How to Tell if a Loan Qualifies as a CRA Small Business Loan
If you're responsible for CRA compliance, it's likely you've wondered whether a loan might qualify as a CRA small business loan. It can be a bit confusing, but this blog post can help. Read on to figure out what can be considered a small business loan for CRA compliance purposes.
Compliance with the Community Reinvestment Act does present challenges, particularly when it comes to areas like Redlining, Community Development, and as we'll discuss in this post, small business loans.
In this post, you'll learn the basics of small business lending for CRA compliance, including what is reportable - and what isn't.
Get ready to dispel the cloud of mystery that often shrouds this topic, and clear up any confusion that you may have about what regulators mean when they say "small business loans."
What Is the Source of the Confusion About CRA Small Business Loans?
It's no secret that decoding what can be considered a CRA small business loan is challenging, but why? Here are three factors:
- We discovered that the key element that causes confusion is whether it is the revenue of the business or the amount of a loan that defines a small business loan, and determines whether it is reportable. In particular, the question is: does the “small” in “small business loans” mean business size (measured by revenue) or loan size (measured by the loan amount)?
- Adding to the confusion is the fact the thresholds for both a small business and a small loan are set at $1,000,000. Plainly said, according to regulators, businesses that make less than or equal to $1,000,000 annually are considered "small businesses," and loans for less than or equal to $1,000,000 are considered "small loans."
- To make things even more challenging, both of these metrics are important when determining what it and what isn't considered reportable by the CRA regulators for a CRA small business loan.
How's that for challenging?
Now that you understand the problem, we'll get into the solution.
How do the regulators define a CRA small business loan?
In CRA compliance, the "loans to small business" section in the Consolidated Report of Condition and Income Call Report provides the basic definition for CRA small business loans. Here are the complete instructions for how to file that report, which also defines CRA small business (and small farm) loans, among lots of other things. Those instruction say:
"For purposes of this schedule, "loans to small businesses" consist of the following:
- Loans with original amounts of $1 million or less that have been reported as “Loans secured by nonfarm nonresidential properties” (in domestic offices) in Schedule RC-C, part I, items 1.e.(1) and 1.e.(2), column B, and
- Loans with original amounts of $1 million or less that have been reported in Schedule RC-C, part I:
- On the FFIEC 041 for banks with less than $300 million in total assets, item 4, column B, "Commercial and industrial loans;"
- On the FFIEC 041 for banks with $300 million or more in total assets, item 4.a, "Commercial and industrial loans to U.S. addressees;" and
- On the FFIEC 031, item 4.a, column B, "Commercial and industrial loans to U.S. addressees” in domestic offices."
While we won't get into the more detailed filing instructions here, this definition is a great place to start.
How do I determine what a small business loan is?
In this section, we'll get into the details of defining a small loan, a small business, and what small business loans are reportable.
As we mentioned above, “small” can refer to both the business size and the loan size. If you are a large bank, you have to report small loans (</$1M in loan amount) to businesses.
Regardless of your institution’s size, you should be aware of who your small loans (</$1M in loan amount) to businesses are being made to. Are they being made to small businesses (</$1M in revenue) or large businesses (>$1M in revenue)?
The aspect is important because regulators want to evaluate you on the size of the loan and then the size or the business that the loan is going to. In essence, they’re asking “What are the small loans (</$1M loan amount) and of those small loans, how many are going to small businesses (</$1M in revenue).
So: A loan that is less than $1,000,000 going to a business whose revenue is less than $1,000,000 is considered a small business loan by examiners. BUT ... A loan that is less than $1,000,000 going to a business who has revenues greater than $1,000,000 is ALSO considered a small business loan.
Why is this important?
You might be asking why you should track this. You should know that while submission is required for some, examiners will evaluate this data for all.
It’s important that you understand the definition of this term for compliance purposes. Now that you've read this post, you do!
What’s equally or arguably more important is the significance of “small business loans” to your compliance program. Examiners will be looking at the distribution of your small business loans to businesses of different sizes as well as different income level geographies.
Regulators are really paying attention to small business lending both for examinations and for their own research purposes. In fact, the FDIC released a report last January that CRA small business lending hasn't bounced back to pre-financial crisis levels.
In this regulatory environment, you need to know the story your CRA data tells. Sophisticated CRA analysis can provide the insights you need.
If you’re a CRA Analytics customer, don’t hesitate to reach out to your customer success manager today to talk more about small business lending. If you’re interested in seeing how we can help your institution with its compliance program or growth strategy, schedule a demo today!
Otherwise, click here to download this free updated CRA Info Kit:
Editors Note: This post was originally published in July 2018. We've edited and refreshed this post to make sure it includes the most up-to-date information possible.