CRA History. The Community Reinvestment Act passage did two things:

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Douglas Jordan
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2 CRA History The Community Reinvestment Act passage did two things: The discussion of CRA brought light to the illegal practice of redlining. Required regulated financial institutions to help meet the credit needs of all the communities they serve including low- and moderate-income communities within the boundaries of safety and soundness.

3 Purpose of CRA Requires banks to help meet the credit needs of their entire communities Including borrowers of different income levels and businesses/farms of different sizes Including low- and moderate-income neighborhoods, certain non-metropolitan middle income geographies or designated disaster areas CRA activities MUST be consistent with, safe, sound and prudent banking practices. 3

4 What is COMMUNITY DEVELOPMENT (CD)? In order to receive consideration under the CRA, a.k.a. CRA Credit : loans, investments (donations), and services must have a primary purpose consistent with the definition of community development In order to qualify as Community Reinvestment Service (volunteering): Have CD as its primary purpose Related to the provision of financial services Has not been considered as a retail service

5 CRA / Community Development Definitions In order to qualify as CRA, there must be a Community Development Purpose Serves Low- and Moderate-Income (LMI) persons or geographies Median Family Income Relevant geography to where a bank does its business Assessment Area (AA) Delineation Census tracts, MSA, Counties, etc. Whole geographies with no conspicuous gaps 5

6 Low- and Moderate-Income (LMI) Low-income = an individual income or tract income that is less than 50% of the AMI Moderate-income = an individual income or tract income that is at least 50%, and less than 80% of the AMI Middle-income = an individual income or tract income that is at least 80% of AMI, but less than 120% of AMI Upper-income = an individual income or tract income that is equal to or greater than 120% of AMI 6

7 Geography: Assessment Area (AA) Banks are required to delineate where they provide services (a.k.a. assessment area) based on the following: Must consist generally of one or more MSAs or MDs, or one or more contiguous political subdivisions such as counties, cities, or towns, and Must include geographies where an institution has its main office, branches, and deposit taking ATMs as well as surrounding areas in which it has originated or purchased a substantial portion of its loans. May adjust the boundaries to include only that portion of a political subdivision that the institution can reasonably be expected to serve. 7

8 Why is CRA important to Banks? A Bank s performance in a CRA exam can adversely affect business plans and expansion Bank regulators (FRB, FDIC, OCC) conduct CRA exams The results are published in a Performance Evaluation (PE) which is publicly available for every examined bank Banks are evaluated in different ways based on their size: Large Banks Lending Test 50% Investment Test 25% Service Test 25% Intermediate Small Banks Lending Test Community Development Test Small Banks: Five factors

9 How Can CRA Help Non-Profits? Because of CRA, Banks have a regulatory obligation to help the community in various ways Donations: CRA Qualified non-profits apply for grants Affordable Housing Economic Development Small Business / entrepreneurial Job creation and training for LMI persons or areas Community Services: most other types of non-profits including: Education related in LMI areas or for LMI persons Free medical services for LMI persons Revitalize Stabilize Providing a service or program that improves a distressed area Remember: Banks need to clearly prove that a non-profit is CRA Related with proper documentation in order to justify funding under CRA.

10 How Can CRA Help Non-Profits? Volunteering: Banks are required to show service in and to their community Service must have some relation to financial services: Volunteering to be on a Board of Directors or Committee: Must have financial oversight or management of the non-profit» Treasurer, or other board member (board decides how funds are used)» Fundraising Event Committee Teaching Financial Literacy Must be to majority LMI persons Schools that are located in LMI Areas and/or 51%+ Free reduced Lunch Volunteering Financial Expertise Free tax preparation for LMI persons (VITA Programs) Counseling or technical assistance for small businesses Some non-profits offer CRA Qualified volunteer opportunities when funded by a bank as part of sponsorship benefit thereby taking care of 2 CRA items

11 How Can CRA Help Non-Profits? To improve chances of funding under CRA criteria: Ask the CRA Officer what they need and when Geography: Be sure your non-profit is located in or serves the Bank s Assessment Area Population served by the non-profit: Must be majority (51%+) Low to Moderate Income (LMI) persons Or justified by the organization or programs being located in or targeted to LMI areas Or the primary purpose as assisting small businesses, especially those in LMI or distressed areas Be prepared to show financials

Bank Community Partners: Help a bank to target its

Help bank to fulfill its CD goals and objectives Help

a primary purpose consistent with the definition of

12 Bank Community Partners: Help a bank to target its investments and volunteering to benefit LMI communities Help bank to fulfill its CD goals and objectives Help bank to maintain awareness of CD needs Activity must have a primary purpose consistent with the definition of community development PUBLIC ORGANIZATIONS BANKS PRIVATE ORGANIZATIONS 12

Bank Community Partner Examples: For profit and nonprofit affordable housing developers Community Development Financial Institutions (CDFIs) Community Development Credit Unions Nonprofit

13 Bank Community Partner Examples: For profit and nonprofit affordable housing developers Community Development Financial Institutions (CDFIs) Community Development Credit Unions Nonprofit neighborhood-based organizations serving primarily low- to moderate-income individuals/communities Small Business Development Centers (SBDCs) and technical assistance providers Governmental agencies Foundations 13

14 What is Community Development? Affordable housing for low- or moderate-income (LMI) individuals Community services for LMI individuals Activities that promote economic development by providing financing for small businesses or small farms Activities that revitalize or stabilize LMI geographies, distressed or underserved non-metro middle-income areas, or designated disaster areas. Activities that support, enable or facilitate projects or activities that meet eligible uses criteria described in Section 2301(c) of the Housing and Economic Recovery Act of 2008 (HERA) and are conducted in designated target areas identified in plans approved by HUD in accordance with the Neighborhood Stabilization Program (NSP) 14

15 Examples of CRA Qualified Investments: Investment, grants, deposits, or shares in or to: Financial intermediaries Minority- or women-owned banks Organizations engaged in affordable housing Organizations promoting economic development by financing small businesses Low-Income Housing Tax Credits New Markets Tax Credits 15

16 Examples of CD Loans: Affordable housing rehabilitation and construction Loans to nonprofit organizations Loans in support of community facilities Loans to CDFIs or CDCs or minority and womenowned financial institutions Loans to governmental entities Loans to finance environmental cleanup or redevelopment of industrial site 16

17 Community Development Services: Has CD as its primary purpose Related to the provision of financial services Has not been considered as a retail service CD Service Examples: Credit counseling Small Business technical assistance Technical assistance to organizations serving LMI housing needs Volunteering on a Non-profit s Board of Directors with a CD mission Providing financial education for LMI individuals Fundraising for a CD Nonprofit 17

18 Bankers: Developing a CRA Strategy Know your community Research community needs Research community demographics Learn about public plans and initiatives Know about other local community based organizations Assess Bank Performance Context Identify and understand bank capacity, strengths and business model Catalogue CD opportunities to lend, invest or provide services in your community Competitive Analysis What are other banks doing?

19 Knowing Community Credit Needs Review written reports and publications on credit needs and programs to serve LMI families. Become knowledgeable of reports by entities that specifically research and analyze policies affecting LMI populations and underserved areas. Explore needs of the least-served areas, where opportunities may be greatest and the competition is least. Compare and contrast products and services provided by the bank against the areas served. Match Bank Products and Services with Community Credit Needs Compare the bank s lending focus, its economic and performance context, and its products and services to community credit needs. Use government loan programs as resources to enhance lending opportunities and to manage and mitigate lending risk.

20 Bankers: A Successful CRA Strategy Should communicate the role and function of CD activities from the top down CD products generate revenue. CD initiatives may expand a bank s market. CD initiatives may complement existing product lines. CD risks may be mitigated and managed Considers costs and CRA return on investment Bang for the Buck A strong CRA Strategy: Is by plan and not by chance Is founded on facts and research Should be integrated into a bank s business plan from all levels Is responsive and diverse to the community it serves

Upon completion of this session you should: Become more familiar with the history/purpose of CRA;

CRA Basics Objectives Upon completion of this session you should: Become more familiar with the history/purpose of CRA; Become more familiar with terms and definitions under the CRA regulation; Introduce