CRA and SBA Paycheck Protection Program

Issue/Inquiry

The Bank is participating in the Small Business Administration (“SBA”) Paycheck Protection Program. The loans should be closing soon. Are these loans considered small business loans or community development loans for Community Reinvestment Act (“CRA”) purposes?

Response Summary

Loans of $1 million or less made under the SBA Paycheck Protection Program are small business loans and considered under the lending test in a CRA examination for banks of all sizes. Intermediate small banks have the option of identifying such loans as either a small business loan or a community development loan. If the Bank has assets of close to $3 billion, it would be considered a large bank for CRA purposes and, therefore, would report such loans as small business loans. Loans greater than $1 million made under the Program would be considered community development loans, as they would stabilize or revitalize geographies that are disaster areas.

Response Detail

SBA Paycheck Protection Program:

The Paycheck Protection Program of the SBA is designed to provide a direct incentive for small businesses to keep their workers on the payroll. The proceeds of a loan under the program can be used by the small business for the following:

• Payroll costs
• Costs related to the continuation of group healthcare benefits
• Mortgage interest payments
• Rent payment
• Utility payments
• Interest payments on obligations incurred before February 15, 2020
• Refinancing SBA Economic Injury Disaster Loans (“EIDL”) made between January 31, 2020, and April 3, 2020

Loans under the Paycheck Protection Program have a term of two years and an interest rate of one percent per annum.

A Paycheck Protection Program loan will be forgiven if at least 75 percent of the proceeds are used for payroll costs and all employees are kept on the payroll for at least eight weeks. Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels.  Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

Paycheck Protection Program loans can be offered by any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, or Farm Credit System institution that is participating. Other regulated lenders will be able to make these loans once they are approved and enrolled in the program.

Lenders may begin processing loan applications as soon as April 3, 2020. The Paycheck Protection Program will be available through June 30, 2020. SBA, Funding Program, Paycheck Protection Program.

FDIC on SBA Paycheck Protection Program and CRA Reporting:

In recent guidance, the FDIC stated that Paycheck Protection Program loans will receive CRA credit in most cases, since loans that benefit small businesses and small farms affected by COVID-19 serve the long-term interest of their communities and the financial system. Generally, loans to for-profit businesses in the amounts of $1 million or less are considered small business loans in CRA evaluations and will be considered as such under the lending test. Paycheck Protection Program loans could also receive consideration as innovative or flexible lending practices. Loans greater than $1 million to small businesses would qualify as community development if jobs are created, retained, or under revitalization/stabilization, and if they benefit primarily low and moderate-income areas or distressed middle-income areas. FDIC, Frequently Asked Questions on the Small Business Administration’s Paycheck Protection Program, As of April 5, 2020.

CRA Reporting and Small Banks, Intermediate Small Banks, and Large Banks:

Under the current CRA thresholds, a “small bank” is one that had assets of $1.305 billion as of December 31st of either of the previous two calendar years. An “intermediate small bank” is one that had assets of at least $326 million, but less than $1.305 billion as of December 31st of either of the previous two calendar years. A “large bank” is one that had assets of more than $1.305 billion as of December 31st of either of the previous two calendar years. 84 Federal Register 71738 (December 30, 2019).

In this case, the Bank has assets of nearly $3 billion and is considered a large bank for CRA purposes.

The CRA testing requirements are different for small, intermediate small, and large banks, but there is a general prohibition against double-counting in CRA reporting. Therefore, retail institutions must report loans that meet the definition of “home mortgage loan”, “small business loan”, or “small farm loan” only in those respective categories regardless of whether they also meet the definition of a “community development loan”. Community Reinvestment Act: Interagency Questions and Answers, §___42(b)(2)—A2.

For example, a “community development loan” is a loan that has community development as its primary purpose and has not been reported as a home mortgage, small business, small farm, or consumer loan. This means that it would not have been reported in the Bank’s HMDA Loan Application Register (“LAR”) or the CRA Loan Register, if the Bank is required to make this report.

However, there is an exception for multi-family dwelling loans in that a financial institution can report such in its HMDA LAR and CRA Loan Register while also counting it as a community development loan. 12 CFR §228.12(h); Community Reinvestment Act: Interagency Questions and Answers, §___42(b)(2)—A2.

An intermediate small bank has the option of identifying a loan as either a community development loan or a small loan to a business, provided that the loan meets the definition of “community development”. Community Reinvestment Act: Interagency Questions and Answers, §___12(h) – A3. Small banks and large banks do not have that option.

As such, an intermediate small bank must consider where it needs the CRA consideration, since a loan cannot be used in both the lending test and the community development test. Since small and large banks have loans that fall into the “small business loan” category, even though the purpose was for community development, they should make federal examiners aware of what the small business portfolio consists of.

Small Business Loan:

Under Regulation BB, which implements the CRA, the term “small business loan” means “loans to small businesses” as defined in the instructions for the preparation of the Consolidated Report of Condition and Income (“Call Report”).  12 CFR 228.12(v).

Those instructions state that for the 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, items 1.e.(1) and 1.e.(2), column B
• 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. addresses”
• On the FFIEC 031, item 4.a, column B, “Commercial and industrial loans to U.S. addresses” in domestic offices.” FFIEC 031 and 041, Schedule RC-C, Part II, Loans to Small Businesses and Small Farms.

As such, loans under the SBA Paycheck Protection Program of $1 million or less would be identified as small business loans for small and large banks. As a large bank, the Bank would identify such loans as small business loans. Intermediate small banks would have the option of identifying such loans as either small business or community development loans.

Community Development Loan:

Regulation BB defines a “community development loan” as a loan that:

• Has community development as its primary purpose
• Has not been reported in the Bank’s assessment as a home mortgage, small business, or consumer loan (unless it is a multi-family dwelling loan)
• Benefits the Bank’s assessment area(s) or a broader statewide or regional area that includes the Bank’s assessment area(s)

“Community development” is broken down into four lending purposes:

• Affordable housing, including rental or multi-family housing, for low to moderate-income families
• Community services targeted at low to moderate-income individuals
• Loans that promote economic development by financing small businesses or farms that meet the SBA criteria or have gross annual revenues of $1 million or less
• Activities that stabilize or revitalize low to moderate-income geographies, designated disaster areas, and distressed or underserved metropolitan moderate-income geographies designated by a federal banking agency. 12 CFR 228.12(g)(3),(h).

Loans of more than $1 million made to New Jersey businesses under the Paycheck Protection Program should be given consideration as community development loans due to the following:

• The Paycheck Protection Program and loan forgiveness are intended to provide economic relief to small businesses nationwide under the Coronavirus Disease 2019 (COVID-19) Emergency Declaration issued by the President on March 13, 2020.
• The Federal Emergency Management Agency (“FEMA”) declared New Jersey to be a disaster area on March 25, 2020 (DR-4488).

The Bank should document the purpose of such a loan as well as the circumstances that would qualify it for consideration as a community development loan.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, April 13th, 2020 at 9:32 am.