How Do I Get CRA Community Development Credit?
When the regulators ask, “What are you doing for Community Development,” how will you answer? These 5 practical tips will help you identify potential Community Development activities.
All banks have to deal with trying to get Community Development credit for Community Reinvestment Act (CRA) compliance. Community Development is intended to ensure that financial institutions meet their community’s unique credit needs. In that spirit, it’s an essential part of both your portfolio and your compliance management.
First, it's worth noting that Community Development for CRA compliance is about more than just loans. There are actually three key types of Community Development activities: Loans, Services, and Qualified Investments.
Compliance professionals may find the process of identifying and submitting loans and activities for Community Development credit stressful, for a few different reasons. First, the regulatory guidance leaves a lot of room for interpretation, and second, the regulators have discretion when evaluating for Community Development credit.
When the regulators ask about your Community Development activity, how will you answer?
Hopefully with a substantial, curated list of loans and activities that they can review. You’re probably familiar with some of the more common sources of Community Development credit. In addition, there are plenty of lesser-known activities that can also qualify. In this post, we will cover a few of those sources of Community Development credit.
5 Clear Ways to Get Community Development Credit
Here are five ways to get Community Development credit that you may not know about.
1. Serve on the Board of Non-Profits
A bank executive’s time commitment to local non-profits may qualify as a CRA Community Development activity, depending on both the organization and the nature of the service.
The OCC notes that “providing technical assistance on financial matters to nonprofit, tribal, or government organizations serving LMI [low- to moderate-income] housing or economic revitalization and development needs,” may qualify as Community Development Services.
Technical assistance may include assistance with marketing, fundraising, training, and more. See the OCC’s Community Development Fact Sheet for more information.
2. Collaborate with Community Development Financial Institutions
Community banks may partner with local Community Development Financial Institutions (CDFIs) to meet the needs of their low-income communities.
CDFIs generally have strong relationships with LMI communities, and are able to respond to the unique credit needs of LMI individuals. Community banks may invest in CDFIs to both improve service to the community and qualify for CRA Community Development consideration.
There are many options for how to invest, including:
- “Providing equity capital using traditional equity instrument;
- Providing equity equivalent investments, or EQ2s, to enhance the CDFI’s lending flexibility;
- Providing funds for lending using traditional debt instruments;
- Providing capital for loans or investments using New Markets Tax Credits;
- Collaborating with CDFIs in loan participations; and much more.”
For more detailed guidance, please see the FDIC’s Strategies for Community Banks to Develop Partnerships with Community Development Financial Institutions.
3. Youth Financial Education
Educating young people in financial literacy is one of the important goals of Community Development.
Financial institutions may qualify for Community Development credit by establishing school savings programs, developing financial education tools or teaching financial literacy curricula for LMI youth.
The Brookings Institution notes that the motivation for this is more than just educational. Particularly when working with high school students, this education and even access to credit products can help them establish a credit history as they’re entering the workforce. They note that it can be a great source of new clients.
In this education, some regulators and industry think tanks note that education should emphasize the importance of saving and wealth-building. Some recommend Individual Development Accounts (IDAs) as a great place to start.
4. Develop and Promote Entrepreneurial Training
Small businesses in LMI communities need support and access to credit as well. One way that financial institutions may strengthen their communities and gain Community Development credit is by offering entrepreneurial training. Like youth education, this training both helps support small businesses and may be a great source of new clients.
Financial institutions don’t have to develop training on their own; they can collaborate with organizations that have already developed basic entrepreneurial training modules and leverage existing resources. The National Foundation for Teaching Entrepreneurship and the SBA’s Business Information and Small Business Development Centers are a few existing organizations.
The Brookings Institution also provides some excellent guidance on entrepreneurial training.
5. Work with Special Interest Groups
Partnerships between financial institutions and local special interest groups may contribute to Community Development credit, either through direct collaboration on Community Development Services or by identifying additional Community Development opportunities.
Some of the activities that may qualify as Community Development Services, according to the OCC, are:
- “Providing technical assistance on financial matters to small businesses or community development organizations, including organizations and individuals applying for loans or grants under the Federal Home Loan Bank’s Affordable Housing Program.
- “Lending employees to provide financial services for organizations facilitating affordable housing construction, rehabilitation, or development.
- “Providing credit counseling, home buyer and home maintenance counseling, financial planning, or other financial services education to promote community development and affordable housing; which may include credit counseling to assist LMI borrowers to avoid foreclosure on their homes.”
There are many more ways to partner with local groups for Community Development Services credit. For a more complete list, as well as the definition of “technical assistance,” please see the OCC’s Community Development Fact Sheet.
Some institutions even reach out to special interest groups to help gain exposure to potential clients and opportunities in LMI communities. These groups are a valuable resource, and most can be contacted easily.
Community Development can be stressful, but it’s essential for many lenders. In some cases, financial institutions may be just a loan or two away from dramatically reducing their CRA compliance risk. The key here is to consider the needs of your community, and use your creative problem-solving skills to determine how your institution can leverage resources to meet them.
As you’re collecting these loans and activities to submit for consideration, we recommend including a few more items than you think you’ll need. This is just to accommodate for the fact that the regulators have discretion when determining what will qualify.
Community Development is just one element of your overall CRA compliance program. Another aspect is geocoding, mapping and analyzing your loan data to ensure that you don't have significant disparities in your loan activity that may be a flag for the regulators.
Editor's Note: This post may look familiar. It was originally published in 2015, and has been entirely updated and refreshed for today. It includes new information and insights, as well as additional free resources.