Consumer Compliance Outlook > 2016 > Second Issue 2016

Consumer Compliance Outlook: Second Issue 2016

Revised Interagency Questions and Answers Regarding Community Reinvestment

On July 25, 2016, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (agencies) published final revisions to the Interagency Questions and Answers (Q&As) Regarding Community Reinvestment in the Federal Register. PDF1  The agencies publish the Q&As to provide guidance on the Community Reinvestment Act (CRA) implementing regulations.In the revised version, the agencies added six new Q&As and revised nine existing ones. They did not adopt one of the two proposed revisions to guidance concerning the availability and effectiveness of retail banking services in response to comments they received but did adopt the other proposed revision to this guidance. The changes focus on the following aspects of CRA performance evaluation:

Here, we provide the full text of the six new Q&As and summarize the nine that were revised.

NEW Q&AS

COMMUNITY DEVELOPMENT SERVICES

1. Q&A §____.24(a)—1: How do examiners evaluate retail banking services and development services under the large institution service test?

Retail banking services and community development services are the two components of the service test and are both important in evaluating a large institution’s performance. In evaluating retail banking services, examiners consider the availability and effectiveness of an institution’s systems for delivering banking services, particularly in low- and moderate-income geographies and to low- and moderate-income individuals; the range of services provided in low-, moderate-, middle-, and upper-income geographies; and the degree to which the services are tailored to meet the needs of those geographies. Examples of retail banking services that improve access to financial services, or decrease costs, for low- or moderate-income individuals include:

In evaluating community development services, examiners consider the extent to which the institution provides such services and their innovativeness and responsiveness to community needs. Examples of community development services are listed in Q&A __.12(i)—3. Examiners will consider any information provided by the institution that demonstrates community development services benefit low- or moderate-income individuals or are responsive to community development needs.

2. Q&A §___.24(e)—2: In evaluating community development services, what quantitative and qualitative factors do examiners review?

The community development services criteria are important factors in the evaluation of a large institution’s service test performance. According to the regulation, the agencies evaluate the extent to which the financial institution provides community development services as well as the innovativeness and responsiveness of such services. Examiners consider both quantitative and qualitative aspects of community development services during the evaluation. Examiners also assess quantitative factors to determine the extent to which community development services are offered and used. The review is not limited to a single quantitative factor. For example, quantitative factors may include the number of:

Examiners will also consider qualitative factors by assessing the degree to which community development services are innovative or responsive to community needs. See Q&As §____.21(a)—4 and §____.21(a)—3. These performance criteria recognize that community development services sometimes require special expertise and effort on the part of the institution and provide benefit to the community that would not otherwise be possible. Such an assessment will depend on the impact of a particular activity on community needs and the benefits received by a community. See Q&A § ___.28(b)—1. For example, a financial institution employee’s unique expertise and service on the board of a community organization may demonstrate these qualitative factors when the employee’s ongoing engagement significantly improves the products, services, or operations of the community development organization. Examiners will consider any relevant information provided by the institution and from third parties that documents the extent, innovativeness, and responsiveness of community development services.

RESPONSIVENESS

3. Q&A §____.21(a)—3: ‘‘Responsiveness’’ to credit and community development needs is either a criterion or otherwise a consideration in all of the performance tests. How do examiners evaluate whether a financial institution has been ‘‘responsive’’ to credit and community development needs?

There are three important factors that examiners consider when evaluating responsiveness: quantity, quality, and performance context. Examiners evaluate the volume and type of an institution’s activities (i.e., retail and community development loans and services and qualified investments) as a first step in evaluating the institution’s responsiveness to credit and community development needs. In addition, an assessment of ‘‘responsiveness’’ encompasses the qualitative aspects of performance, including the effectiveness of the activities. For example, some community development activities require specialized expertise or effort on the part of the institution or provide a benefit to the community that would not otherwise be made available. In some cases, a smaller loan may have more benefit to a community than a larger loan. In other words, when evaluated qualitatively, some activities are more responsive than others. Activities are more responsive if they are successful in meeting identified credit and community development needs. For example, investing in a community development organization that specializes in originating home mortgage loans to low- or moderate-income individuals would be considered more responsive than an investment of the same amount in a single-family mortgage-backed security in which the majority of the loans are to low- or moderate-income borrowers. Although both of these activities may receive consideration as a qualified investment, the former example would be considered to be more responsive than the latter. Examiners evaluate the responsiveness of an institution’s activities to credit and community development needs in light of the institution’s performance context. That is, examiners consider the institution’s capacity, its business strategy, the needs of the community, and the opportunities for lending, investments, and services in the community. To inform their assessment, examiners may consider information about credit and community development needs and opportunities from many sources, including:

Responsiveness to community development needs and opportunities in an institution’s assessment area(s) is also a key consideration when an institution plans to engage in community development activities that benefit areas outside of its assessment area(s). Q&A § _____.12(h)—6 states that an institution will receive consideration for activities that benefit geographies or individuals located somewhere within a broader statewide or regional area that includes the institution’s assessment area(s) even if they will not benefit the institution’s assessment area(s), as long as the institution has been responsive to community development needs and opportunities in its assessment area(s). When considering whether an institution has been responsive to community development needs and opportunities in its assessment area(s), examiners will consider all of the institution’s community development activities in its assessment area(s). Examiners will also consider as responsive to assessment area needs community development activities that support an organization or activity that covers an area that is larger than, but includes, the institution’s assessment area(s). This is true if the purpose, mandate, or function of the organization or activity includes serving geographies or individuals located within the institution’s assessment area(s), even though the institution’s assessment area(s) did not receive an immediate or direct benefit from the institution’s participation in the organization or activity. For example, suppose an institution were to invest in a statewide community development fund that was organized with the purpose of providing community development loans throughout the state in which the institution is located. Examiners would consider this investment when evaluating the institution’s responsiveness to community development needs and opportunities in its assessment area(s) even if the fund had not provided a loan within the institution’s assessment area(s).

INNOVATIVENESS

4. Q&A §____.21(a)—4: What is meant by ‘‘innovativeness’’?

‘‘Innovativeness’’ is one of several qualitative considerations under the lending, investment, and service tests. The community development test for wholesale and limited purpose institutions similarly considers ‘‘innovative’’ loans, investments, and services in the evaluation of performance. Under the CRA regulations, all innovative practices or activities will be considered when an institution implements meaningful improvements to products, services, or delivery systems that respond more effectively to customer and community needs, particularly those segments enumerated in the definition of community development. Institutions should not innovate simply to meet this criterion of the applicable test, particularly if, for example, existing products, services, or delivery systems effectively address the needs of all segments of the community. See Q&A §_____.28—1.

Innovative activities are especially meaningful when they emphasize serving, for example, low- or moderate-income consumers or distressed or underserved nonmetropolitan middle-income geographies in new or more effective ways. Innovativeness may also include products, services, or delivery systems already present in the assessment area by institutions that are not leaders in innovation — for example, due to the lack of available financial resources or technological expertise — when they subsequently introduce those products, services, or delivery systems to their low- or moderate-income customers or segments of consumers or markets not previously served. Practices that cease to be innovative may still receive qualitative consideration for being flexible, complex, or responsive.

REVITALIZE OR STABILIZE UNDERSERVED NONMETROPOLITAN MIDDLE-INCOME GEOGRAPHIES

5. Q&A §___.12(g)—4: Can examples of community development activities discussed in a particular Q&A also apply to other types of community development activities not specifically discussed in that Q&A if they have a similar community development purpose?

Yes. The Interagency Q&As provide examples of particular activities that may receive consideration as community development activities. Because a particular Q&A often describes a single type of community development activity, such as a community development loan, the corresponding examples are of community development loans. However, because community development loans, qualified investments, and community development services all must have a primary purpose of community development, a qualified investment or community development service that supports a community development purpose similar to the activity described in the context of the community development loan would likely receive consideration under the applicable test. The same would be true if the community development activity described in a particular Q&A were a qualified investment or community development service. For example, Q&A § _____.12(h)—1 provides an example of a community development loan to a not-for-profit organization supporting primarily low- or moderate-income housing needs. Similarly, a grant to the same not-for-profit organization would be considered a qualified investment or technical assistance, such as writing a grant proposal for the not-for-profit organization, would be considered a community development service. Further, if a financial institution engaged in all of these activities, each would be considered under the applicable test. See Q&A §_____.23(b)—1.

Moreover, lists of examples included throughout the Q&As are not exhaustive. A Q&A may include examples to demonstrate activities that may qualify under that Q&A, but the examples are not the only activities that might qualify. Financial institutions may submit information about activities they believe meet the definition of community development loan, qualified investment, or community development service to examiners for consideration.

ALTERNATIVE SYSTEMS FOR DELIVERING RETAIL BANKING SERVICES

6. Q&A §____.24(d)(4)—1: How do examiners evaluate the range of services provided in low-, moderate-, middle-, and upper income geographies and the degree to which those services are tailored to meet the needs of those geographies?

Examiners review both information from the institution’s public file and other information provided related to the range of services offered and how they are tailored to meet the particular needs of low- and moderate-income geographies. Examiners always review the information that institutions must maintain in their public files: a list of services generally offered at their branches, including their hours of operation; available loan and deposit products; and transaction fees as well as descriptions, where applicable, of material differences in the availability or cost of services at particular branches. See 12 CFR _____.43(a)(5). The information provided by the financial institution to identify the types of services offered and any differences in services among its branches in different geographies may indicate how its services (including, where appropriate, business hours) are tailored to the convenience and needs of its assessment area(s), particularly low- or moderate-income geographies or low- or moderate-income individuals. See 12 CFR ll, Appendix A, Section (b)(3). Examiners also review any other information provided by the institution, such as data regarding the costs and features of loan and deposit products, account usage and retention, geographic location of accountholders, the availability of information in languages other than English, and any other relevant information demonstrating that its services are tailored to meet the needs of its customers in the various geographies in its assessment area(s). Any information that institutions may maintain regarding services offered through alternative delivery systems (see Q&A §_____.24(d)(3)—1) and through collaborations with government, community, educational, or employer organizations to offer or expand the range of services or access to services, particularly designed to meet the needs of their assessment area(s), including low- and moderate-income communities, will also be considered. Examiners will also review information provided by the public through comments or community contacts.

REVISED Q&AS

The agencies revised the following Q&As:

DEFINITIONS

1. Q&A §_____.12(g)(3)—1:

This Q&A reviews the definition of community development, which includes “activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration’s Development Company or Small Business Investment Company programs or have gross annual revenues of $1 million or less.” The agencies revised it to clarify the meaning of the phrase “promote economic development.”

2. Q&A §_____.12(h)—1:

This Q&A provides examples of community development loans. The agencies revised it to expand the examples to include loans to finance certain renewable energy or energy-efficient technologies.

3. Q&A §_____.12(g)(4)(iii)—4:

This Q&A provides examples of activities that qualify as revitalizing or stabilizing underserved nonmetropolitan middle-income geographies that meet essential community needs. The agencies revised it to expand the examples to include new or rehabilitated communications infrastructure, such as one for broadband internet services that serve the community, including low-or moderate-income individuals, and a new or rehabilitated flood control measure, such as a levee, that serve the community, including low- and moderate-income residents.

4. Q&As §_____.12(g)—1:

This Q&A concerns the definition of community development. The agencies revised it to clarify that qualified community development activities include workforce development or job training programs for low- or moderate-income or unemployed persons.

5. Q&A §_____.12(t)—4:

This Q&A provides examples of qualified investments. The agencies revised it, consistent with revised Q&A 12(g)—1 discussed above, to expand the examples to include workforce development or job training programs for low- or moderate-income or unemployed persons.

6. Q&A §_____.12(i)—3:

This Q&A provides examples of community development services. The agencies revised it to delete the retail banking services listed as examples of community development services in Q&A § ___.12(i)—3. These examples have been included in .24(a)—1, discussed previously, and in .26(c)(3)—1, on community development services by an intermediate small bank.

LENDING TEST

7. Q&A §_____.22(b)(5)—1:

This Q&A addresses flexible or innovative lending practices. The agencies revised it to add two new examples of innovative or flexible lending practices: 1) using alternative credit histories, such as utility or rent payments, to evaluate low- or moderate-income individuals lacking conventional credit histories and who would be denied credit under the institution’s traditional underwriting standards; and 2) providing small dollar loan programs with reasonable terms and offered in a safe and sound manner, including evaluating the applicant’s ability to repay the loan.

SMALL INSTITUTION PERFORMANCE STANDARDS

8. Q&A §_____.26(c)(3)—1:

This Q&A reviews the services examiners consider when evaluating an intermediate small bank under the community development test. The agencies revised it to clarify that maintaining banks with branches and other facilities in low- or moderate- income geographies, designated disaster areas, or distressed or underserved nonmetropolitan middle-income geographies qualifies as community development services under the community development test for intermediate small banks.

SERVICE TESTS FOR LARGE BANKS

9. Q&A §_____.24(d)(3)—1:

This Q&A discusses how examiners evaluate alternative systems for delivering retail banking services. The agencies revised it to list additional factors that examiners may consider when evaluating whether a financial institution’s alternative delivery systems are available and effective in delivering retail banking services in low- and moderate-income geographies and to low- and moderate-income individuals, including online and mobile banking services as examples of alternate delivery systems.

The changes to the Q&As became effective on July 25, 2016.

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