolitan middle-income geography, but will give greater weight to those activities that are most responsive to community needs, including needs of low- or moderate-income individuals or neighborhoods. Qualifying activities may include, for example, providing financing to attract a major new employer that will create long-term job opportunities, including for low- and moderate-income individuals, and activities that provide financing or other assistance for essential infrastructure or facilities necessary to attract or retain businesses or residents.SeeQ&As § __.12(g)(4)(i)—1 and § __.12(h)—5.

§ __.12(g)(4)(iii)—4:What activities are considered to “revitalize or stabilize” an underserved nonmetropolitan middle-income geography, and how are those activities evaluated?

A4. The regulation provides that activities revitalize or stabilize an underserved nonmetropolitan middle-income geography if they help to meet essential community needs, including needs of low- or moderate-income individuals. Activities such as financing for the construction, expansion, improvement, maintenance, or operation of essential infrastructure or facilities for health services, education, public safety, public services, industrial parks, or affordable housing, will be evaluated under these criteria to determine if they qualify for revitalization or stabilization consideration. Examples of the types of projects that qualify as meeting essential community needs, including needs of low- or moderate-income individuals, would be a new or expanded hospital that serves the entire county, including low- and moderate-income residents; an industrial park for businesses whose employees include low- or moderate-income individuals; a new or rehabilitated sewer line that serves community residents, including low- or moderate-income residents; a mixed-income housing development that includes affordable housing for low- and moderate-income families; or a renovated elementary school that serves children from the community, including children from low- and moderate-income families.

Other activities in the area, such as financing a project to build a sewer line spur that connects services to a middle- or upper-income housing development while bypassing a low- or moderate-income development that also needs the sewer services, generally would not qualify for revitalization or stabilization consideration in geographies designated as underserved. However, if an underserved geography is also designated as distressed or a disaster area, additional activities may be considered to revitalize or stabilize the geography, as explained in Q&As § __.12(g)(4)(ii)—2 and § __.12(g)(4)(iii)—3.

§ __.12(h) Community development loan

§ __.12(h)—1:What are examples of community development loans?

A1. Examples of community development loans include, but are not limited to, loans to:

• Borrowers for affordable housing rehabilitation and construction, including construction and permanent financing of multifamily rental property serving low- and moderate-income persons;

• Not-for-profit organizations serving primarily low- and moderate-income housing or other community development needs;

• Borrowers to construct or rehabilitate community facilities that are located in low- and moderate-income areas or that serve primarily low- and moderate-income individuals;

• Financial intermediaries including Community Development Financial Institutions (CDFIs), New Markets Tax Credit-eligible Community Development Entities, Community Development Corporations (CDCs), minority- and women-owned financial institutions, community loan funds or pools, and low-income or community development credit unions that primarily lend or facilitate lending to promote community development;

• Local, state, and tribal governments for community development activities;

• Borrowers to finance environmental clean-up or redevelopment of an industrial site as part of an effort to revitalize the low- or moderate-income community in which the property is located; and

• Businesses, in an amount greater than $1 million, when made as part of the Small Business Administration's 504 Certified Development Company program.

The rehabilitation and construction of affordable housing or community facilities, referred to above, may include the abatement or remediation of, or other actions to correct, environmental hazards, such as lead-based paint, that are present in the housing, facilities, or site.

§ __.12(h)—2:If a retail institution that is not required to report under the Home Mortgage Disclosure Act (HMDA) makes affordable home mortgage loans that would be HMDA-reportable home mortgage loans if it were a reporting institution, or if a small institution that is not required to collect and report loan data under the CRA makes small business and small farm loans and consumer loans that would be collected and/or reported if the institution were a large institution, may the institution have these loans considered as community development loans?

A2. No. Although small institutions are not required to report or collect information on small business and small farm loans and consumer loans, and some institutions are not required to report information about their home mortgage loans under HMDA, if these institutions are retail institutions, the agencies will consider in their CRA evaluations the institutions' originations and purchases of loans that would have been collected or reported as small business, small farm, consumer or home mortgage loans, had the institution beena collecting and reporting institution under the CRA or the HMDA. Therefore, these loans will not be considered as community development loans, unless the small institution is an intermediate small institution (see§ __.12(h)—3). Multifamily dwelling loans, however, may be considered as community development loans as well as home mortgage loans.See alsoQ&A § __.42(b)(2)—2.

§ __.12(h)—3:May an intermediate small institution that is not subject to HMDA reporting have home mortgage loans considered as community development loans? Similarly, may an intermediate small institution have small business and small farm loans and consumer loans considered as community development loans?

A3. Yes. In instances where intermediate small institutions are not required to report HMDA or small business or small farm loans, these loans may be considered, at the institution's option, as community development loans, provided they meet the regulatory definition of “community development.” If small business or small farm loan data have been reported to the agencies to preserve the option to be evaluated as a large institution, but the institution ultimately chooses to be evaluated under the intermediate small institution examination standards, then the institution would continue to have the option to have such loans considered as community development loans. However, if the institution opts to be evaluated under the lending, investment, and service tests applicable to large institutions, it may not choose to have home mortgage, small business, small farm, or consumer loans considered as community development loans.

Loans other than multifamily dwelling loans may not be considered under both the lending test and the community development test for intermediate small institutions. Thus, if an institution elects to have certain loans considered under the community development test, those loans may not also be considered under the lending test, and would be excluded from the lending test analysis.

Intermediate small institutions may choose individual loans within their portfolio for community development consideration. Examiners will evaluate an intermediate small institution's community development activities within the context of the responsiveness of the activity to the community development needs of the institution's assessment area.

§ __.12(h)—4:Do secured credit cards or other credit card programs targeted to low- or moderate-income individuals qualify as community development loans?

A4. No. Credit cards issued to low- or moderate-income individuals for household, family, or other personal expenditures, whether as part of a program targeted to such individuals or otherwise, do not qualify as community development loans because they do not have as their primary purpose any of the activities included in the definition of “community development.”

§ __.12(h)—5:The regulation indicates that community development includes “activities that revitalize or stabilize low- or moderate-income geographies.” Do all loans in a low- to moderate-income geography have a stabilizing effect?

A5. No. Some loans may provide only indirect or short-term benefits to low- or moderate-income individuals in a low- or moderate-income geography. These loans are not considered to have a community development purpose. For example, a loan for upper-income housing in a low- or moderate-income area is not considered to have a community development purpose simply because of the indirect benefit to low- or moderate-income persons from construction jobs or the increase in the local tax base that supports enhanced services to low- and moderate-income area residents. On the other hand, a loan for an anchor business in a low- or moderate-income area (or a nearby area) that employs or serves residents of the area and, thus, stabilizes the area, may be considered to have a community development purpose. For example, in a low-income area, a loan for a pharmacy that employs and serves residents of the area promotes community development.

§ __.12(h)—6:Must there be some immediate or direct benefit to the institution's assessment area(s) to satisfy the regulations' requirement that qualified investments and community development loans or services benefit an institution's assessment area(s) or a broader statewide or regional area that includes the institution's assessment area(s)?

A6. No. The regulations recognize that community development organizations and programs are efficient and effective ways for institutions to promote community development. These organizations and programs often operate on a statewide or even multistate basis. Therefore, an institution's activity is considered a community development loan or service or a qualified investment if it supports an organization or activity that covers an area that is larger than, but includes, the institution's assessment area(s). The institution's assessment area(s) need not receive an immediate or direct benefit from the institution's specific participation in the broader organization or activity, provided that the purpose, mandate, or function of the organization or activity includes serving geographies or individuals located within the institution's assessment area(s).

In addition, a retail institution that, considering its performance context, has adequately addressed the community development needs of its assessment area(s) will receive consideration for certain other community development activities. These community development activities must benefit geographies or individuals located somewhere within a broader statewide or regional area that includes the institution's assessment area(s). Examiners will consider these activities even if they will not benefit the institution's assessment area(s).

§ __.12(h)—7:What is meant by the term “regional area”?

A7. A “regional area” may be as large as a multistate area. For example, the “mid-Atlantic states” may comprise a regional area.

Community development loans and services and qualified investments to statewide or regional organizations that have a bona fide purpose, mandate, or function that includes serving the geographies or individuals within the institution's assessment area(s) will be considered as addressing assessment area needs. When examiners evaluate community development loans and services and qualified investments that benefit a regional area that includes the institution's assessment area(s), they will consider the institution's performance context as well as the size of the regional area and the actual or potential benefit to the institution's assessment area(s). With larger regional areas, benefit to the institution's assessment area(s) may be diffused and, thus, less responsive to assessment area needs.

In addition, as long as an institution has adequately addressed the community development needs of its assessment area(s), it will also receive consideration for community development activities that benefit geographies or individuals located somewhere within the broader statewide or regional area that includes the institution's assessment area(s), even if those activities do not benefit its assessment area(s).

§ __.12(h)—8:What is meant by the term “primary purpose” as that term is used to define what constitutes a community development loan, aqualified investment, or a community development service?

A8. A loan, investment, or service has as its primary purpose community development when it is designed for the express purpose of revitalizing or stabilizing low- or moderate-income areas, designated disaster areas, or underserved or distressed nonmetropolitan middle-income areas, providing affordable housing for, or community services targeted to, low- or moderate-income persons, or promoting economic development by financing small businesses and farms that meet the requirements set forth in 12 CFR __.12(g). To determine whether an activity is designed for an express community development purpose, the agencies apply one of two approaches. First, if a majority of the dollars or beneficiaries of the activity are identifiable to one or more of the enumerated community development purposes, then the activity will be considered to possess the requisite primary purpose. Alternatively, where the measurable portion of any benefit bestowed or dollars applied to the community development purpose is less than a majority of the entire activity's benefits or dollar value, then the activity may still be considered to possess the requisite primary purpose, and the institution may receive CRA consideration for the entire activity, if (1) the express, bona fide intent of the activity, as stated, for example, in a prospectus, loan proposal, or community action plan, is primarily one or more of the enumerated community development purposes; (2) the activity is specifically structured (given any relevant market or legal constraints or performance context factors) to achieve the expressed community development purpose; and (3) the activity accomplishes, or is reasonably certain to accomplish, the community development purpose involved.

Generally, a loan, investment, or service will be determined to have a “primary purpose” of community development only if it meets the criteria described above. However, an activity involving the provision of affordable housing also may be deemed to have a “primary purpose” of community development in certain other limited circumstances in which these criteria have not been met. Specifically, activities related to the provision of mixed-income housing, such as in connection with a development that has a mixed-income housing component or an affordable housing set-aside required by federal, state, or local government, also would be eligible for consideration as an activity that has a “primary purpose” of community development at the election of the institution. In such cases, an institution may receive pro rata consideration for the portion of such activities that helps to provide affordable housing to low- or moderate-income individuals. For example, if an institution makes a $10 million loan to finance a mixed-income housing development in which ten percent of the units will be set aside as affordable housing for low- and moderate-income individuals, the institution may elect to treat $1 million of such loan as a community development loan. In other words, the pro rata dollar amount of the total activity will be based on the percentage of units set-aside for affordable housing for low- or moderate-income individuals.

The fact that an activity provides indirect or short-term benefits to low- or moderate-income persons does not make the activity community development, nor does the mere presence of such indirect or short-term benefits constitute a primary purpose of community development. Financial institutions that want examiners to consider certain activities should be prepared to demonstrate the activities' qualifications.

§ __.12(i) Community development service

§ __.12(i)—1:In addition to meeting the definition of “community development” in the regulation, community development services must also be related to the provision of financial services. What is meant by “provision of financial services”?

A1. Providing financial services means providing services of the type generally provided by the financial services industry. Providing financial services often involves informing community members about how to get or use credit or otherwise providing credit services or information to the community. For example, service on the board of directors of an organization that promotes credit availability or finances affordable housing is related to the provision of financial services. Providing technical assistance about financial services to community-based groups, local or tribal government agencies, or intermediaries that help to meet the credit needs of low- and moderate-income individuals or small businesses and farms is also providing financial services. By contrast, activities that do not take advantage of the employees' financial expertise, such as neighborhood cleanups, do not involve the provision of financial services.

§ __.12(i)—2:Are personal charitable activities provided by an institution's employees or directors outside the ordinary course of their employment considered community development services?

A2. No. Services must be provided as a representative of the institution. For example, if a financial institution's director, on her own time and not as a representative of the institution, volunteers one evening a week at a local community development corporation's financial counseling program, the institution may not consider this activity a community development service.

§ __.12(i)—3:What are examples of community development services?

A3. Examples of community development services include, but are not limited to, the following:

• Providing financial services to low- and moderate-income individuals through branches and other facilities located in low- and moderate-income areas, unless the provision of such services has been considered in the evaluation of an institution's retail banking services under 12 CFR __.24(d);

• Increasing access to financial services by opening or maintaining branches or other facilities that help to revitalize or stabilize a low- or mo