Investing in Community Development Corporations — CRA Considerations
An investment in a bank-owned community development corporation (CDC) can expand a national bank’s Community Reinvestment Act (CRA) reach, while also providing flexibility for how such an investment is considered under CRA. A national bank may use the authority under 12 CFR Part 24, OCC’s Public Welfare Investment regulation, to create or invest in a CDC. This can help the investing bank expand its CRA reach to low- or moderate-income areas or low- or moderate-income individuals within its assessment area—or the broader statewide or regional area—that it otherwise might have difficulty reaching. Because the CDC could make qualified investments and community development (CD) loans, the investing bank has some flexibility in the type of CRA consideration obtained through its investment in the CDC.
When a national bank makes a qualified investment in a bank CDC, it may receive positive CRA consideration under the investment test, or lending test, or both! Here’s how it works: A national bank makes a $100,000 equity investment in a bank CDC (or its holding company CDC), in its assessment area, whose primary purpose meets the definition of community development in the CRA regulation. The bank has a $100,000 qualified investment.
Instead of CRA consideration under the investment test, the bank may opt to receive positive CRA consideration under the lending test for the pro-rata share of the CD loans originated or purchased by the CDC during the bank’s CRA evaluation period. Because the investing bank’s equity investment of $100,000 represents one percent of the CDC’s $10 million capital base, the investing bank may receive CRA consideration for one percent of the CD loans originated or purchased during this CRA evaluation period. If the CDC originated or purchased $15 million in CD loans during this period, the investing bank would receive CRA consideration for $150,000 of CD loans, nicely leveraging its $100,000 equity investment.
The third option is for an investing bank to receive consideration under a combination of the investment and lending tests. Continuing the facts from the above example, the $100,000 equity investment represents 1 percent of the CDC’s capital. The bank’s CD assets of $30 million consists of $12 million in qualified CD investments and $18 million in CD loans, representing 40 percent and 60 percent of total CD assets, respectively. Under this approach, $40,000 of investment test credit is earned based on the fact that CD investments represent 40 percent of the institution’s CD assets. The lending test credit is based on the CD loans originated during the investing bank’s CRA evaluation period as a percentage of total CD assets.