WAIS Document Retrieval [Federal Register: October 6, 1997 (Volume 62, Number 193)] [ Notices ] [Page 52105-52128] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr06oc97-59] ======================================================================= ----------------------------------------------------------------------- FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL Community Reinvestment Act ; Interagency Questions and Answers Regarding Community Reinvestment AGENCY: Federal Financial Institutions Examination Council. ACTION: Notice and request for comment. ----------------------------------------------------------------------- SUMMARY: The Consumer Compliance Task Force of the Federal Financial Institutions Examination Council (FFIEC) is supplementing, amending, and republishing its Interagency Questions and Answers Regarding Community Reinvestment . The Interagency Questions and Answers have been prepared by staff of the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS) (collectively, the ``agencies'') to answer most frequently asked questions about community reinvestment . The Interagency Questions and Answers contain informal staff guidance for agency personnel, financial institutions, and the public. Staff of the agencies seek comment on the proposed questions and answers concerning how to determine whether particular activities have a ``primary purpose'' of community development. In addition, staff also invite public comment on the new and revised questions and answers , particularly the guidance regarding home mortgage loans to middle- and upper-income individuals in low- or moderate-income areas. DATES: Effective date of amended Interagency Questions and Answers on Community Reinvestment : October 6, 1997. The agencies request that comments on the proposed questions and answers be submitted on or before December 5, 1997. ADDRESSES: Questions and comments may be sent to Joe M. Cleaver, Executive Secretary, Federal Financial Institutions Examination Council, 2100 Pennsylvania Avenue NW., Suite 200, Washington, DC 20037, or by facsimile transmission to (202) 634-6556. FOR FURTHER INFORMATION CONTACT: OCC: Malloy Harris, National Bank Examiner, Community and Consumer Policy Division, (202) 874-4446; or Margaret Hesse, Senior Attorney, Community and Consumer Law Division, (202) 874-5750, Office of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219. Board: Glenn E. Loney, Associate Director, Division of Consumer and Community Affairs, (202) 452-3585; or Robert deV. Frierson, Assistant General Counsel, Legal Division, (202) 452-3711, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. FDIC: Bobbie Jean Norris, National Coordinator, Community Affairs and Community Reinvestment , Division of Compliance and Consumer Affairs, (202) 942-3090; or Ann Hume Loikow, Counsel, Legal Division, (202) 898-3796, Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429. OTS: Theresa A. Stark, Project Manager, Compliance Policy, (202) 906-7054; or Richard R. Riese, Project Manager, Compliance Policy, (202) 906- [[Page 52106]] 6134, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552. SUPPLEMENTARY INFORMATION: Background In 1995, the agencies revised their Community Reinvestment Act (CRA) regulations by issuing a joint final rule, which was published on May 4, 1995 (60 FR 22156). See 12 CFR parts 25, 228, 345 and 563e, implementing 12 U.S.C. 2901 et seq. The agencies published two notices of proposed rulemaking prior to publishing the joint final rule. See 58 FR 67466 (Dec. 21, 1993); 59 FR 51232 (Oct. 7, 1994). The agencies published related clarifying documents on December 20, 1995 (60 FR 66048) and May 10, 1996 (61 FR 21362). On October 21, 1996, the Consumer Compliance Task Force of the FFIEC published `` Interagency Questions and Answers Regarding Community Reinvestment '' (hereinafter, Interagency Questions and Answers ) to provide informal staff guidance for use by agency personnel, financial institutions, and the public. See 61 FR 54647. In the supplementary information published with the Interagency Questions and Answers , the agencies' staff requested comments and indicated that they intended to update the Interagency Questions and Answers on a periodic basis. 61 FR at 54648. This document supplements, revises, and republishes that guidance based, in part, on questions and comments received from examiners, financial institutions, and other interested parties. The agencies consider the Interagency Questions and Answers to be their primary vehicle for disseminating guidance interpreting their CRA regulations. This document includes new questions and answers that: (1) Clarify that not all activities that finance businesses meeting certain size eligibility standards necessarily promote economic development under the CRA regulations; (2) make a technical correction to one of the questions and answers published in the original Interagency Questions and Answers ; (3) explain how the Agencies' examiners evaluate home mortgage loans to middle- and upper-income borrowers in low- and moderate-income areas under the CRA regulations' lending test; (4) explain how a financial institution should geocode a small business or small farm loan where the borrower provides only a post office box or rural route and box number; and (5) caution that the Agencies' quarterly publication of a list of financial institutions that will be examined for CRA compliance is subject to change. Finally, this document especially seeks comment on the proposed questions and answers concerning how to determine whether particular activities have a ``primary purpose'' of community development, and also invites public comment on the new and revised questions and answers . A discussion of the revised and new questions and answers follows. Questions and answers are grouped by the provision of the CRA regulations that they discuss and are presented in the same order as the regulatory provisions. The Interagency Questions and Answers employ an abbreviated method to cite to the regulations. Because the regulations of the four agencies are substantively identical, corresponding sections of the different regulations usually bear the same suffix. Therefore, the Interagency Questions and Answers typically cite only to the suffix. For example, the small bank performance standards for national banks appear at 12 CFR 25.26; for Federal Reserve member banks supervised by the Board, they appear at 12 CFR 228.26; for nonmember banks, at 12 CFR 345.26; and for thrifts, at 12 CFR 563e.26. Accordingly, the citation in this document would be to Sec. ----.26. In the few instances in which the suffix in one of the regulations is different, the specific citation for that regulation is provided. Do All Activities That Finance Businesses Meeting Certain Size Eligibility Standards Promote Economic Development? The CRA Regulations define the term `` community development'' to include ``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 (13 CFR 121.301) or have gross annual revenues of $1 million or less.'' 12 CFR 25.12(h)(3), 228.12(h)(3), 345.12(h)(3) and 563e.12(g)(3). The October 1996 Interagency Questions and Answers included a question and answer concerning whether all activities that finance these businesses or farms promote economic development. That question and answer (Q&A), Q&A1 addressing Secs. __.12(h)(3) and 563e.12(g)(3), is being revised in response to further questions and public comments. The revised question and answer clarifies that to be considered as `` community development'' under Secs. __.12(h)(3) and 563e.12(g)(3), a loan, investment or service, whether made directly or through an intermediary, must meet both a size test and a purpose test. An activity meets the size requirement if it finances entities that either meet the size eligibility standards of the Small Business Administration's Development Company (SBDC) or Small Business Investment Company (SBIC) programs, or have gross annual revenues of $1 million or less. To meet the purpose test, the activity must promote economic development. An activity is considered to promote economic development if it supports permanent job creation, retention, and/or improvement for persons who are currently low- or moderate-income, or supports permanent job creation, retention, and/or improvement in low- or moderate-income geographies targeted for redevelopment by Federal, state, local or tribal governments. The agencies will presume that any loan or investment in or to a SBDC or SBIC promotes economic development. Funding provided in connection with other SBA programs may also promote economic development; however, examiners will make that determination based on business types, funding purposes, and other relevant information. Where Do Institutions Find Income Level Data In the October 1996 Interagency Questions and Answers , Q&A1 addressing Secs. __.12(n) and 563e.12(m) contained an incorrect address for the FFIEC's internet home page. That question and answer has been revised to include the correct address: `http://www.ffiec.gov/'. Home Mortgage Loans to Middle- and Upper-Income Borrowers in Low- and Moderate-Income Areas Several community development organizations have notified the agencies of their belief that the CRA regulations do not sufficiently recognize the efforts of financial institutions that make home mortgage loans to middle- or upper-income borrowers in low- or moderate-income areas. These community organizations have suggested to agency staff that lower-income geographies should be developed into mixed-income geographies, inhabited with residents of all income categories. For example, one community organization described problems that its community encountered in redeveloping an inner city area by providing single family housing affordable to low- and moderate-income borrowers and other necessary services. Although affordable housing was provided, the community had difficulty attracting retail services. A commercial developer considered building a [[Page 52107]] shopping center near a new, affordable housing development, but determined that the center would not be profitable because of the lower level of disposable income of many of the low- and moderate-income homeowners. Consequently, the community organization representative stressed how important it is for future development that distressed areas being revitalized attract residents of all income levels. The Agencies previously considered the appropriate weight that should be accorded lending in low- and moderate-income areas to higher- income borrowers. During the CRA reform rulemaking process, however, the agencies received public comment opposed to a proposal that would have evaluated an institution's lending primarily based on its lending activities in low- and moderate-income geographies. See, e.g., 58 FR 67,466, 67,480 (December 21, 1993). Those commenters opposed the proposal, stating that it would inappropriately have given institutions a greater incentive to make loans to high-income borrowers located in low-income geographies than to make loans to low-income borrowers located in high-income geographies. In response to these comments, the final interagency CRA regulations de-emphasized the location of the loans under the lending test by also evaluating lending based on borrower characteristics, i.e., income. Because of the numerous inquiries the agencies have received since the final rules were issued, agency staff are adding new guidance addressing Sec. __.22(b)(2) & (3), answering how home mortgage loans to borrowers of all incomes, but especially to middle- and upper-income borrowers, located in low- or moderate-income areas will be evaluated under the CRA regulations' lending test. The new question and answer explains that examiners consider all home mortgage loans under the performance criteria of the lending test. This means that examiners first evaluate the institution's lending activity based on the number and amount of home mortgage loans in the institution's assessment area(s). Examiners next evaluate the geographic distribution of all of the institution's home mortgage loans based on the loan location, including (1) the portion of the institution's lending in the institution's assessment area(s); (2) the dispersion of lending in the institution's assessment area(s); and (3) the number and amount of loans in low-, moderate-, middle-, and upper- income geographies in the institution's assessment area(s). Finally, examiners evaluate these loans based on borrower characteristics, i.e., the number and amount of home mortgage loans to low-, moderate-, middle-, and upper-income individuals. The regulation, however, allows examiners flexibility in judging the appropriate consideration of loans to middle- or upper-income individuals in low- or moderate-income areas. The new question and answer explains that all of the lending test criteria must be considered in light of an institution's performance context. The performance context will determine the importance of the borrower distribution criterion, particularly as it relates to the geographic distribution of the loans. If the performance context information indicates, for example, that the loans are for homes located in an area for which the local, state, tribal, or Federal Government or a community -based development organization has developed a revitalization or stabilization plan (such as a Federal Enterprise Community or Empowerment Zone) that includes attracting mixed-income residents to establish a stabilized, economically diverse neighborhood, the examiner has the flexibility to consider these loans as favorably as loans to low- or moderate-income borrowers in the low- or moderate-income geography. If, on the other hand, no such plan exists and there is no other evidence of governmental support for a revitalization or stabilization project in the area and the loans to middle- or upper- income borrowers significantly disadvantage or primarily have the effect of displacing low- or moderate-income residents, examiners may view these loans simply as home mortgage loans to middle- or upper- income borrowers who happen to reside in a low- or moderate-income geography and weigh them accordingly in their evaluation of the institution. Thus, the performance context may significantly influence how these loans affect an institution's performance. Geocoding Addresses Consisting of Post Office Boxes or Rural Routes and Box Numbers Staff from the agencies previously provided guidance about how to geocode (i.e., assign a census tract or block numbering area for) small business or small farm loans for which the borrower provides an address consisting of either a post office box number or a rural route and box number. See Interagency Staff CRA Interpretive Letter, published as OCC Interpretive Letter No. 729, (1995-1996 Transfer Binder) Fed. Banking L. Rep. (CCH), para. 81-046 (June 14, 1996). In this letter, staff indicated that, if an institution could not obtain from its small business or small farm borrower a street address in addition to a rural route and box number or post office box number, the institution could collect and report the location of the loan based on the town, state, and zip code provided by the borrower. The location of the borrower's post office would serve as a proxy for the location of the small business or farm. Staff have reconsidered this guidance and are now providing a question and answer based on Sec. __.42(a)(3) addressing this issue. The revised guidance states that, for purposes of 1997 data collection and reporting, financial institutions may rely on the guidance provided in the interpretive letter if a small business or small farm borrower provides only a rural route and box number or a post office box number as its address. Thus, for 1997, institutions may collect and report the location of small business or small farm loans for which the institution has been unable to ascertain a street address, using the location (i.e., the census tract or block numbering area) of the borrower's post office box as a proxy. Because financial institutions typically know where their small business or small farm borrowers, or the collateral securing their loans, are located, staff have provided new instructions for 1998 data collection and reporting purposes. Beginning in 1998, financial institutions should request the street address of small business and small farm borrowers, even if the borrower initially provides only a post office box number or rural route and box number. If no street address exists, institutions should not use the post office box as a proxy, but instead geocode the census tract or block numbering area as ``NA.'' Is Publication of the List of Institutions to be Examined in the Upcoming Quarter Determinative of Whether an Institution Will, in Fact, be Examined in the Upcoming Quarter Agency staff have added a new question and answer addressing Sec. __.45 relating to the publication of the institutions to be examined in the upcoming quarter. The question and answer clarifies that whether or not an institution is included on the published list will not always indicate that the institution will or will not be examined in the upcoming quarter. Although the agencies will attempt to ensure that the published lists are as accurate as possible, the agencies sometimes may need to alter their examination plans. [[Page 52108]] Because of the potential for such adjustments, staff urge all interested members of the public to file comments regarding the CRA performance of an institution whether or not the institution has been scheduled for a CRA examination. Request for Comment and Proposed Questions and Answers on Community Development Explaining the ``Primary Purpose'' for Community Development Activities The definitions of `` community development loan,'' `` community development service,'' and ``qualified investment'' all require a ``primary purpose of community development.'' See 12 CFR 25.12(i)(1), (j)(1), and (s); 228.12(i)(1), (j)(1), and (s); 345.12(i)(1), (j)(1), and (s); and 563e.12(h)(1), (i)(1), and (r). The agencies have received a number of inquiries about whether certain activities have the necessary ``primary purpose'' of community development to qualify as a community development loan, qualified investment or community development service. Some inquiries come from persons interested in creating new community development vehicles. These inquiries typically ask what minimum characteristics should be designed into a targeted loan, investment or service to possess the necessary primary purpose. In answering these questions , the agencies have generally stated that a ``primary purpose'' of community development exists when the loan, investment or service is divisible and measurable in terms of dollars, housing units built, or countable individuals benefited, and when an identifiable majority of the dollars expended, units built or individuals benefited is clearly attributable to one of the community development purposes enumerated in the regulation. However, this answer does not address other inquiries concerning activities that are subject to certain legal or market restraints, such that they do not reach this threshold, yet often display laudable community development purposes and result in real, long-term community development benefits. In addition, many of the projects occur within a performance context that buttresses a conclusion that the activity was ``designed for the express purpose'' of achieving a qualifying community development purpose, even though less than half the dollars involved in the entire project have been concentrated on that purpose. Federal tax-incentive affordable housing projects, where less than half the units or half the dollars go into the portion of the project that represents affordable housing for low- or moderate-income persons, fall into this category. A number of other inquiries are characterized by a range of facts and contexts. Given this variety, the agencies recognize that many types of endeavors have been devised to address an array of community development pursuits. In addition, the agencies have observed that within the broad range of qualifying activities, distinctions can and should be made among those activities. Accordingly, in publishing proposed guidance on ``primary purpose,'' the agencies are also providing additional commentary that emphasizes the quantitative and qualitative distinctions that should be made when applying the performance criteria of the pertinent regulatory tests to evaluate eligible community development loans, qualified investments or community development services. Proposed Q&A7 addressing Secs. __.12(i) and 563e.12(h) is based on the preamble to the final rule as set forth at 60 FR 22,156, 22,159 (May 4, 1995), which states that activities not designed for the express purpose of community development (as defined in the regulation) are not eligible for consideration as community development loans or services or qualified investments. The preamble further states that the provision of indirect or short-term benefits to low- or moderate-income persons does not make an activity community development. In addition to incorporating this preamble language into the Interagency Questions and Answers , the answer identifies the kind of information that would be reviewed to determine whether an activity was designed for the express purpose of community development. The answer adopts a simplified threshold rule and an alternative approach for finding sufficient bases to conclude that an activity possesses the requisite primary purpose. Agency staff are also proposing additional questions and answers that provide relevant guidance on the evaluation of activities whose primary purpose is community development, as well as the reporting of community development loans. This additional guidance emphasizes that once a loan or investment is found to possess a primary purpose of community development, the evaluation of that community development loan or qualified investment under the relevant performance criteria would allow for differentiation among those activities based not only on the differing dollar amounts attributable to the underlying community development purpose, but also on the loan's innovation or complexity under Sec. __.22(b)(4) or the investment's innovation, complexity, responsiveness or non-routine characteristics under Sec. __.23(e). In addition, proposed Q&A3 addressing Sec. __.42(b)(2) discusses whether a loan may be reported as a community development loan if its primary purpose is to finance an affordable housing project for low- or moderate-income individuals, but only 40% of the units in question will actually be occupied by individuals or families with low- or moderate-incomes. Staff request public comment particularly addressing whether the proposed primary purpose standard over-inclusively qualifies activities as having a community development purpose, and, if so, is this adequately balanced by the regulatory requirements that allow marginal activities to be weighted less heavily than those activities that provide a greater benefit related to the community development purpose or demonstrate other performance criteria, such as innovation, complexity, or responsiveness. Staff also invite comment about whether the proposed guidance may result in excluding, as not having a primary purpose of community development, deserving endeavors. Sections __.12(i) & 563e.12(h) Proposed Q7 What is meant by the term ``primary purpose'' as that term is used to define what constitutes a community development loan, a qualified investment or a community development service? Proposed A7 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, 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 Secs. __.12(h) or 563e.12(g). To determine whether an activity is designed for an express community development purpose, the agencies apply one of two approaches. First, if a majority of the dollars or beneficiaries of the activity are identifiable to one or more of the enumerated community development purposes, then the activity will be considered to possess the requisite primary purpose. Alternatively, where [[Page 52109]] the measurable portion of any benefit bestowed or dollars applied to the community development purpose is less than a majority of the entire activity's benefits or dollar value, then the activity may still be considered to possess the requisite primary purpose if (1) the express, bona fide intent of the activity, as stated, for example, in a prospectus, loan proposal, or community action plan, is primarily one or more of the enumerated community development purposes; (2) the activity is specifically structured (given any relevant market or legal constraints or performance context factors) to achieve the expressed community development purpose; and (3) the activity accomplishes, or is reasonably certain to accomplish, the community development purpose involved. The fact that an activity provides indirect or short-term benefits to low-or moderate-income persons does not make the activity community development, nor does the mere presence of such indirect or short-term benefits constitute a primary purpose of community development. Financial institutions that want examiners to consider certain activities under either approach should be prepared to demonstrate the activities' qualifications. Section __.22(b)(4) Proposed Q1 When evaluating an institution's record of community development lending, may an examiner distinguish among community development loans on the basis of the actual amount of the loan that advances the community development purpose? Proposed A1 Yes. When evaluating the institution's record of community development lending under Sec. __.22(b)(4), it is appropriate to give greater weight to the amount of the loan that is targeted to the intended community development purpose. For example, consider two $10 million projects (with a total of 100 units each) that have as their express primary purpose affordable housing and are located in the same community . One of these projects sets aside 40% of its units for low- income residents and the other project allocates 65% of its units for low-income residents. An institution would report both loans as $10 million community development loans under the Sec. __.42(b)(2) aggregate reporting obligation. However, transaction complexity, innovation and all other relevant considerations being equal, the 65% project would receive greater positive consideration under the lending test than the 40% project. The 65% project provides more affordable housing for more people per dollar expended. Under Sec. __.22(b)(4), the amount of CRA consideration an institution receives for its community development loans should bear a direct relation to the benefits received by the community and the innovation or complexity of the loans required to accomplish the activity, not simply to the dollar amount expended on a particular transaction. By applying all performance criteria, a community development loan of a lower dollar amount could receive more favorable consideration under the lending test than a community development loan with a higher dollar amount, but with less innovation, complexity, or impact on the community . Section __.23(e) Proposed Q1 When applying the performance criteria of Sec. __.23(e), may an examiner distinguish among qualified investments based on how much of the investment actually supports the underlying community development purpose? Proposed A1 Yes. Although Sec. __.23(e)(1) speaks in terms of the dollar amount of qualified investments, the criterion permits an examiner to weight certain investments differently or to make other appropriate distinctions when evaluating an institution's record of making qualified investments. For instance, a targeted mortgage-backed security that qualifies as an affordable housing issue that has only 60% of its face value supported by loans to low-or moderate-income borrowers generally would not be weighted as heavily under Sec. __.23(e)(1) as a targeted mortgage-backed security with 100% of its face value supported by affordable housing loans to low-and moderate-income borrowers. The examiner should describe any differential weighting (or other adjustment), and its basis in the Public Evaluation. However, no matter how a qualified investment is handled for purposes of Sec. __.23(e)(1), it will also be evaluated with respect to the performance criteria set forth in Sec. __.23(e) (2), (3) and (4) . By applying all criteria, a qualified investment of a lower dollar amount could receive more favorable consideration under the Investment Test than a qualified investment with a higher dollar amount, but with fewer qualitative enhancements. Section__.42(b)(2) Proposed Q3 When the primary purpose of a loan is to finance an affordable housing project for low-or moderate-income individuals, but only 40% of the units in question will actually be occupied by individuals or families with low-or moderate-incomes, should the entire loan amount be reported as a community development loan? Proposed A3 Yes. As long as the primary purpose of the loan is a community development purpose, the full amount of the institution's loan should be included in its reporting of aggregate amounts of community development lending. General Comments In addition to the specific request for comments on the proposed ``primary purpose'' questions and answers , staff invite public comment on the new and revised questions and answers , particularly the guidance regarding home mortgage loans to middle-and upper-income individuals in low-or moderate-income areas. Staff also invite public comment on a continuing basis on any issues raised by the CRA and these Interagency Questions and Answers . Staff of the agencies intend to continue to update the Interagency Questions and Answers periodically. If, after reading the Interagency Questions and Answers , financial institutions, examiners, community groups, or other interested parties have unanswered questions or comments about the agencies' community reinvestment regulations, they should submit them to the agencies. Staff will consider including questions received from the public in future guidance. Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) The SBREFA requires an agency, for each rule for which it prepares a final regulatory flexibility analysis, to publish one or more compliance guides to help small entities understand how to comply with the rule. Pursuant to section 605(b) of the Regulatory Flexibility Act , the agencies certified that their proposed CRA rule would not have a significant economic impact on a substantial number of small entities and invited public comments on that determination. See 58 FR 67478 (Dec. 21, 1993); 59 FR 51250 (Oct. 7, 1994). In response to public comment, the agencies voluntarily prepared a final regulatory flexibility analysis for the joint final rule, although the analysis was not required because it supported [[Page 52110]] the agencies' earlier certification regarding the proposed rule. Because a regulatory flexibility analysis was not required, section 212 of the SBREFA does not apply to the final CRA rule. However, in their continuing efforts to provide clear, understandable regulations and to comply with the spirit of the SBREFA, the agencies have compiled the Interagency Questions and Answers . The Interagency Questions and Answers serve the same purpose as the compliance guide described in the SBREFA by providing guidance on a variety of issues of particular concern to small banks and thrifts. The text of the Interagency Questions and Answers follows: Text of the Interagency Questions and Answers Interagency Questions and Answers Regarding Community Reinvestment Table of Contents The agencies are providing answers to questions pertaining to the following provisions and topics of the CRA regulations: Sec. __.11 Authority, purposes, and scope Sec. __.11(c) Scope Secs. 25.11(c)(3), 228.11(c)(3) & 345.11(c)(3) Certain special purpose banks Sec. __.12 Definitions Sec. __.12(a) Affiliate Secs. __.12(f) & 563e.12(e) Branch Secs. __.12(h) & 563e.12(g) Community development Sec. __.12(h)(3) & 563e.12(g)(3) Activities that promote economic development by financing businesses or farms that meet certain size eligibility standards Secs. __.12(i) & 563e.12(h) Community development loan Secs. __.12(j) & 563e.12(i) Community development service Secs. __.12(k) & 563e.12(j) Consumer loan Secs. __.12(m) & 563e.12(l) Home mortgage loan Secs. __.12(n) & 563e.12(m) Income level Secs. __.12(o) & 563e.12(n) Limited purpose institution Secs. __.12(s) & 563e.12(r) Qualified investment __.12(t) Small institution Sec. __.12(u) Small business loan Sec. __.12(w) Wholesale institution Sec. __.21 Performance tests, standards, and ratings, in general Sec. __.21(a) Performance tests and standards Sec. __.21(b) Performance context Sec. __.21(b)(2) Information maintained by the institution or obtained from community contacts Sec. __.21(b)(4) Institutional capacity and constraints Sec. __.21(b)(5) Institution's past performance and the performance of similarly situated lenders Sec. __.22 Lending test Sec. __.22(a) Scope of test Sec. __.22(a)(1) Types of loans considered Sec. __.22(a)(2) Other loan data Sec. __.22(b) Performance criteria Sec. __.22(b)(1) Lending activity Sec. __.22(b)(2) & (3) Geographic distribution and borrower characteristics Sec. __.22(c) Affiliate lending Sec. __.22(c)(1) In general Sec. __.22(c)(2) Constraints on affiliate lending Sec. __.22(c)(2)(i) No affiliate may claim a loan origination or loan purchase if another institution claims the same loan origination or purchase Sec. __.22(c)(2)(ii) If an institution elects to have its supervisory agency consider loans within a particular lending category made by one or more of the institution's affiliates in a particular assessment area, the institution shall elect to have the agency consider all loans within that lending category in that particular assessment area made by all of the institution's affiliates Sec. __.22(d) Lending by a consortium or a third party Sec. __.23 Investment test Sec. __.23(b) Exclusion Sec. __.24 Service test Sec. __.24(d) Performance criteria--retail banking services Sec. __.24(d)(3) Availability and effectiveness of alternative systems for delivering retail banking services Sec. __.25 Community development test for wholesale or limited purpose institutions Sec. __.25(d) Indirect activities Sec. __.25(f) Community development performance rating Sec. __.26 Small institution performance standards Sec. __.26(a) Performance criteria Sec. __.26(a)(1) Loan-to-deposit ratio Sec. __.26(a)(2) Percentage of lending within assessment area(s) Sec. __.26(a)(3) and (4) Distribution of lending within assessment area(s) by borrower income and geographic location Sec. __.26(b) Performance rating Sec. __.27--Strategic plan Sec. __.27(c) Plans in general Sec. __.27(f) Plan content Sec. __.27(f)(1) Measurable goals Sec. __.27(g) Plan approval Sec. __.27(g)(2) Public participation Sec. __.28--Assigned ratings Sec. __.28(a) Ratings in general Sec. __.29--Effect of CRA performance on applications Sec. __.29(a) CRA performance Sec. __.29(b) Interested parties Sec. __.41--Assessment area delineation Sec. __.41(a) In general Sec. __.41(c) Geographic area(s) for institutions other than wholesale or limited purpose institutions Sec. __.41(c)(1) Generally consist of one or more MSAs or one or more contiguous political subdivisions Sec. __.41(d) Adjustments to geographic area(s) Sec. __.41(e) Limitations on delineation of an assessment area Sec. __.41(e)(3) May not arbitrarily exclude low- or moderate- income geographies Sec. __.41(e)(4) May not extend substantially beyond a CMSA boundary or beyond a state boundary unless located in a multistate MSA Sec. __.42--Data collection, reporting, and disclosure Sec. __.42(a) Loan information required to be collected and maintained Sec. __.42(a)(2) Loan amount at origination Sec. __.42(a)(3) The loan location Sec. __.42(a)(4) Indicator of gross annual revenue Sec. __.42(b) Loan information required to be reported Sec. __.42(b)(1) Small business and small farm loan data Sec. __.42(b)(2) Community development loan data Sec. __.42(b)(3) Home mortgage loans Sec. __.42(c) Optional data collection and maintenance Sec. __.42(c)(1) Consumer loans Sec. __.42(c)(1)(iv) Income of borrower Sec. __.42(c)(2) Other loan data Sec. __.42(d) Data on affiliate lending Sec. __.43--Content and availability of public file Sec. __.43(a) Information available to the public Sec. __.43(a)(1) Public comments Sec. __.43(b) Additional information available to the public Sec. __.43(b)(1) Institutions other than small institutions Sec. __.43(c) Location of public information Sec. __.44--Public notice by institutions Sec. __.45--Publication of planned examination schedule APPENDIX B to Part__CRA Notice The body of the Interagency Questions and Answers Regarding Community Reinvestment follows: Section __ .11--Authority, purposes, and scope Section __ .11(c) Scope Section 25.11(c)(3), 228.11(c)(3) & 345.11(c)(3) Certain Special Purpose Banks Q1. Is the list of special purpose banks exclusive? A1. No, there may be other examples of special purpose banks. These banks engage in specialized activities that do not involve granting credit to the public in the ordinary course of business. Special purpose banks typically serve as correspondent banks, trust companies, or clearing agents or engage only in specialized services, such as cash management controlled disbursement services. A financial institution, however, does not become a special purpose bank merely by ceasing to make loans and, instead, making investments and providing other retail banking services. Q2. To be a special purpose bank, must a bank limit its activities in its charter? A2. No. A special purpose bank may, but is not required to, limit the scope of its activities in its charter, articles of association or other corporate organizational documents. A bank that [[Page 52111]] does not have legal limitations on its activities, but has voluntarily limited its activities, however, would no longer be exempt from Community Reinvestment Act (CRA) requirements if it subsequently engaged in activities that involve granting credit to the public in the ordinary course of business. A bank that believes it is exempt from CRA as a special purpose bank should seek confirmation of this status from its supervisory agency. Section __ .12--Definitions Section __ .12(a) Affiliate Q1. Does the definition of ``affiliate'' include subsidiaries of an institution? A1. Yes, ``affiliate'' includes any company that controls, is controlled by, or is under common control with another company. An institution's subsidiary is controlled by the institution and is, therefore, an affiliate. Sections __ .12(f) & 563e.12(e) Branch Q1. Do the definitions of ``branch,'' ``automated teller machine (ATM),'' and ``remote service facility (RSF)'' include mobile branches, ATMs, and RSFs? A1. Yes. Staffed mobile offices that are authorized as branches are considered ``branches'' and mobile ATMs and RSFs are considered ``ATMs'' and ``RSFs.'' Q2. Are loan production offices (LPOs) branches for purposes of the CRA? A2. LPOs and other offices are not ``branches'' unless they are authorized as branches of the institution through the regulatory approval process of the institution's supervisory agency. Sections __.12(h) & 563e.12(g) Community Development Q1. Are community development activities limited to those that promote economic development? A1. No. Although the definition of `` community development'' includes activities that promote economic development by financing small businesses or farms, the rule does not limit community development loans and services and qualified investments to those activities. Community development also includes community -or tribal- based child care, educational, health, or social services targeted to low- or moderate-income persons, affordable housing for low- or moderate-income individuals, and activities that revitalize or stabilize low- or moderate-income areas. Q2. Must a community development activity occur inside a low- or moderate-income area in order for an institution to receive CRA consideration for the activity? A2. No. Community development includes activities outside of low- and moderate-income areas that provide affordable housing for, or community services targeted to, low- or moderate-income individuals and activities that promote economic development by financing small businesses and farms. Activities that stabilize or revitalize particular low- or moderate-income areas (including by creating, retaining, or improving jobs for low- or moderate-income persons) also qualify as community development, even if the activities are not located in these low- or moderate-income areas. One example is financing a supermarket that serves as an anchor store in a small strip mall located at the edge of a middle-income area, if the mall stabilizes the adjacent low-income community by providing needed shopping services that are not otherwise available in the low-income community . Q3. Does the regulation provide flexibility in considering performance in high-cost areas? A3. Yes, the flexibility of the performance standards allows examiners to account in their evaluations for conditions in high-cost areas. Examiners consider lending and services to individuals and geographies of all income levels and businesses of all sizes and revenues. In addition, the flexibility in the requirement that community development loans, community development services, and qualified investments have as their ``primary'' purpose community development allows examiners to account for conditions in high-cost areas. For example, examiners could take into account the fact that activities address a credit shortage among middle-income people or areas caused by the disproportionately high cost of building, maintaining or acquiring a house when determining whether an institution's loan to or investment in an organization that funds affordable housing for middle-income people or areas, as well as low- and moderate-income people or areas, has as its primary purpose community development. Sections __.12(h)(3) & 563e.12(g)(3) Activities That Promote Economic Development by Financing Businesses or Farms That Meet Certain Size Eligibility Standards Q1. `` Community development'' includes activities that promote economic development by financing businesses or farms that meet certain size eligibility standards. Are all activities that finance businesses and farms that meet these size eligibility standards considered to be community development? A1. No. To be considered as `` community development'' under Secs. ----.12(h)(3) and 563e.12(g)(3), a loan, investment or service, whether made directly or through an intermediary, must meet both a size test and a purpose test. An activity meets the size requirement if it finances entities that either meet the size eligibility standards of the Small Business Administration's Development Company (SBDC) or Small Business Investment Company (SBIC) programs, or have gross annual revenues of $1 million or less. To meet the purpose test, the activity must promote economic development. An activity is considered to promote economic development if it supports permanent job creation, retention, and/or improvement for persons who are currently low- or moderate- income, or supports permanent job creation, retention, and/or improvement in low- or moderate-income geographies targeted for redevelopment by Federal, state, local or tribal governments. The agencies will presume that any loan or investment in or to a SBDC or SBIC promotes economic development. Sections __.12(i) & 563e.12(h) Community Development Loan Q1. What are examples of community development loans? A1. Examples of community development loans include, but are not limited to, loans to: <bullet> Borrowers for affordable housing rehabilitation and construction, including construction and permanent financing of multifamily rental property serving low- and moderate-income persons; <bullet> Not-for-profit organizations serving primarily low- and moderate-income housing or other community development needs; <bullet> Borrowers to construct or rehabilitate community facilities that are located in low- and moderate-income areas or that serve primarily low- and moderate-income individuals; <bullet> Financial intermediaries including Community Development Financial Institutions (CDFIs), Community Development Corporations (CDCs), minority- and women-owned financial institutions, community loan funds or pools, and low-income or community development credit unions that primarily lend or facilitate lending to promote community development. <bullet> Local, state, and tribal governments for community development activities; and [[Page 52112]] <bullet> Borrowers to finance environmental clean-up or redevelopment of an industrial site as part of an effort to revitalize the low- or moderate-income community in which the property is located. Q2. If a retail institution that is not required to report under the Home Mortgage Disclosure Act (HMDA) makes affordable home mortgage loans that would be HMDA-reportable home mortgage loans if it were a reporting institution, or if a small institution that is not required to collect and report loan data under CRA makes small business and small farm loans and consumer loans that would be collected and/or reported if the institution were a large institution, may the institution have these loans considered as community development loans? A2. No. Although small institutions are not required to report or collect information on small business and small farm loans and consumer loans, and some institutions are not required to report information about their home mortgage loans under HMDA, if these institutions are retail institutions, the agencies will consider in their CRA evaluations the institutions' originations and purchases of loans that would have been collected or reported as small business, small farm, consumer or home mortgage loans, had the institution been a collecting and reporting institution under the CRA or the HMDA. Therefore, these loans will not be considered as community development loans. Multifamily dwelling loans, however, may be considered as community development loans as well as home mortgage loans. See also Q&A2 addressing Sec. __.42(b)(2). Q3. Do secured credit cards or other credit card programs targeted to low- or moderate-income individuals qualify as community development loans? A3. No. Credit cards issued to low- or moderate-income individuals for household, family, or other personal expenditures, whether as part of a program targeted to such individuals or otherwise, do not qualify as community development loans because they do not have as their primary purpose any of the activities included in the definition of `` community development.'' Q4. The regulation indicates that community development includes ``activities that revitalize or stabilize low- or moderate-income geographies.'' Do all loans in a low- to moderate-income geography have a stabilizing effect? A4. No. Some loans may provide only indirect or short-term benefits to low- or moderate-income individuals in a low- or moderate-income geography. These loans are not considered to have a community development purpose. For example, a loan for upper-income housing in a distressed area is not considered to have a community development purpose simply because of the indirect benefit to low- or moderate- income persons from construction jobs or the increase in the local tax base that supports enhanced services to low- and moderate-income area residents. On the other hand, a loan for an anchor business in a distressed area (or a nearby area), that employs or serves residents of the area, and thus stabilizes the area, may be considered to have a community development purpose. For example, in an underserved, distressed area, a loan for a pharmacy that employs, and provides supplies to, residents of the area promotes community development. Q5. Must there be some immediate or direct benefit to the institution's assessment area(s) to satisfy the regulations' requirement that qualified investments and community development loans or services benefit an institution's assessment area(s) or a broader statewide or regional area that includes the institution's assessment area(s)? A5. No. The regulations, for example, recognize that community development organizations and programs are frequently efficient and effective ways for institutions to promote community development. These organizations and programs often operate on a statewide or even multi- state basis. Therefore, an institution's activity is considered a community development loan or service or a qualified investment if it supports an organization or activity that covers an area that is larger than, but includes, the institution's assessment area(s). The institution's assessment area need not receive an immediate or direct benefit from the institution's specific participation in the broader organization or activity, provided the purpose, mandate, or function of the organization or activity includes serving geographies or individuals located within the institution's assessment area. Furthermore, the regulations permit a wholesale or limited purpose institution to consider community development loans, community development services, and qualified investments wherever they are located, as long as the institution has otherwise adequately addressed the credit needs within its assessment area(s). Q6. What is meant by a ``regional area'' in the requirement that a community development loan must benefit the institution's assessment area(s) or a broader statewide or regional area that includes the institution's assessment area(s)? A6. A ``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. When examiners evaluate community development loans that benefit a regional area that includes the institution's assessment area, however, the examiners will consider the size of the regional area and the actual or potential benefit to the institution's assessment area(s). In most cases, the larger the regional area, the more diffuse the benefit will be to the institution's assessment area(s). Examiners may view loans with more direct benefits to an institution's assessment area(s) as more responsive to the credit needs of the area(s) than loans for which the actual benefit to the assessment area(s) is uncertain or for which the benefit is diffused throughout a larger area that includes the assessment area(s). Sections__.12(j) & 563e.12(i) Community Development Service Q1. In addition to meeting the definition of `` community development'' in the regulation, community development services must also be related to the provision of financial services. What is meant by ``provision of financial services''? A1. Providing financial services means providing services of the type generally provided by the financial services industry. Providing financial services often involves informing community members about how to get or use credit or otherwise providing credit services or information to the community . For example, service on the board of directors of an organization that promotes credit availability or finances affordable housing is related to the provision of financial services. Providing technical assistance about financial services to community -based groups, local or tribal government agencies, or intermediaries that help to meet the credit needs of low- and moderate- income individuals or small businesses and farms is also providing financial services. By contrast, activities that do not take advantage of the employees' financial expertise, such as neighborhood cleanups, do not involve the provision of financial services. Q2. Are personal charitable activities provided by an institution's employees or directors outside the ordinary course of their employment considered community development services? A2. No. Services must be provided as a representative of the institution. For example, if a financial institution's director, on her own time and not as a [[Page 52113]] representative of the institution, volunteers one evening a week at a local community development corporation's financial counseling program, the institution may not consider this activity a community development service. Q3. What are examples of community development services? A3. Examples of community development services include, but are not limited to, the following: <bullet> Providing technical assistance on financial matters to nonprofit, tribal or government organizations serving low- and moderate-income housing or economic revitalization and development needs; <bullet> Providing technical assistance on financial matters to small businesses or community development organizations; <bullet> Lending employees to provide financial services for organizations facilitating affordable housing construction and rehabilitation or development of affordable housing; <bullet> Providing credit counseling, home buyers and home maintenance counseling, financial planning or other financial services education to promote community development and affordable housing; <bullet> Establishing school savings programs for low- or moderate- income individuals; <bullet> Providing electronic benefits transfer and point of sale terminal systems to improve access to financial services, such as by decreasing costs, for low- or moderate-income individuals; and <bullet> Providing other financial services with the primary purpose of community development, such as low-cost bank accounts or free government check cashing that increases access to financial services for low- or moderate-income individuals. Examples of technical assistance activities that might be provided to community development organizations include: <bullet> Serving on a loan review committee; <bullet> Developing loan application and underwriting standards; <bullet> Developing loan processing systems; <bullet> Developing secondary market vehicles or programs; <bullet> Assisting in marketing financial services, including development of advertising and promotions, publications, workshops and conferences; <bullet> Furnishing financial services training for staff and management; <bullet> Contributing accounting/bookkeeping services; and <bullet> Assisting in fund raising, including soliciting or arranging investments. Sections__.12(k) & 563e.12(j) Consumer Loan Q1. Are home equity loans considered ``consumer loans''? A1. Home equity loans made for purposes other than home purchase, home improvement or refinancing home purchase or home improvement loans are consumer loans if they are extended to one or more individuals for household, family, or other personal expenditures. Q2. May a home equity line of credit be considered a ``consumer loan'' even if part of the line is for home improvement purposes? A2. If the predominant purpose of the line is home improvement, the line may only be reported under HMDA and may not be considered a consumer loan. However, the full amount of the line may be considered a ``consumer loan'' if its predominant purpose is for household, family, or other personal expenditures, and to a lesser extent home improvement, and the full amount of the line has not been reported under HMDA. This is the case even though there may be ``double counting'' because part of the line may also have been reported under HMDA. Q3. How should an institution collect or report information on loans the proceeds of which will be used for multiple purposes? A3. If an institution makes a single loan or provides a line of credit to a customer to be used for both consumer and small business purposes, consistent with the Call Report and TFR instructions, the institution should determine the major (predominant) component of the loan or the credit line and collect or report the entire loan or credit line in accordance with the regulation's specifications for that loan type. Sections__.12(m) & 563e.12(l) Home Mortgage Loan Q1. Does the term ``home mortgage loan'' include loans other than ``home purchase loans''? A1. Yes. ``Home mortgage loan'' includes a ``home improvement loan'' as well as a ``home purchase loan,'' as both terms are defined in the HMDA regulation, Regulation C, 12 CFR part 203. This definition also includes multifamily (five-or-more families) dwelling loans, loans for the purchase of manufactured homes, and refinancings of home improvement and home purchase loans. Q2. Some financial institutions broker home mortgage loans. They typically take the borrower's application and perform other settlement activities; however, they do not make the credit decision. The broker institutions may also initially fund these mortgage loans, then immediately assign them to another lender. Because the broker institution does not make the credit decision, under Regulation C (HMDA), they do not record the loans on their HMDA-LARs, even if they fund the loans. May an institution receive any consideration under CRA for its home mortgage loan brokerage activities? A2. Yes. A financial institution that funds home mortgage loans but immediately assigns the loans to the lender that made the credit decisions may present information about these loans to examiners for consideration under the lending test as ``other loan data.'' Under Regulation C, the broker institution does not record the loans on its HMDA-LAR because it does not make the credit decisions, even if it funds the loans. An institution electing to have these home mortgage loans considered must maintain information about all of the home mortgage loans that it has funded in this way. Examiners will consider this other loan data using the same criteria by which home mortgage loans originated or purchased by an institution are evaluated. Institutions that do not provide funding but merely take applications and provide settlement services for another lender that makes the credit decisions will receive consideration for this service as a retail banking service. Examiners will consider an institution's mortgage brokerage services when evaluating the range of services provided to low-, moderate-, middle-and upper-income geographies and the degree to which the services are tailored to meet the needs of those geographies. Alternatively, an institution's mortgage brokerage service may be considered a community development service if the primary purpose of the service is community development. An institution wishing to have its mortgage brokerage service considered as a community development service must provide sufficient information to substantiate that its primary purpose is community development and to establish the extent of the services provided. Sections __.12(n) & 563e.12(m) Income Level Q1. Where do institutions find income level data for geographies and individuals? A1. The income levels for geographies, i.e., census tracts and block numbering areas, are derived from [[Page 52114]] Census Bureau information and are updated every ten years. Institutions may contact their regional Census Bureau office or the Census Bureau's Income Statistics Office at (301) 763-8576 to obtain income levels for geographies. See Appendix A of these Interagency Questions and Answers for a list of the regional Census Bureau offices. The income levels for individuals are derived from information calculated by the Department of Housing and Urban Development (HUD) and updated annually. Institutions may contact HUD at (800) 245-2691 to request a copy of ``FY [year number, e.g., 1996] Median Family Incomes for States and their Metropolitan and Nonmetropolitan Portions.'' Alternatively, institutions may obtain a list of the 1990 Census Bureau-calculated and the annually updated HUD median family incomes for metropolitan statistical areas (MSAs) and statewide nonmetropolitan areas by calling the Federal Financial Institution Examination Council's (FFIEC's) HMDA Help Line at (202) 452-2016. A free copy will be faxed to the caller through the ``fax-back'' system. Institutions may also call this number to have ``faxed-back'' an order form, from which they may order a list providing the median family income level, as a percentage of the appropriate MSA or nonmetropolitan median family income, of every census tract and block numbering area (BNA). This list costs $50. Institutions may also obtain the list of MSA and statewide nonmetropolitan area median family incomes or an order form through the FFIEC's home page on the Internet at ``http://www.ffiec.gov/'. Sections__.12(o) & 563e.12(n) Limited Purpose Institution Q1. What constitutes a ``narrow product line'' in the definition of ``limited purpose institution''? A1. An institution offers a narrow product line by limiting its lending activities to a product line other than a traditional retail product line required to be evaluated under the lending test (i.e., home mortgage, small business, and small farm loans). Thus, an institution engaged only in making credit card or motor vehicle loans offers a narrow product line, while an institution limiting its lending activities to home mortgages is not offering a narrow product line. Q2. What factors will the agencies consider to determine whether an institution that, if limited purpose, makes loans outside a narrow product line, or, if wholesale, engages in retail lending, will lose its limited purpose or wholesale designation because of too much other lending? A2. Wholesale institutions may engage in some retail lending without losing their designation if this activity is incidental and done on an accommodation basis. Similarly, limited purpose institutions continue to meet the narrow product line requirement if they provide other types of loans on an infrequent basis. In reviewing other lending activities by these institutions, the agencies will consider the following factors: <bullet> Is the other lending provided as an incident to the institution's wholesale lending? <bullet> Are the loans provided as an accommodation to the institution's wholesale customers? <bullet> Are the loans made only infrequently to the limited purpose institution's customers? <bullet> Does only an insignificant portion of the institution's total assets and income result from the other lending? <bullet> How significant a role does the institution play in providing that type(s) of loan(s) in the institution's assessment area(s)? <bullet> Does the institution hold itself out as offering that type(s) of loan(s)? <bullet> Does the lending test or the community development test present a more accurate picture of the institution's CRA performance? Q3. Do ``niche institutions'' qualify as limited purpose (or wholesale) institutions? A3. Generally, no. Institutions that are in the business of lending to the public, but specialize in certain types of retail loans (for example, home mortgage or small business loans) to certain types of borrowers (for example, to high-end income level customers or to corporations or partnerships of licensed professional practitioners) (``niche institutions'') generally would not qualify as limited purpose (or wholesale) institutions. Sections__.12(s) & 563e.12(r) Qualified Investment Q1. Does the CRA regulation provide authority for institutions to make investments? A1. No. The CRA regulation does not provide authority for institutions to make investments that are not otherwise allowed by Federal law. Q2. Are mortgage-backed securities or municipal bonds ``qualified investments''? A2. As a general rule, mortgage-backed securities and municipal bonds are not qualified investments because they do not have as their primary purpose community development, as defined in the CRA regulations. Nonetheless, mortgage-backed securities or municipal bonds designed primarily to finance community development generally are qualified investments. Municipal bonds or other securities with a primary purpose of community development need not be housing-related. For example, a bond to fund a community facility or park or to provide sewage services as part of a plan to redevelop a low-income neighborhood is a qualified investment. Housing-related bonds or securities must primarily address affordable housing (including multifamily rental housing) needs in order to qualify. Q3. Are Federal Home Loan Bank stocks and membership reserves with the Federal Reserve Banks ``qualified investments''? A3. No. Federal Home Loan Bank stock and membership reserves with the Federal Reserve Banks do not have a sufficient connection to community development to be qualified investments. Q4. What are examples of qualified investments? A4. Examples of qualified investments include, but are not limited to, investments, grants, deposits or shares in or to: <bullet> Financial intermediaries (including, Community Development Financial Institutions (CDFIs), Community Development Corporations (CDCs), minority- and women-owned financial institutions, community loan funds, and low-income or community development credit unions) that primarily lend or facilitate lending in low- and moderate-income areas or to low- and moderate-income individuals in order to promote community development, such as a CDFI that promotes economic development on an Indian reservation; <bullet> Organizations engaged in affordable housing rehabilitation and construction, including multifamily rental housing; <bullet> Organizations, including, for example, Small Business Investment Companies (SBICs) and specialized SBICs, that promote economic development by financing small businesses; <bullet> Facilities that promote community development in low- and moderate-income areas for low- and moderate-income individuals, such as youth programs, homeless centers, soup kitchens, health care facilities, battered women's centers, and alcohol and drug recovery centers; <bullet> Projects eligible for low-income housing tax credits; <bullet> State and municipal obligations, such as revenue bonds, that specifically [[Page 52115]] support affordable housing or other community development; <bullet> Not-for-profit organizations serving low- and moderate- income housing or other community development needs, such as counseling for credit, home-ownership, home maintenance, and other financial services education; and <bullet> Organizations supporting activities essential to the capacity of low- and moderate-income individuals or geographies to utilize credit or to sustain economic development, such as, for example, day care operations and job training programs that enable people to work. Q5. Will an institution receive consideration for charitable contributions as ``qualified investments''? A5. Yes, provided they have as their primary purpose community development as defined in the regulations. A charitable contribution, whether in cash or an in-kind contribution of property, is included in the term ``grant.'' A qualified investment is not disqualified because an institution receives favorable treatment for it (for example, as a tax deduction or credit) under the Internal Revenue Code. Q6. An institution makes or participates in a community development loan. The institution provided the loan at below-market interest rates or ``bought down'' the interest rate to the borrower. Is the lost income resulting from the lower interest rate or buy-down a qualified investment? A6. No. The agencies will, however, consider the innovativeness and complexity of the community development loan within the bounds of safe and sound banking practices. Q7. Will the agencies consider as a qualified investment the wages or other compensation of an employee or director who provides assistance to a community development organization on behalf of the institution? A7. No. However, the agencies will consider donated labor of employees or directors of a financial institution in the service test if the activity is a community development service. Section__.12(t) Small institution Q1. How are the ``total bank and thrift assets'' of a holding company determined? A1. ``Total banking and thrift assets'' of a holding company are determined by combining the total assets of all banks and/or thrifts that are majority-owned by the holding company. An institution is majority-owned if the holding company directly or indirectly owns more than 50 percent of its outstanding voting stock. Q2. How are Federal and State branch assets of a foreign bank calculated for purposes of the CRA? A2. A Federal or State branch of a foreign bank is considered a small institution if the Federal or State branch has less than $250 million in assets and the total assets of the foreign bank's or its holding company's U.S. bank and thrift subsidiaries that are subject to the CRA are less than $1 billion. This calculation includes not only FDIC-insured bank and thrift subsidiaries, but also the assets of any FDIC-insured branch of the foreign bank and the assets of any uninsured Federal or State branch (other than a limited branch or a Federal agency) of the foreign bank that results from an acquisition described in section 5(a)(8) of the International Banking Act of 1978 (12 U.S.C. Sec. 3103(a)(8)). Section__.12(u) Small business loan Q1. Are loans to nonprofit organizations considered small business loans or are they considered community development loans? A1. To be considered a small business loan, a loan must meet the definition of ``loan to small business'' in the instructions in the ``Consolidated Reports of Conditions and Income'' (Call Report) and ``Thrift Financial Reports'' (TFR). In general, a loan to a nonprofit organization, for business or farm purposes, where the loan is secured by nonfarm nonresidential property and the original amount of the loan is $1 million or less, if a business loan, or $500,000 or less, if a farm loan, would be reported in the Call Report and TFR as a small business or small farm loan. If a loan to a nonprofit organization is reportable as a small business or small farm loan, it cannot also be considered as a community development loan, except by a wholesale or limited purpose institution. Loans to nonprofit organizations that are not small business or small farm loans for Call Report and TFR purposes may be considered as community development loans if they meet the regulatory definition. Q2. Are loans secured by commercial real estate considered small business loans? A2. Yes, depending on their principal amount. Small business loans include loans secured by ``nonfarm nonresidential properties,'' as defined in the Call Report and TFR, in amounts less than $1 million. Q3. Are loans secured by nonfarm residential real estate to finance small businesses ``small business loans''? A3. No. Loans secured by nonfarm residential real estate that are used to finance small businesses are not included as ``small business'' loans for Call Report and TFR purposes. The agencies recognize that many small businesses are financed by loans secured by residential real estate. If these loans promote community development, as defined in the regulation, they may be considered as community development loans. Otherwise, at an institution's option, the institution may collect and maintain data separately concerning these loans and request that the data be considered in its CRA evaluation as ``Other Secured Lines/Loans for Purposes of Small Business.'' Q4. Are credit cards issued to small businesses considered ``small business loans''? A4. Credit cards issued to a small business or to individuals to be used, with the institution's knowledge, as business accounts are small business loans if they meet the definitional requirements in the Call Report or TFR instructions. Section__.12(w) Wholesale Institution Q1. What factors will the agencies consider in determining whether an institution is in the business of extending home mortgage, small business, small farm, or consumer loans to retail customers? A1. The agencies will consider whether: <bullet> The institution holds itself out to the retail public as providing such loans; and <bullet> The institution's revenues from extending such loans are significant when compared to its overall operations. A wholesale institution may make some retail loans without losing its wholesale designation as described above in Q&A2 addressing Secs. __.12(o) and 563e.12(n). Section__.21--Performance tests, Standards, and Ratings, in General Section__.21(a) Performance Tests and Standards Q1. Are all community development activities weighted equally by examiners? A1. No. Examiners will consider the responsiveness to credit and community development needs, as well as the innovativeness and complexity of an institution's community development lending, qualified investments, and community development services. These criteria include consideration of the degree to which they serve as a [[Page 52116]] catalyst for other community development activities. The criteria are designed to add a qualitative element to the evaluation of an institution's performance. Section__.21(b) Performance Context Q1. Is the performance context essentially the same as the former regulation's needs assessment? A1. No. The performance context is a broad range of economic, demographic, and institution-and community -specific information that an examiner reviews to understand the context in which an institution's record of performance should be evaluated. The agencies will provide examiners with much of this information prior to the examination. The performance context is not a formal or written assessment of community credit needs. Section__.21(b)(2) Information Maintained by the Institution or Obtained From Community Contacts Q1. Will examiners consider performance context information provided by institutions? A1. Yes. An institution may provide examiners with any information it deems relevant, including information on the lending, investment, and service opportunities in its assessment area(s). This information may include data on the business opportunities addressed by lenders not subject to the CRA. Institutions are not required, however, to prepare a needs assessment. If an institution provides information to examiners, the agencies will not expect information other than what the institution normally would develop to prepare a business plan or to identify potential markets and customers, including low-and moderate- income persons and geographies in its assessment area(s). The agencies will not evaluate an institution's efforts to ascertain community credit needs or rate an institution on the quality of any information it provides. Q2. Will examiners conduct community contact interviews as part of the examination process? A2. Yes. Examiners will consider information obtained from interviews with local community , civic, and government leaders. These interviews provide examiners with knowledge regarding the local community , its economic base, and community development initiatives. To ensure that information from local leaders is considered--particularly in areas where the number of potential contacts may be limited-- examiners may use information obtained through an interview with a single community contact for examinations of more than one institution in a given market. In addition, the agencies will consider information obtained from interviews conducted by other agency staff and by the other agencies. In order to augment contacts previously used by the agencies and foster a wider array of contacts, the agencies will share community contact information. Section__.21(b)(4) Institutional Capacity and Constraints Q1. Will examiners consider factors outside of an institution's control that prevent it from engaging in certain activities? A1. Yes. Examiners will take into account statutory and supervisory limitations on an institution's ability to engage in any lending, investment, and service activities. For example, a savings association that has made few or no qualified investments due to its limited investment authority may still receive a low satisfactory rating under the investment test if it has a strong lending record. Sec. __.21(b)(5) Institution's Past Performance and the Performance of Similarly Situated Lenders Q1. Can an institution's assigned rating be adversely affected by poor past performance? A1. Yes. The agencies will consider an institution's past performance in its overall evaluation. For example, an institution's past performance may support a rating of ``substantial noncompliance'' if the institution has not improved performance rated as ``needs to improve.'' Q2. How will examiners consider the performance of similarly situated lenders? A2. The performance context section of the regulation permits the performance of similarly situated lenders to be considered, for example, as one of a number of considerations in evaluating the geographic distribution of an institution's loans to low-, moderate-, middle-, and upper-income geographies. This analysis, as well as other analyses, may be used, for example, where groups of contiguous geographies within an institution's assessment area(s) exhibit abnormally low penetration. In this regard, the performance of similarly situated lenders may be analyzed if such an analysis would provide accurate insight into the institution's lack of performance in those areas. The regulation does not require the use of a specific type of analysis under these circumstances. Moreover, no ratio developed from any type of analysis is linked to any lending test rating. Sec. __.22--Lending Test Sec. __.22(a) Scope of test Sec. __.22(a)(1) Types of Loans Considered Q1. If a large retail institution is not required to collect and report home mortgage data under the HMDA, will the agencies still evaluate the institution's home mortgage lending performance? A1. Yes. The agencies will sample the institution's home mortgage loan files in order to assess its performance under the lending test criteria. Q2. When will examiners consider consumer loans as part of an institution's CRA evaluation? A2. Consumer loans will be evaluated if the institution so elects; and an institution that elects not to have its consumer loans evaluated will not be viewed less favorably by examiners than one that does. However, if consumer loans constitute a substantial majority of the institution's business, the agencies will evaluate them even if the institution does not so elect. The agencies interpret ``substantial majority'' to be so significant a portion of the institution's lending activity by number or dollar volume of loans that the lending test evaluation would not meaningfully reflect its lending performance if consumer loans were excluded. Sec. __.22(a)(2) Other Loan Data Q1. How are lending commitments (such as letters of credit) evaluated under the regulation? A1. The agencies consider lending commitments (such as letters of credit) only at the option of the institution. Commitments must be legally binding between an institution and a borrower in order to be considered. Information about lending commitments will be used by examiners to enhance their understanding of an institution's performance. Q2. Will examiners review application data as part of the lending test? A2. Application activity is not a performance criterion of the lending test. However, examiners may consider this information in the performance context analysis because this information may give examiners insight on, for example, the demand for loans. Q3. May a financial institution receive consideration under CRA for modification, extension, and consolidation agreements (MECAs), in which it obtains loans from other institutions without actually purchasing [[Page 52117]] or refinancing the loans, as those terms have been interpreted under CRA? A3. Yes. In some states, MECAs, which are not considered loan refinancings because the existing loan obligations are not satisfied and replaced, are common. Although these transactions are not considered to be purchases or refinancings, as those terms have been interpreted under CRA, they do achieve the same results. An institution may present information about its MECA activities to examiners for consideration under the lending test as ``other loan data.'' Section __.22(b) Performance Criteria Q1. How will examiners apply the performance criteria in the lending test? A1. Examiners will apply the performance criteria reasonably and fairly, in accord with the regulations, the examination procedures, and this Guidance. In doing so, examiners will disregard efforts by an institution to manipulate business operations or present information in an artificial light that does not accurately reflect an institution's overall record of lending performance. Section __.22(b)(1) Lending Activity Q1. How will the agencies apply the lending activity criterion to discourage an institution from originating loans that are viewed favorably under CRA in the institution itself and referring other loans, which are not viewed as favorably, for origination by an affiliate? A1. Examiners will review closely institutions with (1) a small number and amount of home mortgage loans with an unusually good distribution among low-and moderate-income areas and low- and moderate- income borrowers and (2) a policy of referring most, but not all, of their home mortgage loans to affiliated institutions. If an institution is making loans mostly to low-and moderate-income individuals and areas and referring the rest of the loan applicants to an affiliate for the purpose of receiving a favorable CRA rating, examiners may conclude that the institution's lending activity is not satisfactory because it has inappropriately attempted to influence the rating. In evaluating an institution's lending, examiners will consider legitimate business reasons for the allocation of the lending activity. Section __.22(b)(2) & (3) Geographic Distribution and Borrower Characteristics Q1. How do the geographic distribution of loans and the distribution of lending by borrower characteristics interact in the lending test? A1. Examiners generally will consider both the distribution of an institution's loans among geographies of different income levels and among borrowers of different income levels and businesses of different sizes. The importance of the borrower distribution criterion, particularly in relation to the geographic distribution criterion, will depend on the performance context. For example, distribution among borrowers with different income levels may be more important in areas without identifiable geographies of different income categories. On the other hand, geographic distribution may be more important in areas with the full range of geographies of different income categories. Q2. Must an institution lend to all portions of its assessment area? A2. The term ``assessment area'' describes the geographic area within which the agencies assess how well an institution has met the specific performance tests and standards in the rule. The agencies do not expect that simply because a census tract or block numbering area is within an institution's assessment area(s) the institution must lend to that census tract or block numbering area. Rather the agencies will be concerned with conspicuous gaps in loan distribution that are not explained by the performance context. Similarly, if an institution delineated the entire county in which it is located as its assessment area, but could have delineated its assessment area as only a portion of the county, it will not be penalized for lending only in that portion of the county, so long as that portion does not reflect illegal discrimination or arbitrarily exclude low- or moderate-income geographies. The capacity and constraints of an institution, its business decisions about how it can best help to meet the needs of its assessment area(s), including those of low- and moderate-income neighborhoods, and other aspects of the performance context, are all relevant to explain why the institution is serving or not serving portions of its assessment area(s). Q3. Will examiners take into account loans made by affiliates when evaluating the proportion of an institution's lending in its assessment area(s)? A3. Examiners will not take into account loans made by affiliates when determining the proportion of an institution's lending in its assessment area(s), even if the institution elects to have its affiliate lending considered in the remainder of the lending test evaluation. However, examiners may consider an institution's business strategy of conducting lending through an affiliate in order to determine whether a low proportion of lending in the assessment area(s) should adversely affect the institution's lending test rating. Q4. When will examiners consider loans (other than community development loans) made outside an institution's assessment area(s)? A4. Favorable consideration will be given for loans to low- and moderate-income persons and small business and farm loans outside of an institution's assessment area(s), provided the institution has adequately addressed the needs of borrowers within its assessment area(s). The agencies will apply this consideration not only to loans made by large retail institutions being evaluated under the lending test, but also to loans made by small institutions being evaluated under the small institution performance standards. Loans to low-and moderate-income persons and small businesses and farms outside of an institution's assessment area(s), however, will not compensate for poor lending performance within the institution's assessment area(s). Q5. Under the lending test, how will examiners evaluate home mortgage loans to middle- or upper-income individuals in a low- or moderate-income geography? A5. Examiners will consider these home mortgage loans under the performance criteria of the lending test, i.e., by number and amount of home mortgage loans, whether they are inside or outside the financial institution's assessment area(s), their geographic distribution, and the income levels of the borrowers. Examiners will use information regarding the financial institution's performance context to determine how to evaluate the loans under these performance criteria. Depending on the performance context, examiners could view home mortgage loans to middle-income individuals in a low-income geography very differently. For example, if the loans are for homes located in an area for which the local, state, tribal, or Federal government or a community -based development organization has developed a revitalization or stabilization plan (such as a Federal enterprise community or empowerment zone) that includes attracting mixed-income residents to establish a stabilized, economically diverse neighborhood, examiners may give more consideration to such loans, which may be viewed as serving the low- or moderate-income community 's needs as well as serving those of the [[Page 52118]] middle-or upper-income borrowers. If, on the other hand, no such plan exists and there is no other evidence of governmental support for a revitalization or stabilization project in the area and the loans to middle- or upper-income borrowers significantly disadvantage or primarily have the effect of displacing low- or moderate-income residents, examiners may view these loans simply as home mortgage loans to middle- or upper-income borrowers who happen to reside in a low- or moderate-income geography and weigh them accordingly in their evaluation of the institution. Section__.22(c) Affiliate Lending Section__.22(c)(1) In General Q1. If an institution elects to have loans by its affiliate(s) considered, may it elect to have only certain categories of loans considered? A1. Yes. An institution may elect to have only a particular category of its affiliate's lending considered. The basic categories of loans are home mortgage loans, small business loans, small farm loans, community development loans, and the five categories of consumer loans (motor vehicle loans, credit card loans, home equity loans, other secured loans, and other unsecured loans). Section__.22(c)(2) Constraints on Affiliate Lending Section__.22(c)(2)(i) No Affiliate may Claim a Loan Origination or Loan Purchase if Another Institution Claims the Same Loan Origination or Purchase Q1. How is this constraint on affiliate lending applied? A1. This constraint prohibits one affiliate from claiming a loan origination or purchase claimed by another affiliate. However, an institution can count as a purchase a loan originated by an affiliate that the institution subsequently purchases, or count as an origination a loan later sold to an affiliate, provided the same loans are not sold several times to inflate their value for CRA purposes. Section__.22(c)(2)(ii) If an Institution Elects To Have its Supervisory Agency Consider Loans Within a Particular Lending Category Made by one or More of the Institution's Affiliates in a Particular Assessment Area, the Institution Shall Elect to Have the Agency Consider all Loans Within That Lending Category in That Particular Assessment Area Made by all of the Institution's Affiliates Q1. How is this constraint on affiliate lending applied? A1. This constraint prohibits ``cherry-picking'' affiliate loans within any one category of loans. The constraint requires an institution that elects to have a particular category of affiliate lending in a particular assessment area considered to include all loans of that type made by all of its affiliates in that particular assessment area. For example, assume that an institution has one or more affiliates, such as a mortgage bank that makes loans in the institution's assessment area. If the institution elects to include the mortgage bank's home mortgage loans, it must include all of mortgage bank's home mortgage loans made in its assessment area. The institution cannot elect to include only those low- and moderate-income home mortgage loans made by the mortgage bank affiliate and not home mortgage loans to middle- and upper-income individuals or areas. Q2. How is this constraint applied if an institution's affiliates are also insured depository institutions subject to the CRA? A2. Strict application of this constraint against ``cherry- picking'' to loans of an affiliate that is also an insured depository institution covered by the CRA would produce the anomalous result that the other institution would, without its consent, not be able to count its own loans. Because the agencies did not intend to deprive an institution subject to the CRA of receiving consideration for its own lending, the agencies read this constraint slightly differently in cases involving a group of affiliated institutions, some of which are subject to the CRA and share the same assessment area(s). In those circumstances, an institution that elects to include all of its mortgage affiliate's home mortgage loans in its assessment area would not automatically be required to include all home mortgage loans in its assessment area of another affiliate institution subject to the CRA. However, all loans of a particular type made by any affiliate in the institution's assessment area(s) must either be counted by the lending institution or by another affiliate institution that is subject to the CRA. This reading reflects the fact that a holding company may, for business reasons, choose to transact different aspects of its business in different subsidiary institutions. However, the method by which loans are allocated among the institutions for CRA purposes must reflect actual business decisions about the allocation of banking activities among the institutions and should not be designed solely to enhance their CRA evaluations. Section__.22(d) Lending by a Consortium or a Third Party Q1. Will equity and equity-type investments in a third party receive positive consideration under the lending test? A1. If an institution has made an equity or equity-type investment in a third party, loans made by the third party may be considered under the lending test. On the other hand, asset-backed and debt securities that do not represent an equity-type interest in a third party will not be considered under the lending test unless the securities are booked by the purchasing institution as a loan. For example, if an institution purchases stock in a community development corporation (``CDC'') that primarily lends in low- and moderate-income areas or to low-and moderate-income individuals in order to promote community development, the institution may claim a pro rata share of the CDC's loans as community development loans. The institution's pro rata share is based on its percentage of equity ownership in the CDC. Q&A1 addressing Sec. __.23(b) provides information concerning consideration of an equity or equity-type investment under the investment test and both the lending and investment tests. Q2. How will examiners evaluate loans made by consortia or third parties under the lending test? A2. Loans originated or purchased by consortia in which an institution participates or by third parties in which an institution invests will only be considered if they qualify as community development loans and will only be considered under the community development criterion of the lending test. However, loans originated directly on the books of an institution or purchased by the institution are considered to have been made or purchased directly by the institution, even if the institution originated or purchased the loans as a result of its participation in a loan consortium. These loans would be considered under all the lending test criteria appropriate to them depending on the type of loan. Q3. In some circumstances, an institution may invest in a third party, such as a community development bank, that is also an insured depository institution and is thus subject to CRA requirements. If the investing institution requests its supervisory agency to consider its pro rata share of community development loans made by the third party, as allowed under 12 CFR Sec. __.22(d), may the third party also receive consideration for these loans? [[Page 52119]] A3. Yes, as long as the financial institution and the third party are not affiliates. The regulations state, at 12 CFR Sec. __.22(c)(2)(i), that two affiliates may not both claim the same loan origination or loan purchase. However, if the financial institution and the third party are not affiliates, the third party may receive consideration for the community development loans it originates, and the financial institution that invested in the third party may also receive consideration for its pro rata share of the same community development loans under 12 CFR Sec. __.22(d). Section__.23--Investment Test Section__.23(b) Exclusion Q1. Even though the regulations state that an activity that is considered under the lending or service tests cannot also be considered under the investment test, may parts of an activity be considered under one test and other parts be considered under another test? A1. Yes, in some instances the nature of an activity may make it eligible for consideration under more than one of the performance tests. For example, certain investments and related support provided by a large retail institution to a CDC may be evaluated under the lending, investment, and service tests. Under the service test, the institution may receive consideration for any community development services that it provides to the CDC, such as service by an executive of the institution on the CDC's board of directors. If the institution makes an investment in the CDC that the CDC uses to make community development loans, the institution may receive consideration under the lending test for its pro-rata share of community development loans made by the CDC. Alternatively, the institution's investment may be considered under the investment test, assuming it is a qualified investment. In addition, an institution may elect to have a part of its investment considered under the lending test and the remaining part considered under the investment test. If the investing institution opts to have a portion of its investment evaluated under the lending test by claiming a share of the CDC's community development loans, the amount of investment considered under the investment test will be offset by that portion. Thus, the institution would only receive consideration under the investment test for the amount of its investment multiplied by the percentage of the CDC's assets that meet the definition of a qualified investment. Section__.24--Service test Section__.24(d) Performance Criteria--Retail Banking Services Q1. How do examiners evaluate the availability and effectiveness of an institution's systems for delivering retail banking services? A1. Convenient access to full service branches within a community is an important factor in determining the availability of credit and non-credit services. Therefore, the service test performance standards place primary emphasis on full service branches while still considering alternative systems, such as automated teller machines (``ATMs''). The principal focus is on an institution's current distribution of branches; therefore, an institution is not required to expand its branch network or operate unprofitable branches. Under the service test, alternative systems for delivering retail banking services, such as ATMs, are considered only to the extent that they are effective alternatives in providing needed services to low- and moderate-income areas and individuals. Section__.24(d)(3) Availability and Effectiveness of Alternative Systems for Delivering Retail Banking Services Q1. How will examiners evaluate alternative systems for delivering retail banking services? A1. The regulation recognizes the multitude of ways in which an institution can provide services, for example, ATMs, banking by telephone or computer, and bank-by-mail programs. Delivery systems other than branches will be considered positively under the regulation to the extent that they are effective alternatives to branches in providing needed services to low-and moderate-income areas and individuals. The list of systems in the regulation is not intended to be inclusive. Q2. Are debit cards considered under the service test as an alternative delivery system? A2. By themselves, no. However, if debit cards are a part of a larger combination of products, such as a comprehensive electronic banking service, that allows an institution to deliver needed services to low- and moderate-income areas and individuals in its community , the overall delivery system that includes the debit card feature would be considered an alternative delivery system. Section__.25 Community Development Test for Wholesale or Limited Purpose Institutions Section__.25(d) Indirect Activities Q1. How are investments in third party community development organizations considered under the community development test? A1. Similar to the lending test for retail institutions, investments in third party community development organizations may be considered as qualified investments or as community development loans or both (provided there is no double counting), at the institution's option, as described above in the discussion regarding Secs. __.22(d) and __.23(b). Section __.25(f) Community Development Performance Rating Q1. Must a wholesale or limited purpose institution engage in all three categories of community development activities (lending, investment and service) to perform well under the community development test? A1. No, a wholesale or limited purpose institution may perform well under the community development test by engaging in one or more of these activities. Section __.26--Small Institution Performance Standards Section __.26(a) Performance Criteria Q1. May examiners consider, under one or more of the performance criteria of the small institution performance standards, lending- related activities, such as community development loans and lending- related qualified investments, when evaluating a small institution? A1. Yes. Examiners can consider ``lending-related activities,'' including community development loans and lending-related qualified investments, when evaluating the first four performance criteria of the small institution performance test. Although lending-related activities are specifically mentioned in the regulation in connection with only the first three criteria (i.e., loan-to-deposit ratio, percentage of loans in the institution's assessment area, and lending to borrowers of different incomes and businesses of different sizes), examiners can also consider these activities when they evaluate the fourth criteria-- geographic distribution of the institution's loans. Q2. What is meant by ``as appropriate'' when referring to the fact that lending-related activities will be considered, ``as appropriate,'' under the [[Page 52120]] various small institution performance criteria? A2. ``As appropriate'' means that lending-related activities will be considered when it is necessary to determine whether an institution meets or exceeds the standards for a satisfactory rating. Examiners will also consider other lending-related activities at an institution's request. Q3. When evaluating a small institution's lending performance, will examiners consider, at the institution's request, community development loans originated or purchased by a consortium in which the institution participates or by a third party in which the institution has invested? A3. Yes. However, a small institution that elects to have examiners consider community development loans originated or purchased by a consortium or third party must maintain sufficient information on its share of the community development loans so that the examiners may evaluate these loans under the small institution performance criteria. Q4. Under the small institution performance standards, will examiners consider both loan originations and purchases? A4. Yes, consistent with the other assessment methods in the regulation, examiners will consider both loans originated and purchased by the institution. Likewise, examiners may consider any other loan data the small institution chooses to provide, including data on loans outstanding, commitments and letters of credit. Q5. Under the small institution performance standards, how will qualified investments be considered for purposes of determining whether a small institution receives a satisfactory CRA rating? A5. The small institution performance standards focus on lending and other lending-related activities. Therefore, examiners will consider only lending-related qualified investments for the purposes of determining whether the small institution receives a satisfactory CRA rating. Section __ .26(a)(1) Loan-to-Deposit Ratio Q1. How is the loan-to-deposit ratio calculated? A1. A small institution's loan-to-deposit ratio is calculated in the same manner that the Uniform Bank Performance Report/Uniform Thrift Performance Report (UBPR/UTPR) determines the ratio. It is calculated by dividing the institution's net loans and leases by its total deposits. The ratio is found in the Liquidity and Investment Portfolio section of the UBPR and UTPR. Examiners will use this ratio to calculate an average since the last examination by adding the quarterly loan-to-deposit ratios and dividing the total by the number of quarters. Q2. How is the ``reasonableness'' of a loan-to-deposit ratio evaluated? A2. No specific ratio is reasonable in every circumstance, and each small institution's ratio is evaluated in light of information from the performance context, including the institution's capacity to lend, demographic and economic factors present in the assessment area, and the lending opportunities available in the assessment area(s). If a small institution's loan-to-deposit ratio appears unreasonable after considering this information, lending performance may still be satisfactory under this criterion taking into consideration the number and the dollar volume of loans sold to the secondary market or the number and amount and innovativeness or complexity of community development loans and lending-related qualified investments. Q3. If an institution makes a large number of loans off-shore, will examiners segregate the domestic loan-to-deposit ratio from the foreign loan-to-deposit ratio? A3. No. Examiners will look at the institution's net loan-to- deposit ratio for the whole institution, without any adjustments. Section __ .26(a)(2) Percentage of Lending Within Assessment Area(s) Q1. Must a small institution have a majority of its lending in its assessment area(s) to receive a satisfactory performance rating? A1. No. The percentage of loans and, as appropriate, other lending- related activities located in the bank's assessment area(s) is but one of the performance criteria upon which small institutions are evaluated. If the percentage of loans and other lending related activities in an institution's assessment area(s) is less than a majority, then the institution does not meet the standards for satisfactory performance only under this criterion. The effect on the overall performance rating of the institution, however, is considered in light of the performance context, including information regarding economic conditions, loan demand, the institution's size, financial condition and business strategies, and branching network and other aspects of the institution's lending record. Section __.26(a) (3) & (4) Distribution of Lending Within Assessment Area(s) by Borrower Income and Geographic Location Q1. How will a small institution's performance be assessed under these lending distribution criteria? A1. Distribution of loans, like other small institution performance criteria, is considered in light of the performance context. For example, a small institution is not required to lend evenly throughout its assessment area(s) or in any particular geography. However, in order to meet the standards for satisfactory performance under this criterion, conspicuous gaps in a small institution's loan distribution must be adequately explained by performance context factors such as lending opportunities in the institution's assessment area(s), the institution's product offerings and business strategy, and institutional capacity and constraints. In addition, it may be impracticable to review the geographic distribution of the lending of an institution with few demographically distinct geographies within an assessment area. If sufficient information on the income levels of individual borrowers or the revenues or sizes of business borrowers is not available, examiners may use proxies such as loan size for estimating borrower characteristics, where appropriate. Section __.26(b) Performance Rating Q1. How can a small institution achieve an ``outstanding'' performance rating? A1. A small institution that meets each of the standards for a ``satisfactory'' rating and exceeds some or all of those standards may warrant an ``outstanding'' performance rating. In assessing performance at the ``outstanding'' level, the agencies consider the extent to which the institution exceeds each of the performance standards and, at the institution's option, its performance in making qualified investments and providing services that enhance credit availability in its assessment area(s). In some cases, a small institution may qualify for an ``outstanding'' performance rating solely on the basis of its lending activities, but only if its performance materially exceeds the standards for a ``satisfactory'' rating, particularly with respect to the penetration of borrowers at all income levels and the dispersion of loans throughout the geographies in its assessment area(s) that display income variation. An institution with a high [[Page 52121]] loan-to-deposit ratio and a high percentage of loans in its assessment area(s), but with only a reasonable penetration of borrowers at all income levels or a reasonable dispersion of loans throughout geographies of differing income levels in its assessment area(s), generally will not be rated ``outstanding'' based only on its lending performance. However, the institution's performance in making qualified investments and its performance in providing branches and other services and delivery systems that enhance credit availability in its assessment area(s) may augment the institution's satisfactory rating to the extent that it may be rated ``outstanding.'' Q2. Will a small institution's qualified investments, community development loans, and community development services be considered if they do not directly benefit its assessment area(s)? A2. Yes. These activities are eligible for consideration if they benefit a broader statewide or regional area that includes a small institution's assessment area(s), as discussed more fully in Q&A6 addressing Secs. __.12(i) and 563e.12(h). Section __.27--Strategic plan Section __.27(c) Plans in General Q1. To what extent will the agencies provide guidance to an institution during the development of its strategic plan? A1. An institution will have an opportunity to consult with and provide information to the agencies on a proposed strategic plan. Through this process, an institution is provided guidance on procedures and on the information necessary to ensure a complete submission. For example, the agencies will provide guidance on whether the level of detail as set out in the proposed plan would be sufficient to permit agency evaluation of the plan. However, the agencies' guidance during plan development and, particularly, prior to the public comment period, will not include commenting on the merits of a proposed strategic plan or on the adequacy of measurable goals. Q2. How will a joint strategic plan be reviewed if the affiliates have different primary Federal supervisors? A2. The agencies will coordinate review of and action on the joint plan. Each agency will evaluate the measurable goals for those affiliates for which it is the primary regulator. Section __.27(f) Plan Content Section __.27(f)(1) Measurable Goals Q1. How should ``measurable goals'' be specified in a strategic plan? A1. Measurable goals (e.g., number of loans, dollar amount, geographic location of activity, and benefit to low-and moderate-income areas or individuals) must be stated with sufficient specificity to permit the public and the agencies to quantify what performance will be expected. However, institutions are provided flexibility in specifying goals. For example, an institution may provide ranges of lending amounts in different categories of loans. Measurable goals may also be linked to funding requirements of certain public programs or indexed to other external factors as long as these mechanisms provide a quantifiable standard. Section __.27(g) Plan Approval Section __.27(g)(2) Public Participation Q1. How will the public receive notice of a proposed strategic plan? A1. An institution submitting a strategic plan for approval by the agencies is required to solicit public comment on the plan for a period of thirty (30) days after publishing notice of the plan at least once in a newspaper of general circulation. The notice should be sufficiently prominent to attract public attention and should make clear that public comment is desired. An institution may, in addition, provide notice to the public in any other manner it chooses. Section __.28--Assigned Ratings Section __.28(a) Ratings in General Q1. How are institutions with domestic branches in more than one state assigned a rating? A1. The evaluation of an institution that maintains domestic branches in more than one state (``multistate institution'') will include a written evaluation and rating of its CRA record of performance as a whole and in each state in which it has a domestic branch. The written evaluation will contain a separate presentation on a multistate institution's performance for each metropolitan statistical area and the nonmetropolitan area within each state, if it maintains one or more domestic branch offices in these areas. This separate presentation will contain conclusions, supported by facts and data, on performance under the performance tests and standards in the regulation. The evaluation of a multistate institution that maintains a domestic branch in two or more states in a multistate metropolitan area will include a written evaluation (containing the same information described above) and rating of its CRA record of performance in the multistate metropolitan area. In such cases, the statewide evaluation and rating will be adjusted to reflect performance in the portion of the state not within the multistate metropolitan statistical area. Q2. How are institutions that operate within only a single state assigned a rating? A2. An institution that operates within only a single state (``single-state institution'') will be assigned a rating of its CRA record based on its performance within that state. In assigning this rating, the agencies will separately present a single-state institution's performance for each metropolitan area in which the institution maintains one or more domestic branch offices. This separate presentation will contain conclusions, supported by facts and data, on the single-state institution's performance under the performance tests and standards in the regulation. Q3. How do the agencies weight performance under the lending, investment and service test for large retail institutions? A3. A rating of ``outstanding,'' ``high satisfactory,'' ``low satisfactory,'' ``needs to improve,'' or ``substantial noncompliance,'' based on a judgment supported by facts and data, will be assigned under each performance test. Points will then be assigned to each rating as described in the first matrix set forth below. A large retail institution's overall rating under the lending, investment and service tests will then be calculated in accordance with the second matrix set forth below, which incorporates the rating principles in the regulation. Points Assigned for Performance Under Lending, Investment, and Service Tests ------------------------------------------------------------------------ Lending Service Investment ------------------------------------------------------------------------ Outstanding...................... 12 6 6 High Satisfactory................ 9 4 4 Low Satisfactory................. 6 3 3 Needs to Improve................. 3 1 1 [[Page 52122]] Substantial Noncompliance........ 0 0 0 ------------------------------------------------------------------------ Composite Rating Point Requirements [Add points from three tests] ------------------------------------------------------------------------ Rating Total points ------------------------------------------------------------------------ Outstanding............................... 20 or over. Satisfactory.............................. 11 through 19. Needs to Improve.......................... 5 through 10. Substantial Noncompliance................. 0 through 4. ------------------------------------------------------------------------ Note: There is one exception to the Composite Rating matrix. An institution may not receive a rating of ``satisfactory'' unless it receives at least ``low satisfactory'' on the lending test. Therefore, the total points are capped at three times the lending test score. Section __.29--Effect of CRA Performance on Applications Section __.29(a) CRA Performance Q1. What weight is given to an institution's CRA performance examination in reviewing an application? A1. In cases in which CRA performance is a relevant factor, information from a CRA performance examination of the institution is a particularly important consideration in the applications process because it represents a detailed evaluation of the institution's CRA performance by its Federal supervisory agency. In this light, an examination is an important, and often controlling factor in the consideration of an institution's record. In some cases, however, the examination may not be recent or a specific issue raised in the application process, such as progress in addressing weaknesses noted by examiners, progress in implementing commitments previously made to the reviewing agency, or a supported allegation from a commenter, is relevant to CRA performance under the regulation and was not addressed in the examination. In these circumstances, the applicant should present sufficient information to supplement its record of performance and to respond to the substantive issues raised in the application proceeding. Q2. What consideration is given to an institution's commitments for future action in reviewing an application by those agencies that consider such commitments? A2. Commitments for future action are not viewed as part of the CRA record of performance. In general, institutions cannot use commitments made in the applications process to overcome a seriously deficient record of CRA performance. However, commitments for improvements in an institution's performance may be appropriate to address specific weaknesses in an otherwise satisfactory record or to address CRA performance when a financially troubled institution is being acquired. Section __.29(b) Interested Parties Q1. What consideration is given to comments from interested parties in reviewing an application? A1. Materials relating to CRA performance received during the applications process can provide valuable information. Written comments, which may express either support for or opposition to the application, are made a part of the record in accordance with the agencies' procedures, and are carefully considered in making the agencies' decision. Comments should be supported by facts about the applicant's performance and should be as specific as possible in explaining the basis for supporting or opposing the application. These comments must be submitted within the time limits provided under the agencies' procedures. Q2. Is an institution required to enter into agreements with private parties? A2. No. Although communications between an institution and members of its community may provide a valuable method for the institution to assess how best to address the credit needs of the community , the CRA does not require an institution to enter into agreements with private parties. These agreements are not monitored or enforced by the agencies. Section __.41--Assessment Area Delineation Section __ ----.41(a) In General Q1. How do the agencies evaluate ``assessment areas'' under the revised CRA regulations compared to how they evaluated ``local communities'' that institutions delineated under the original CRA regulations? A1. The revised rule focuses on the distribution and level of an institution's lending, investments, and services rather than on how and why an institution delineated its ``local community '' or assessment area(s) in a particular manner. Therefore, the agencies will not evaluate an institution's delineation of its assessment area(s) as a separate performance criterion as they did under the original regulation. Rather, the agencies will only review whether the assessment area delineated by the institution complies with the limitations set forth in the regulations at Sec. __.41(e). Q2. If an institution elects to have the agencies consider affiliate lending, will this decision affect the institution's assessment area(s)? A2. If an institution elects to have the lending activities of its affiliates considered in the evaluation of the institution's lending, the geographies in which the affiliate lends do not affect the institution's delineation of assessment area(s). Q3. Can a financial institution identify a specific ethnic group rather than a geographic area as its assessment area? A3. No, assessment areas must be based on geography. Section __.41(c) Geographic Area(s) for Institutions Other Than Wholesale or Limited Purpose Institutions Section __.41(c)(1) Generally Consist of one or More MSAs or one or More Contiguous Political Subdivisions Q1. Besides cities, towns, and counties, what other units of local government are political subdivisions for CRA purposes? A1. Townships and Indian reservations are political subdivisions for CRA purposes. Institutions should be aware that the boundaries of townships and Indian reservations may not be consistent with the boundaries of the census tracts or block numbering areas (``geographies'') in the area. In these cases, institutions must ensure that their assessment area(s) consists only of whole geographies by adding any portions of the geographies that lie outside the political subdivision to the delineated assessment area(s). Q2. Are wards, school districts, voting districts, and water districts political subdivisions for CRA purposes? A2. No. However, an institution that determines that it predominantly serves an area that is smaller than a city, town or other political subdivision may delineate as its assessment area the larger political subdivision and then, in accordance with Sec. __.41(d), adjust the boundaries of the assessment area to [[Page 52123]] include only the portion of the political subdivision that it reasonably can be expected to serve. The smaller area that the institution delineates must consist of entire geographies, may not reflect illegal discrimination, and may not arbitrarily exclude low-or moderate-income geographies. Section __.41(d) Adjustments to Geographic Area(s) Q1. When may an institution adjust the boundaries of an assessment area to include only a portion of a political subdivision? A1. Institutions must include whole geographies (i.e., census tracts or block numbering areas) in their assessment areas and generally should include entire political subdivisions. Because census tracts and block numbering areas are the common geographic areas used consistently nationwide for data collection, the agencies require that assessment areas be made up of whole geographies. If including an entire political subdivision would create an area that is larger than the area the institution can reasonably be expected to serve, an institution may, but is not required to, adjust the boundaries of its assessment area to include only portions of the political subdivision. For example, this adjustment is appropriate if the assessment area would otherwise be extremely large, of unusual configuration, or divided by significant geographic barriers (such as a river, mountain, or major highway system). When adjusting the boundaries of their assessment areas, institutions must not arbitrarily exclude low- or moderate-income geographies or set boundaries that reflect illegal discrimination. Section__.41(e) Limitations on Delineation of an Assessment Area Section__.41(e)(3) May not Arbitrarily Exclude Low- or Moderate-Income Geographies Q1. How will examiners determine whether an institution has arbitrarily excluded low- or moderate-income geographies? A1. Examiners will make this determination on a case-by-case basis after considering the facts relevant to the institution's assessment area delineation. Information that examiners will consider may include: <bullet> Income levels in the institution's assessment area(s) and surrounding geographies; <bullet> Locations of branches and deposit-taking ATMs; <bullet> Loan distribution in the institution's assessment area(s) and surrounding geographies; <bullet> The institution's size; <bullet> The institution's financial condition; and <bullet> The business strategy, corporate structure and product offerings of the institution. Section__.41(e)(4) May not Extend Substantially Beyond a CMSA Boundary or Beyond a State Boundary Unless Located in a Multistate MSA Q1. What are the maximum limits on the size of an assessment area? A1. An institution shall not delineate an assessment area extending substantially across the boundaries of a consolidated metropolitan statistical area (CMSA) or the boundaries of an MSA, if the MSA is not located in a CMSA. Similarly, an assessment area may not extend substantially across state boundaries unless the assessment area is located in a multistate MSA. An institution may not delineate a whole state as its assessment area unless the entire state is contained within a CMSA. These limitations apply to wholesale and limited purpose institutions as well as other institutions. An institution shall delineate separate assessment areas for the areas inside and outside a CMSA (or MSA if the MSA is not located in a CMSA) if the area served by the institution's branches outside the CMSA (or MSA) extends substantially beyond the CMSA (or MSA) boundary. Similarly, the institution shall delineate separate assessment areas for the areas inside and outside of a state if the institution's branches extend substantially beyond the boundary of one state (unless the assessment area is located in a multistate MSA). In addition, the institution should also delineate separate assessment areas if it has branches in areas within the same state that are widely separate and not at all contiguous. For example, an institution that has its main office in New York City and a branch in Buffalo, New York, and each office serves only the immediate areas around it, should delineate two separate assessment areas. Q2. Can an institution delineate one assessment area that consists of an MSA and two large counties that abut the MSA but are not adjacent to each other? A2. As a general rule, an institution's assessment area should not extend substantially beyond the boundary of an MSA if the MSA is not located in a CMSA. Therefore, the MSA would be a separate assessment area, and because the two abutting counties are not adjacent to each other and, in this example, extend substantially beyond the boundary of the MSA, the institution would delineate each county as a separate assessment area (so, in this example, there would be three assessment areas). However, if the MSA and the two counties were in the same CMSA, then the institution could delineate only one assessment area including them all. Section__.42--Data Collection, Reporting, and Disclosure Q1. When must an institution collect and report data under the CRA regulations? A1. All institutions except small institutions are subject to data collection and reporting requirements. A small institution is a bank or thrift that, as of December 31 of either of the prior two calendar years, had total assets of less than $250 million and was independent or an affiliate of a holding company that, as of December 31 of either of the prior two calendar years, had total banking and thrift assets of less than $1 billion. For example: ------------------------------------------------------------------------ Data collection Institution's required Date asset size for (millions) following calendar year? ------------------------------------------------------------------------ 12/31/94.................................... $240 No. 12/31/95.................................... $260 No. 12/31/96.................................... $230 No. 12/31/97.................................... $280 No. 12/31/98.................................... $260 Yes, beginning 1/ 01/99. ------------------------------------------------------------------------ All institutions that are subject to the data collection and reporting requirements must report the data for a calendar year by March 1 of the subsequent year. In the example, above, the institution would report the data collected for calendar year 1999 by March 1, 2000. The Board of Governors of the Federal Reserve System is handling the processing of the reports for all of the primary regulators. The reports should be submitted in a prescribed electronic format on a timely basis. The mailing address for submitting these reports is: Attention: CRA Processing, Board of Governors of the Federal Reserve System, 1709 New York Avenue, N.W., 5th Floor, Washington, DC 20006. Q2. Should an institution develop its own program for data collection, or will the regulators require a certain format? A2. An institution may use the free software that is provided by the FFIEC to reporting institutions for data collection and reporting or develop its own program. Those institutions that develop their own programs must follow the precise format for the new [[Page 52124]] CRA data collection and reporting rules. This format may be obtained by contacting the CRA Assistance Line at (202) 872-7584. Q3. How should an institution report data on lines of credit? A3. Institutions must collect and report data on lines of credit in the same way that they provide data on loan originations. Lines of credit are considered originated at the time the line is approved or increased; and an increase is considered a new origination. Generally, the full amount of the credit line is the amount that is considered originated. In the case of an increase to an existing line, the amount of the increase is the amount that is considered originated and that amount should be reported. Q4. Should renewals of lines of credit be reported? A4. No. Similar to loan renewals, renewals of lines of credit are not considered loan originations and should not be reported. Q5. When should merging institutions collect data? A5. Three scenarios of data collection responsibilities for the calendar year of a merger and subsequent data reporting responsibilities are described below. <bullet> Two institutions are exempt from CRA collection and reporting requirements because of asset size. The institutions merge. No data collection is required for the year in which the merger takes place, regardless of the resulting asset size. Data collection would begin after two consecutive years in which the combined institution had year-end assets of at least $250 million or was part of a holding company that had year-end banking and thrift assets of at least $1 billion. <bullet> Institution A, an institution required to collect and report the data, and Institution B, an exempt institution, merge. Institution A is the surviving institution. For the year of the merger, data collection is required for Institution A's transactions. Data collection is optional for the transactions of the previously exempt institution. For the following year, all transactions of the surviving institution must be collected and reported. <bullet> Two institutions that each are required to collect and report the data merge. Data collection is required for the entire year of the merger and for subsequent years so long as the surviving institution is not exempt. The surviving institution may file either a consolidated submission or separate submissions for the year of the merger but must file a consolidated report for subsequent years. Q6. Can small institutions get a copy of the data collection software even though they are not required to collect or report data? A6. Yes. Any institution that is interested in receiving a copy of the software may send a written request to: Attn.: CRA Processing, Board of Governors of the Federal Reserve System, 1709 New York Ave, N.W., 5th Floor, Washington, DC 20006. They may also call the CRA Assistance Line at (202) 872-7584 or send Internet e-mail to CRAHELP@FRB.GOV. Q7. If a small institution is designated a wholesale or limited purpose institution, must it collect data that it would not otherwise be required to collect because it is a small institution? A7. No. However, small institutions must be prepared to identify those loans, investments and services to be evaluated under the community development test. Section__.42(a) Loan Information Required to be Collected and Maintained Q1. Must institutions collect and report data on all commercial loans under $1 million at origination? A1. No. Institutions that are not exempt from data collection and reporting are required to collect and report only those commercial loans that they capture in the Call Report, Schedule RC-C, Part II, and in the TFR, Schedule SB. Small business loans are defined as those whose original amounts are $1 million or less and that were reported as either ``Loans secured by nonfarm or nonresidential real estate'' or ``Commercial and Industrial loans'' in Part I of the Call Report or TFR. Q2. For loans defined as small business loans, what information should be collected and maintained? A2. Institutions that are not exempt from data collection and reporting are required to collect and maintain in a standardized, machine readable format information on each small business loan originated or purchased for each calendar year: <bullet> A unique number or alpha-numeric symbol that can be used to identify the relevant loan file; <bullet> The loan amount at origination; <bullet> The loan location; and <bullet> An indicator whether the loan was to a business with gross annual revenues of $1 million or less. The location of the loan must be maintained by census tract or block numbering area. In addition, supplemental information contained in the file specifications includes a date associated with the origination or purchase and whether a loan was originated or purchased by an affiliate. The same requirements apply to small farm loans. Q3. Will farm loans need to be segregated from business loans? A3. Yes. Q4. Should institutions collect and report data on all agricultural loans under $500,000 at origination? A4. Institutions are to report those farm loans that they capture in the Call Report, Schedule RC-C, Part II and Schedule SB of the TFR. Small farm loans are defined as those whose original amounts are $500,000 or less and were reported as either ``Loans to finance agricultural production and other loans to farmers'' or ``Loans secured by farmland'' in Part I of the Call Report and TFR. Q5. Should institutions collect and report data about small business and small farm loans that are refinanced or renewed? A5. An institution collects and reports information about refinancings but does not collect and report information about renewals. A refinancing typically involves the satisfaction of an existing obligation that is replaced by a new obligation undertaken by the same borrower. When an institution refinances a loan, it is considered a new origination and loan data should be collected and reported if otherwise required. Consistent with HMDA, however, if under the original loan agreement, the institution is unconditionally obligated to refinance the loan, or is obligated to refinance the loan subject to conditions within the borrower's control, the institution would not report these events as originations. For purposes of the CRA data collection and reporting requirements, an extension of the maturity of an existing loan is a renewal, and is not considered a loan origination. Therefore, institutions should not collect and report data on loan renewals. Q6. Does a loan to the ``fishing industry'' come under the definition of a small farm loan? A6. Yes. Instructions for Part I of the Call Report and Schedule SB of the TFR include loans ``made for the purpose of financing fisheries and forestries, including loans to commercial fishermen'' as a component of the definition for ``Loans to finance agricultural production and other loans to farmers.'' Part II of Schedule RC-C of the Call Report and Schedule SB of the TFR, which serve as the basis of the [[Page 52125]] definition for small business and small farm loans in the revised regulation, capture both ``Loans to finance agricultural production and other loans to farmers'' and ``Loans secured by farmland.'' Q7. How should an institution report a home equity line of credit, part of which is for home improvement purposes, but the predominant part of which is for small business purposes? A7. The institution has the option of reporting the portion of the home equity line that is for home improvement purposes under HMDA. That portion of the loan would then be considered when examiners evaluate home mortgage lending. If the line meets the regulatory definition of a `` community development loan,'' the institution should collect and report information on the entire line as a community development loan. If the line does not qualify as a community development loan, the institution has the option of collecting and maintaining (but not reporting) the entire line of credit as ``Other Secured Lines/Loans for Purposes of Small Business.'' Q8. When collecting small business and small farm data for CRA purposes, may an institution collect and report information about loans to small businesses and small farms located outside the United States? A8. At an institution's option, it may collect data about small business and small farm loans located outside the United States; however, it cannot report this data because the CRA data collection software will not accept data concerning loan locations outside the United States. Q9. Is an institution that has no small farm or small business loans required to report under CRA? A9. Each institution subject to data reporting requirements must, at a minimum, submit a transmittal sheet, definition of its assessment area(s), and a record of its community development loans. If the institution does not have community development loans to report, the record should be sent with ``0'' in the community development loan composite data fields. An institution that has not purchased or originated any small business or small farm loans during the reporting period would not submit the composite loan records for small business or small farm loans. Q10. How should an institution collect and report the location of a loan made to a small business or farm if the borrower provides an address that consists of a post office box number or a rural route and box number? A10. Prudent banking practices dictate that an institution know the location of its customers or loan collateral. Therefore, institutions typically will know the actual location of their borrowers or loan collateral beyond an address consisting only of a post office box. Many borrowers have street addresses in addition to post office box numbers or rural route and box numbers. Institutions should ask their borrowers to provide the street address of the main business facility or farm or the location where the loan proceeds otherwise will be applied. Once the institution receives this information from the borrower, it should assign a census tract or block numbering area to that location (geocode) and report that information as required under the regulation. There may be cases in which a borrower cannot provide a street address because of the rural nature of the community . If a borrower can provide only a rural route and box number, or in those rare instances in which a borrower reports a post office box and the institution cannot determine the location of the business, the following guidance will apply, depending on the date the loan is originated or purchased: <bullet> For loans originated or purchased in 1997, if an institution cannot determine the borrower's street address, the institution should geocode the location of the loan using the town, state, and zip code of the location of the post office as a proxy for the location of the borrower. In cases where the assigned location of the zip code for the rural route and box number or post office box encompasses more than one census tract or block numbering area, the institution should be able to provide a specific rationale for the census tract or block numbering area selected for geocoding purposes. <bullet> For loans originated or purchased in 1998 or later, if the institution cannot determine the borrower's street address, the institution should report the borrower's state, county, MSA, if applicable, and ``NA,'' for ``not available,'' in lieu of a census tract or block numbering area code. Section __.42(a)(2) Loan Amount at Origination Q1. When an institution purchases a small business or small farm loan, which amount should the institution collect and report--the original amount of the loan or the amount at purchase? A1. When collecting and reporting information on purchased small business and small farm loans, an institution collects and reports the amount of the loan at origination, not at the time of purchase. This is consistent with the Call Report's and TFR's use of the ``original amount of the loan'' to determine whether a loan should be reported as a ``loan to a small business'' or a ``loan to a small farm'' and in which loan size category a loan should be reported. When assessing the volume of small business and small farm loan purchases for purposes of evaluating lending test performance under CRA, however, examiners will evaluate an institution's activity based on the amounts at purchase. Q2. How should an institution collect data about multiple loan originations to the same business? A2. If an institution makes multiple originations to the same business, the loans should be collected and reported as separate originations rather than combined and reported as they are on the Call Report or TFR, which reflect loans outstanding, rather than originations. However, if institutions make multiple originations to the same business solely to inflate artificially the number or volume of loans evaluated for CRA lending performance, the agencies may combine these loans for purposes of evaluation under the CRA. Q3. How should an institution collect data pertaining to credit cards issued to small businesses? A3. If an institution agrees to issue credit cards to a business' employees, all of the credit card lines opened on a particular date for that single business should be reported as one small business loan origination rather than reporting each individual credit card line, assuming the criteria in the ``small business loan'' definition in the regulation are met. The credit card program's ``amount at origination'' is the sum of all of the employee/business credit cards'' credit limits opened on a particular date. If subsequently issued credit cards increase the small business credit line, the added amount is reported as a new origination. Section__.42(a)(3) The Loan Location Q1. Which location should an institution record if a small business loan's proceeds are used in a variety of locations? A1. The institution should record the loan location by either the location of the business headquarters or the location where the greatest portion of the proceeds are applied, as indicated by the borrower. Section__.42(a)(4) Indicator of Gross Annual Revenue Q1. When indicating whether a small business borrower had gross annual [[Page 52126]] revenues of $1 million or less, upon what revenues should an institution rely? A1. Generally, an institution should rely on the revenues that it considered in making its credit decision. For example, in the case of affiliated businesses, such as a parent corporation and its subsidiary, if the institution considered the revenues of the entity's parent or a subsidiary corporation of the parent as well, then the institution would aggregate the revenues of both corporations to determine whether the revenues are $1 million or less. Alternatively, if the institution considered the revenues of only the entity to which the loan is actually extended, the institution should rely solely upon whether gross annual revenues are above or below $1 million for that entity. However, if the institution considered and relied on revenues or income of a cosigner or guarantor that is not an affiliate of the borrower, the institution should not adjust the borrower's revenues for reporting purposes. Q2. If an institution that is not exempt from data collection and reporting does not request or consider revenue information to make the credit decision regarding a small business or small farm loan, must the institution collect revenue information in connection with that loan? A2. No. In those instances, the institution should enter the code indicating ``revenues not known'' on the individual loan portion of the data collection software or on an internally developed system. Loans for which the institution did not collect revenue information may not be included in the loans to businesses and farms with gross annual revenues of $1 million or less when reporting this data. Q3. What gross revenue should an institution use in determining the gross annual revenue of a start-up business? A3. The institution should use the actual gross annual revenue to date (including $0 if the new business has had no revenue to date). Although a start-up business will provide the institution with pro forma projected revenue figures, these figures may not accurately reflect actual gross revenue. Section__.42(b) Loan Information Required To Be Reported Section__.42(b)(1) Small Business and Small Farm Loan Data Q1. For small business and small farm loan information that is collected and maintained, what data should be reported? A1. Each institution that is not exempt from data collection and reporting is required to report in machine-readable form annually by March 1 the following information, aggregated for each census tract or block numbering area in which the institution originated or purchased at least one small business or small farm loan during the prior year: <bullet> The number and amount of loans originated or purchased with original amounts of $100,000 or less; <bullet> The number and amount of loans originated or purchased with original amounts of more than $100,000 but less than or equal to $250,000; <bullet> The number and amount of loans originated or purchased with original amounts of more than $250,000 but not more than $1 million; and <bullet> To the extent that information is available, the number and amount of loans to businesses and farms with gross annual revenues of $1 million or less (using the revenues the institution considered in making its credit decision). Section __.42(b)(2) Community Development Loan Data Q1. What information about community development loans must institutions report? A1. Institutions subject to data reporting requirements must report the aggregate number and amount of community development loans originated and purchased during the prior calendar year. Q2. If a loan meets the definition of a home mortgage, small business, or small farm loan AND qualifies as a community development loan, where should it be reported? Can FHA, VA and SBA loans be reported as community development loans? A2. Except for multifamily affordable housing loans, which may be reported by retail institutions both under HMDA as home mortgage loans and as community development loans, in order to avoid double counting, retail institutions must report loans that meet the definitions of home mortgage, small business, or small farm loans only in those respective categories even if they also meet the definition of community development loans. As a practical matter, this is not a disadvantage for retail institutions because any affordable housing mortgage, small business, small farm or consumer loan that would otherwise meet the definition of a community development loan will be considered elsewhere in the lending test. Any of these types of loans that occur outside the institution's assessment area can receive favorable consideration under the borrower characteristic criteria of the lending test. See Q&A4 under Sec. __.22(b) (2) & (3). Limited purpose and wholesale institutions also must report loans that meet the definitions of home mortgage, small business, or small farm loans in those respective categories; however, they must also report any loans from those categories that meet the regulatory definition of `` community development loans'' as community development loans. There is no double counting because wholesale and limited purpose institutions are not subject to the lending test and, therefore, are not evaluated on their level and distribution of home mortgage, small business, small farm and consumer loans. Section __.42(b)(3) Home Mortgage Loans Q1. Must institutions that are not required to collect home mortgage loan data by the HMDA collect home mortgage loan data for purposes of the CRA? A1. No. If an institution is not required to collect home mortgage loan data by the HMDA, the institution need not collect home mortgage loan data under the CRA. Examiners will sample these loans to evaluate the institution's home mortgage lending. If an institution wants to ensure that examiners consider all of its home mortgage loans, the institution may collect and maintain data on these loans. Section __.42(c) Optional data collection and maintenance Section __.42(c)(1) Consumer loans Q1. What are the data requirements regarding consumer loans? A1. There are no data reporting requirements for consumer loans. Institutions may, however, opt to collect and maintain data on consumer loans. If an institution chooses to collect information on consumer loans, it may collect data for one or more of the following categories of consumer loans: motor vehicle, credit card, home equity, other secured, and other unsecured. If an institution collects data for loans in a certain category, it must collect data for all loans originated or purchased within that category. The institution must maintain these data separately for each category for which it chooses to collect data. The data collected and maintained should include for each loan: <bullet> A unique number or alpha-numeric symbol that can be used to identify the relevant loan file; <bullet> The loan amount at origination or purchase; <bullet> The loan location; and [[Page 52127]] <bullet> The gross annual income of the borrower that the institution considered in making its credit decision. Section __.42(c)(1)(iv) Income of borrower Q1. If an institution does not consider income when making an underwriting decision in connection with a consumer loan, must it collect income information? A1. No. Further, if the institution routinely collects, but does not verify, a borrower's income when making a credit decision, it need not verify the income for purposes of data maintenance. Q2. May an institution list ``0'' in the income field on consumer loans made to employees when collecting data for CRA purposes as the institution would be permitted to do under HMDA? A2. Yes. Section __.42(c)(2) Other Loan Data Q1. Schedule RC-C, Part II of the Call Report and schedule SB of the TFR do not allow financial institutions to report loans for commercial and industrial purposes that are secured by residential real estate. Loans extended to small businesses with gross annual revenues of $1 million or less may, however, be secured by residential real estate. Is there a way to collect this information on the software to supplement an institution's small business lending data at the time of examination? A1. Yes. If these loans promote community development, as defined in the regulation, the institution should collect and report information about these loans as community development loans. Otherwise, at an institution's option, it may collect and maintain data concerning loans, purchases, and lines of credit extended to small businesses and secured by residential real estate for consideration in the CRA evaluation of its small business lending. To facilitate this optional data collection, the software distributed free-of-charge by the FFIEC provides that an institution may collect this information to supplement its small business lending data by choosing loan type, ``Other Secured Lines/Loans for Purposes of Small Business,'' in the individual loan data. (The title of the loan type, ``Other Secured Lines of Credit for Purposes of Small Business,'' which was found in the instructions accompanying the 1996 data collection software, is being changed to ``Other Secured Lines/Loans for Purposes of Small Business'' in order to accurately reflect that lines of credit and loans may be reported under this loan type.) This information should be maintained at the institution but should not be submitted for central reporting purposes. Q2. Must an institution collect data on loan commitments and letters of credit? A2. No. Institutions are not required to collect data on loan commitments and letters of credit. Institutions may, however, provide for examiner consideration information on letters of credit and commitments. Q3. Are commercial and consumer leases considered loans for purposes of CRA data collection? A3. Commercial and consumer leases are not considered small business or small farm loans or consumer loans for purposes of the data collection requirements in 12 CFR Sec. __.42(a) & (c)(1). However, if an institution wishes to collect and maintain data about leases, the institution may provide this data to examiners as ``other loan data'' under 12 CFR Sec. __.42(c)(2) for consideration under the lending test. Section __.42(d) Data on Affiliate Lending Q1. If an institution elects to have an affiliate's home mortgage lending considered in its CRA evaluation, what data must the institution make available to examiners? A1. If the affiliate is a HMDA reporter, the institution must identify those loans reported by its affiliate under 12 CFR part 203 (Regulation C, implementing HMDA). At its option, the institution may either provide examiners with the affiliate's entire HMDA Disclosure Statement or just those portions covering the loans in its assessment area(s) that it is electing to consider. If the affiliate is not required by HMDA to report home mortgage loans, the institution must provide sufficient data concerning the affiliate's home mortgage loans for the examiners to apply the performance tests. Section __.43--Content and Availability of Public File Section __.43(a) Information Available to the Public Section __.43(a)(1) Public Comments Q1. What happens to comments received by the agencies? A1. Comments received by a Federal financial supervisory agency will be on file at the agency for use by examiners. Those comments are also available to the public unless they are exempt from disclosure under the Freedom of Information Act . Q2. Is an institution required to respond to public comments? A2. No. All institutions should review comments and complaints carefully to determine whether any response or other action is warranted. A small institution subject to the small institution performance standards is specifically evaluated on its record of taking action, if warranted, in response to written complaints about its performance in helping to meet the credit needs in its assessment area(s) (Sec. __.26(a)(5)). For all institutions, responding to comments may help to foster a dialogue with members of the community or to present relevant information to an institution's Federal financial supervisory agency. If an institution responds in writing to a letter in the public file, the response must also be placed in that file, unless the response reflects adversely on any person or placing it in the public file violates a law. Q3. May an institution include a response to its CRA Performance Evaluation in its public file? A3. Yes. However, the format and content of the evaluation, as transmitted by the supervisory agency, may not be altered or abridged in any manner. In addition, an institution that received a less than satisfactory rating during it most recent examination must include in its public file a description of its current efforts to improve its performance in helping to meet the credit needs of its entire community. The institution must update the description on a quarterly basis. Section __.43(b) Additional Information Available to the Public Section __.43(b)(1) Institutions Other Than Small Institutions Q1. Must an institution that elects to have affiliate lending considered include data on this lending in its public file? A1. Yes. The lending data to be contained in an institution's public file covers the lending of the institution's affiliates, as well as of the institution itself, considered in the assessment of the institution's CRA performance. An institution that has elected to have mortgage loans of an affiliate considered must include either the affiliate's HMDA Disclosure Statements for the two prior years or the parts of the Disclosure Statements that relate to the institution's assessment area(s), at the institution's option. Section__.43(c) Location of Public Information Q1. What is an institution's ``main office''? A1. An institution's main office is the main, home, or principal office as designated in its charter. [[Page 52128]] Section__.44--Public Notice by Institutions Q1. Are there any placement or size requirements for an institution's public notice? A1. The notice must be placed in the institution's public lobby, but the size and placement may vary. The notice should be placed in a location and be of a sufficient size that customers can easily see and read it. Section__.45--Publication of Planned Examination Schedule Q1. Where will the agencies publish the planned examination schedule for the upcoming calendar quarter? A1. The agencies may use the Federal Register, a press release, the Internet, or other existing agency publications for disseminating the list of the institutions scheduled to for CRA examinations during the upcoming calendar quarter. Interested parties should contact the appropriate Federal financial supervisory agency for information on how the agency is publishing the planned examination schedule. Q2. Is inclusion on the list of institutions that are scheduled to undergo CRA examinations in the next calendar quarter determinative of whether an institution will be examined in that quarter? A2. No. The agencies attempt to determine as accurately as possible which institutions will be examined during the upcoming calendar quarter. However, whether an institution's name appears on the published list does not conclusively determine whether the institution will be examined during that quarter. The agencies may need to defer a planned examination or conduct an unforeseen examination because of scheduling difficulties or other circumstances. Appendix B to Part__CRA Notice Q1. What agency information should be added to the CRA notice form? A1. The following information should be added to the form: OCC-supervised institutions only: The address of the deputy comptroller of the district in which the institution is located should be inserted in the appropriate blank. These addresses can be found at 12 CFR Sec. 4.5(a). OCC-, FDIC-, and Board-supervised institutions: ``Officer in Charge of Supervision'' is the title of the responsible official at the appropriate Federal Reserve Bank. Appendix A Regional Offices of the Bureau of the Census To obtain median family income levels of census tracts, MSAs, block numbering areas and statewide nonmetropolitan areas, contact the appropriate regional office of the Bureau of the Census as indicated below. The list shows the states covered by each regional office. Atlanta, (404) 730-3833 Alabama, Florida, Georgia Boston, (617) 424-0510 Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont Charlotte, (704) 344-6144 District of Columbia, Kentucky, North Carolina, South Carolina, Tennessee, Virginia Chicago, (708) 562-1740 Illinois, Indiana, Wisconsin Dallas, (214) 640-4470 or (800) 835-9752 Louisiana, Mississippi, Texas Denver, (303) 969-7750 Arizona, Colorado, Nebraska, New Mexico, North Dakota, South Dakota, Utah, Wyoming Detroit, (313) 259-1875 Michigan, Ohio, West Virginia Kansas City, (913) 551-6711 Arkansas, Iowa, Kansas, Minnesota, Missouri, Oklahoma Los Angeles, (818) 904-6339 California New York, (212) 264-4730 New York, Puerto Rico Philadelphia, (215) 597-8313 or (215) 597-8312 Delaware, Maryland, New Jersey, Pennsylvania Seattle, (206) 728-5314 Alaska, Hawaii, Idaho, Montana, Nevada, Oregon, Washington Dated: September 29, 1997. Joe M. Cleaver, Executive Secretary, Federal Financial Institutions Examination Council. [FR Doc. 97-26206 Filed 10-3-97; 8:45 am] BILLING CODE 4810-33-P; 6714-01-P; 6210-01-P 6720-01-P