How better documentation can assist in receiving community development credit under the CRA
Part of the Community Reinvestment Act (CRA) performance evaluation for certain financial institutions, such as intermediate small banks and large banks, includes an analysis of the number and dollar amount of community development loans, investments and services. Examiners may or may not include community development activities for CRA credit based on the documentation or lack thereof showing the activity meets a community development purpose.
The current rules provide for four categories of community development:
- Affordable housing, including multifamily rental housing, for low- or moderate-income (LMI) individuals
- Community services targeted to LMI individuals
- Activities that promote economic development by financing businesses or farms that meet both the size and purpose test, with size eligibility following standards of the Small Business Administration’s Development Company or Small Business Investment Company programs or those that have gross annual revenues of $1 million or less
- Activities that revitalize or stabilize LMI geographies, designated disaster areas or distressed or underserved nonmetropolitan middle-income geographies designated by the Board, Federal Deposit Insurance Corporation and Office of Comptroller of the Currency
Community development templates should be built to gather and showcase that activities meet the definition of community development and to support which category of community development the activity falls within.
For example, the form to document affordable housing should include rent rolls and bedroom counts of each unit, along with the location of the units, to determine average or fair market value rents for the area based on bedroom count. The location information should include the property’s address along with the state, county and census tract codes for that address. The HUD.gov website has details on fair market rents (FMRs) by state and county that can be used to demonstrate the FMRs by bedroom count for that county.
Comparing the rent rolls based on bedroom count to the FMRs for that bedroom count can demonstrate affordable housing by showing the rents being charged are below the FMRs.
Another way to support affordable housing is to obtain information about any government-subsidized housing programs, such as rents paid through Section 8 housing programs. The key here is to provide support that the housing is affordable and would benefit low- or moderate-income individuals.
When demonstrating the category of economic development, it is important to remember that this is a two-prong test (size and purpose test). First, the organization that is being provided the financing must meet the size test, and the documentation should include details and support of the business’s gross annual revenues or other details to support they meet the size eligibility test. Once there is support for the size test, there should be support that the financing promotes economic development by meeting the purpose test. The interagency questions and answers (Q&As) state that activities promote economic development if they support:
- Permanent job creation, retention and/or improvement for LMI persons, in LMI geographies, in or other areas targeted for redevelopment by Federal, state, local or tribal governments, financing intermediaries that lend to, invest in or provide technical assistance to startups or recently formed small businesses or farms, or through technical assistance like shared space or technology for those entities.
- Federal, state, local or tribal economic development initiatives that include provisions for creating or improving access for LMI persons to jobs, or to job training or workforce development programs.
In addition, the Q&As state that “the agencies will presume that any loan or service to or investment in a Small Business Development Center, Small Business Investment Company, Rural Business Investment Company, New Markets Venture Capital Company, New Markets Tax Credit eligible Community Development Entity or Community Development Financial Institution that finances small businesses or small farms, promotes economic development.” Make sure any loan or service meeting this criteria is documented as such.
When documenting job creation, retention or improvement, there should be support that the jobs benefit LMI persons or are located in LMI geographies or in areas targeted for redevelopment by Federal, state, local, or tribal governments. Documenting the number and types of jobs and the physical area where these jobs will be created or retained will help support the economic development purpose. Using any available data for the average wage for workers in a particular occupation or industry could help determine whether an activity promotes economic development.
In addition, the jobs created must be permanent in nature, not temporary. Also, keep in mind that low-wage jobs do not always benefit LMI persons, as many students or other individuals can take advantage of such jobs even though they themselves have other income sources available. Although not a requirement, full-time jobs may have more impact on economic development than part-time jobs.
To support an activity that will revitalize or stabilize certain geographies, the form or documentation should include the location of the activity, as the geography served should be an LMI geography, a designated disaster area or a distressed or underserved middle-income geography. Using the FFIEC.gov geocoding/mapping system can provide census demographic data to support the tract income level or whether the geography served is an underserved or distressed area. Using the FEMA website at fema.gov/locations or a government revitalization or stabilization plan or disaster recovery plan can be useful in finding and supporting a designated disaster area.
For a designated disaster area, examiners will consider activities related to disaster recovery that revitalize or stabilize the area for 36 months following the date of designation unless there is a demonstrable community need to extend that period for disasters that may require long-term recovery efforts. Documenting the date of the designated disaster and the source of information about the designation may assist in demonstrating that activities meet the requirements.
Aside from the qualifying geography information, there should be support to demonstrate that the activity revitalizes or stabilizes the area, such as by helping to meet essential community needs, helping to attract new or retain existing businesses or residents, providing foreclosure prevention programs, providing assistance for essential community-wide infrastructure or activities that provide housing, financial assistance and services to individuals in designated disaster areas and to individuals who have been displaced from those areas, including LMI individuals.
Some examples included in the Q&As are financing for the construction, expansion, improvement, maintenance or operation of essential infrastructure or facilities for health services, education, public safety, public services, industrial parks, affordable housing or communication services.
When using the community services category, there should be documentation to support that the service is targeted to LMI individuals. There are plenty of nonprofit organizations that provide wonderful services, but they are not limited to those individuals who are LMI.
The type of service or services should be documented along with support as to how you determined the service is targeted to LMI individuals. This could include a nonprofit organization’s defined mission of serving LMI persons or financial details highlighting government grants received that are limited to offering services only to LMI persons.
Other support could include details on the percentage of persons who receive the service that are eligible to receive Medicaid or other government assistance programs with income qualification limitations or services to schools where a majority (over 50%) of students qualify for free or reduced-price meals under the U.S. Department of Agriculture’s National School Lunch Program. The National Center for Education Statistics website (nces.gov) is one resource that can be used for free and reduced lunch statistics.
Concerning community services, where an employee or director volunteers or is providing services to an organization on behalf of the financial institution, not only does the service or organization need to benefit LMI individuals, but the service being provided must also be related to the provision of financial services. This means the service provided is of the type generally provided by the financial services industry or using the employee’s financial expertise, such as budgeting, financial education classes, credit counseling services, fundraising or serving on the board of directors.
By contrast, services such as neighborhood cleanups, serving food at a homeless shelter or little league coaching are not services that would use financial expertise. The type of service provided by an employee or director should be documented to support the volunteer hours provided were financial in nature.
Documenting the geographical location benefiting from the activity not only helps support the community development purpose, but also helps to show that it benefits the institution’s CRA assessment area or broader regional area that includes the assessment area, which is a requirement in order to receive credit for these activities.
Overall, the more documentation and support that can be provided to examiners to support you’ve met the definitions within community development, the more you increase your odds that community development credit will be received.
How Wipfli can help
If your organization is looking to maximize potential CRA credits, Wipfli can help. Our team of dedicated advisors can guide you through the process of documenting your community development activities, so you can make the most of the credits available to you. Contact an advisor today to get started.
