Consumer Compliance Outlook: First Quarter 2014

Community Reinvestment Act: The Transition from Small Bank to Intermediate Small Bank

As a community bank’s assets increase over time, its classification under the Community Reinvestment Act (CRA) can change from a small bank (SB) to an intermediate small bank (ISB).1 When this occurs, the relevant CRA examination procedures change because ISBs are subject to both a lending test and a community development (CD) test, while SBs are only subject to a streamlined lending test that focuses on retail activities. This change need not be a source of stress for the institution or its personnel provided they arm themselves with necessary information about, and undertake appropriate preparation for, the transition.

The CRA regulations provide different evaluation methods in response to basic differences in institutions’ structures and operations.2 This article reviews the CRA asset-size triggers that result in an institution evolving from an SB to an ISB, reviews the differences between SB and ISB evaluations, and proposes some recommendations for new and existing ISBs.

ISB Asset-Size Threshold

Regulation BB, 12 C.F.R. §228.12(u),3 defines an ISB as a “a small bank with assets of at least $300 million as of December 31 of both of the prior two calendar years and less than $1.202 billion as of December 31 of either of the prior two calendar years.”4 Accordingly, if an institution’s assets were over the threshold of $300 million as of both December 31, 2012, and December 31, 2013, it would be considered an ISB on January 1, 2014. Because asset sizes can fluctuate, both under and over the relevant threshold during the course of a given year, the year-end asset sizes for two successive years are used to determine whether a bank is an SB, an ISB, or a large bank and which set of examination procedures will be used for the bank’s CRA evaluation. The Federal Financial Institutions Examination Council has published a document that explains this further.5 Note that the ISB examination procedures are used for all ISBs, even for those that have just crossed the threshold. An SB that is approaching the ISB threshold can ensure success by understanding the performance tests and criteria for an ISB and becoming engaged and taking actions before it becomes an ISB.

SB versus ISB CRA Expectations

The CRA typically classifies institutions based upon their asset size. The classification determines which CRA performance criteria and tests are used to evaluate an institution’s CRA performance. As previously noted, the primary difference between SB and ISB performance evaluations is that an ISB evaluation includes the CD test in addition to the small bank lending test. The CD test will be new to institutions that have only recently become ISBs.6

Under the lending test, the following performance criteria are reviewed: net loan-to-deposit ratio; percentage of lending-related activities located inside the institution’s assessment area(s); geographic distribution of loans; record of lending to borrowers of different income levels and to businesses and farms of different sizes; and a record of taking action, if warranted, in response to written complaints about the institution’s performance in helping meet community credit needs.7

The loan products evaluated under the lending test vary, depending on an institution’s major product lines. Relevant lending products include residential mortgage loans (e.g., home-purchase loans, home-improvement loans, and refinancings), small business loans, small farm loans, and consumer loans.

The CD test measures the extent to which an institution engages in community development activities. In evaluating the responsiveness of a bank’s community development activities, examiners review the volume, mix, and qualitative aspects of community development loans, of qualified investments, and of community development services. Specifically, the CD test uses the following performance criteria:

At its heart, the CD test focuses on determining whether an institution understands and is responsive to the community development needs of its assessment area(s). In many cases, new ISBs will already be well placed to do so; in other instances, however, recently classified ISBs may need to take deliberate steps to make community development loans, make qualified investments, and provide community development services that are responsive to community development needs in the area. The agencies that conduct CRA evaluations expect ISBs to engage in a mixture of community development loans, qualified investments, and community development services consistent with the institution’s capacity and business strategy as well as with the community development needs and opportunities in the area.

To qualify as a community development activity, relevant loans, investments, and service activities must have community development as a primary purpose.9 The Federal Reserve Board, the FDIC, and the OCC publish Interagency Questions and Answers Regarding Community Reinvestment (Interagency Q&As).10 Interagency Q&A §__.12(h)—8 explains the meaning of “primary purpose”:

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).

The Interagency Q&As also state that if “a majority of the dollars or beneficiaries are identifiable to one or more of the enumerated community development purposes, the activity will be considered to have community development as a primary purpose.” Even in cases when less than a majority of the benefits or dollars are associated with an enumerated community development purpose, a loan, investment, or service is deemed to have been made with community development as a primary purpose provided that its express, bona fide intent is one of the enumerated community development purposes, the activity is specifically structured to achieve its express community development purpose, and the activity accomplishes, or is reasonably certain to accomplish, that purpose.11

If the primary purpose is providing community services targeted to low- or moderate-income (LMI) individuals; economic development; or revitalizing or stabilizing LMI areas, designated disaster areas, distressed, or underserved nonmetropolitan middle-income areas, an institution can receive consideration for the full amount invested.12 However, if the primary purpose is for affordable housing for LMI individuals, the institution can receive consideration under CRA for only the portion of the activities that helps to provide affordable housing to LMI individuals. For example, if an institution made a loan for $10 million to a developer who designated 10 percent of the housing project as affordable housing for LMI individuals, the institution would receive CRA credit for $1 million (i.e., 10 percent of the total project). If an institution has any questions about a potential community development activity’s eligibility for CRA consideration, it should contact the agency that conducts its CRA evaluations.

Evaluation of an ISB’s CRA performance involves not only analyzing the volume of community development activities but also the responsiveness of those activities to the community development needs of the institution’s assessment area(s).13 The CD test was designed to be flexible, allowing each institution to decide how to allocate resources based on its capacity, business strategies, and community development needs and opportunities. From community to community, community development needs are likely to differ. Consideration of qualitative aspects recognizes that community development activities sometimes require special expertise or provide benefits that would otherwise not be made available. Consequently, a smaller loan may provide more qualitative benefit to a specific community than a larger dollar loan that is not as responsive to the area’s community development needs.14 The agencies that conduct CRA evaluations understand that community banks do not have the resources of larger institutions; accordingly, qualitative factors such as “innovativeness” and “complexity,” which are considered in CRA large bank evaluations, do not apply to ISBs.

To receive an outstanding rating on the CD test, an ISB’s community development performance must demonstrate excellent responsiveness to the community development needs of its assessment area(s) through community development loans, qualified investments, and community development services in light of the ISB’s capacity and community development needs and opportunities. For a satisfactory rating on the CD test, an ISB’s performance must demonstrate adequate responsiveness; in turn, poor responsiveness will lead to a needs to improve rating, and very poor responsiveness will lead to a substantial noncompliance rating.

For an ISB to receive an overall satisfactory rating for its CRA performance, it must receive at least a satisfactory rating on both the lending test and the CD test. If the institution receives an outstanding rating on one test and a satisfactory rating on the other, the institution may receive an overall outstanding rating. Both tests are weighted equally (unlike in CRA large bank evaluations where the large bank lending test is given more weight than the investment and services tests). However, if an ISB receives a needs to improve rating on either test, its overall rating will be needs to improve, as outlined in the following chart:

ISB Performance Evaluation Rating
Lending Test
CD Test
Satisfactory Satisfactory Satisfactory
Outstanding Satisfactory Satisfactory or Outstanding
Satisfactory Outstanding Satisfactory or Outstanding
Needs to Improve Satisfactory or Outstanding Needs to Improve
Satisfactory or Outstanding Needs to Improve Needs to Improve

Preparing for the ISB CD Test

Understanding the rating system allows prospective, recent, and existing ISBs to fine-tune their CRA community development programs to be responsive to community development needs and opportunities. To ensure a satisfactory or outstanding rating, a bank will want to assess the needs in its community and engage in activities responsive to those needs and the bank’s capacities. The CD test allows an ISB to apply its resources strategically to help meet community development needs through loans, investments, and services. Accordingly, CRA program elements that will benefit ISBs include: community outreach to build an understanding of its assessment area(s), training for key personnel, tracking systems for demonstrating community development performance, and performing self-assessments. Discussions with customers and community groups should provide a deeper understanding of how community development activities could benefit the community.

Implementing an appropriate CRA program that includes an emphasis on community development and includes key personnel is an important step. In the CRA context, key personnel refers not only to the chief CRA officer but also to lending, investment, and marketing personnel. Lending staff should be able to understand and identify community development lending opportunities in the assessment area(s). Likewise, investment staff should be able to identify and evaluate potential qualified investments. Marketing staff with an understanding of community development services will be better able to tailor outreach for that purpose.

The results of outreach can be used to engage in the community development activities (loans, investments, and services) that are the most responsive to community development needs and opportunities within its assessment area(s). For example, if the community lacks affordable housing, the bank may decide to engage in multifamily affordable housing lending or invest in low-income housing tax credits that benefit the assessment area(s).

Many community banks already engage in activities that qualify as community development during the regular course of business. However, if the institution is unable to provide information about these activities to examiners, the activities could be overlooked during the evaluation. Establishing an appropriate mechanism for routinely capturing information about all community development activities is an important step toward ensuring that activities are considered during the CRA examination. Once the information is collected and internally recorded, the CRA officer can compile a list of community development activities on a periodic basis (such as quarterly or annually) and have it ready for the next CRA evaluation. Tracking methods that leverage the institution’s existing loan and investment software platforms may also be useful in assisting institutions to capture community development information.

As previously referenced, performance standards are based on a review of objective quantitative data and the qualitative aspects of a bank’s performance. Self-assessments allow institutions to understand and monitor both the quantitative and qualitative aspects of their CRA performance between evaluations. Self-assessments can provide a good starting point for identifying strengths and gaps in a bank’s CRA performance. A self-assessment should include information regarding economic conditions, demographic shifts, the bank’s product offerings and business strategy, its capacity and constraints, and other factors relevant to responsiveness to community development needs and opportunities. Any information that helps to explain or quantify the extent and responsiveness of the bank’s loans, activities, and investments to community development needs and opportunities will be helpful. Although an institution is not required to conduct self-assessments or to provide its results to examiners, those results can be very useful for planning future activities and when communicating with examiners about performance and performance context.15


Although an ISB CRA evaluation includes the requirement of the CD test that does not apply to an SB evaluation, new ISBs should not be unduly concerned. Many community banks are already involved in community development activities. With appropriate preparation and extra attention to their CRA programs, new and existing ISBs should find themselves well positioned for an ISB evaluation. Specific issues and questions should be raised with your primary regulator.