CRA and Qualified Investments

Issue/Inquiry

What are the criteria by which the Bank should review municipal bonds and mortgage-backed securities to identify what would be considered as “qualified investments” under the Community Reinvestment Act (“CRA”)?

Response Summary

Municipal bonds and mortgage-backed securities will be considered qualified investments under the CRA if their primary purpose is community development.

Response Detail

In evaluating the CRA performance of large and intermediate small banks under the investment test, federal regulators use the following criteria:

• The dollar amount of qualified investments
• The innovativeness or complexity of qualified investments
• The responsiveness of qualified investments to credit and community development needs
• The degree to which the qualified investments are not routinely provided by private investors. 12 CFR §228.23; 26(c)(2).

In addition, a qualified investment must benefit the bank’s assessment area or a broader state-wide or regional area that includes the assessment area.

A “qualified investment” is “a lawful investment, deposit, membership share or grant that has as its primary purpose community development.” 12 CFR §228.12(t).

The term “community development” means:

• Affordable housing (including multifamily rental housing) for low or moderate-income individuals
• Community services targeted to low or moderate-income individuals
• 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 or have gross annual revenues of $1 million or less
• Activities that revitalize or stabilize low or moderate-income geographies, designated disaster areas; or distressed or underserved nonmetropolitan middle-income geographies designated by a federal banking regulator based on such factors as rates of poverty, unemployment, or population density
• Loans, investments, and services that support or facilitate projects conducted in accordance with the HUD Neighborhood Stabilization Program (“NSP”), are provided no later two years after the date funds are appropriated for the NSP, and benefit low, moderate, and middle-income individuals and geographies in the bank’s assessment area or areas outside the bank’s assessment area, provided the bank has adequately addressed the community development needs of its assessment area. 12 CFR §228.12(g).

In most cases, mortgage-backed securities and municipal bonds are not considered qualified investments because they do not have community development as their primary purpose. If such investments are designed primarily to finance community development, however, they may be deemed to be qualified investments.

Housing-related bonds and securities must primarily address affordable housing needs of low to moderate-income individuals, including multi-family rental housing. Investments may also qualify which are not housing-related, such as a bond for funding a community facility or park or providing sewage services as part of a plan to redevelop a low-income neighborhood.

Certain municipal bonds that revitalize or stabilize underserved non-metropolitan middle-income geographies may also be qualified investments. Such activities would include the construction, expansion, maintenance, or operation of essential infrastructure or facilities for health services, public safety, public services, industrial parks, affordable housing, or communication services. Interagency CRA Questions and Answers, §__.12(t) – 2: A1.

Therefore, in determining whether a mortgage-backed security or municipal bond is a qualified investment, the Bank must look to the primary purpose of the security or bond. Since securities or bonds that are qualified investments are not common in the marketplace, the Bank should consider working with an experienced investment professional in identifying such investments.

This entry was posted on Tuesday, September 5th, 2017 at 1:34 pm.