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Letty Ann Shapiro, Community Development Expert, OCC

When planning and making community development investments, national banks must understand and comply with two regulations that share a common purpose but have somewhat differing criteria.

CRA and the public welfare investment authority share the same goal: Encouraging bank investments that benefit the public. Yet their provisions differ and can be confusing. This article explains the similarities and the differences in the regulations.

• CRA was enacted in 1977 to prevent redlining, a discriminatory practice of denying or limiting financial services in a specific area, and to encourage banks to help meet the credit needs of all segments of their communities, including low- and moderate-income neighborhoods. The CRA regulation (12 CFR 25) establishes the framework and criteria examiners use to assess the records that national banks compile as they strive to meet the credit needs of their communities and maintain safe and sound operations.
• The public welfare investment authority (12 CFR 24) gives national banks the legal authority to promote the public welfare by making community development investments that otherwise are not expressly permitted under the National Bank Act. With this authority, for example, banks can own real estate that serves the public welfare.

Similarities

Some national banks make community development investments directly. Others make them indirectly, through community development corporations, tax credit funds, or in partnership with community-based organizations. Many investments leverage funding and services provided by local, state, or federal government agencies. Most of the public welfare investments made by banks may also qualify for CRA credit.

Bank investments under the public welfare authority must primarily benefit low- and moderate-income persons, low- and moderate-income areas, or other government-targeted redevelopment areas. In addition, an investment that would receive consideration under CRA as a "qualified investment" would also meet the public welfare requirements.

Public welfare investment authority gives banks the right to make debt and equity investments, including those that support affordable housing and other real estate development, provide equity for small business start-up and expansion, revitalize or stabilize government-designated areas, and supplement or enhance banks’ traditional community development lending.

CRA-qualified investments have a similar goal. National banks receive positive consideration for making or purchasing investments that meet the definition of a “qualified investment” under the CRA regulation. These investments

• Provide affordable housing for low- and moderate-income persons,
• Promote economic development by financing small businesses or farms,
• Revitalize or stabilize low- and moderate-income areas, designated disaster areas, or distressed or underserved nonmetropolitan middle income geographies, and
• Provide community services targeted to low- and moderate-income persons.

The regulation provides CRA evaluations for small, intermediate-small, and large national banks.

• Small banks are usually evaluated under a test that focuses primarily on their lending performance. Small banks may also request review of their investment and service activities that help them meet their CRA objectives.
• Intermediate-small banks are evaluated under a lending test and a community development test.
• Large banks are evaluated under the lending, investment, and service tests.
• National banks with limited purpose and wholesale designations are evaluated under the community development test, which assesses the banks’ community development lending, qualified investments, and community development services.
• National banks that operate under OCC-approved CRA strategic plans are evaluated according to the goals of these plans, which may include qualified investments.

Public welfare investments that have been authorized according to the 12 CFR 24 guidelines can usually help banks meet their CRA obligations. In most instances, public welfare investments approved under public welfare authority also will meet the CRA definition of qualified investments.

Differences

There are important differences between the regulations. CRA-qualified investments are subject to geographic limits and public welfare investments are not. The public welfare authority gives national banks the right to make community development investments within and outside their assessment areas.

In contrast, CRA-qualified investments must benefit banks' assessment area(s) or the broader statewide or regional areas that include the banks' assessment area(s). To meet this test, an investment must have the potential to benefit a bank's assessment area. For example, an investment in a statewide affordable housing fund that is designed to benefit a bank's assessment area would meet this geographical requirement.

In addition, a retail bank that has met the qualified investment needs of its assessment area also will receive CRA consideration for qualified investments within the broader statewide or regional area that includes the assessment area. The consideration will be made even if these qualified investments do not have the potential to benefit the assessment area. This broader statewide or regional area may be as small as a city or county, or as large as a multistate area. For example, the "mid-Atlantic states" may comprise a regional area. These broader statewide or regional investments provide the "icing on the cake" to enhance a bank's CRA performance.

A wholesale or limited-purpose bank has an even broader geographic limit for "icing on the cake" credit: the CRA-qualified investment can benefit an area anywhere outside of the assessment area, if the bank has otherwise adequately addressed the qualified investment needs of its assessment area.

Banks that want CRA consideration for public welfare investments should make sure that any investments purchased under the public welfare investment authority meet the regulatory definition of CRA-qualified investments, including geographic restrictions.