RSK.IQ Question of the Week 6/15/20

Paycheck Protection Program and CRA

Issue/Inquiry

The Bank has participated in the Paycheck Protection Program. It has not obtained information for the annual gross revenues of the borrowers to whom it has made such loans. Recently, the Bank has learned that the federal regulators require financial institutions to obtain this information, or else the loans cannot be reported for Community Reinvestment Act (“CRA”) purposes. Since the Bank is a small bank for CRA reporting purposes, is this requirement still applicable?

How do I ask my own questions?

Response Summary

For banks not exempt from CRA reporting requirements, the gross annual revenues of a borrower or the revenues relied on by the financial institution in making the credit decision must be obtained before a loan can be reported. The federal regulators have recently indicated that this requirement also pertains to Paycheck Protection Program loans, even though annual gross revenue is not a criterion for making such loans. However, if the Bank is being evaluated under the CRA small bank performance standards, this requirement is not applicable. Therefore, loans made under the Paycheck Protection Program will be considered in the CRA performance evaluation of a small bank, even though information on the gross annual revenues of the borrowers has not been obtained. In the loans-to-deposit test, such loans should be considered as community development loans.

Response Detail

Paycheck Protection Program and Gross Annual Revenues:

Small businesses eligible under the Paycheck Protection Program include those with 500 or fewer employees, although businesses in certain industries with more than 500 employees may qualify for such loans. SBA Top Line Overview of PPP (3/31/2020).

Since revenue is not a criterion for obtaining Paycheck Protection Program loans, such information was not always obtained by lenders. However, Interagency guidance has recently been issued indicating that revenue information should be obtained for such borrowers for CRA reporting purposes:

“[05/20/2020] CRA PPP Reporting. For Paycheck Protection Program (PPP) loans reported as small business loans (Type 01), with loan amounts of $1 million or less, made to an existing bank customer, should a bank report revenue on the CRA loan register based on what it had previously gathered about that business? For a new PPP borrower, which has an unknown revenue, may banks use a revenue estimate and report it as having gross annual revenues of “1” (gross annual revenues of $1 million or less) or must they use a CRA revenue code of “3” (unknown/not used in credit decision).

Generally, a bank should rely on and report the gross annual revenues that it considered in making its credit decision. Loans for which the bank did not collect revenue information may not be included when evaluating a bank’s performance in lending to businesses and farms with gross annual revenues of $1 million or less unless the small business or small farm provides supplemental information or the bank has another source demonstrating the borrower’s revenue, such as information on existing customers. Banks that have access to an applicant’s gross annual revenue information may, but are not required to, report that information. When evaluating CRA performance, the Board of Governors of the Federal Reserve System, the Office of the Comptroller, and the Federal Deposit Insurance Corporation (agencies) will consider the unique circumstances affecting borrowers and banks resulting from the COVID-19 emergency and will not penalize a bank for making a large volume of loans for which gross annual revenue information is not available. The agencies will also consider a bank’s good faith efforts demonstrably designed to support low- and moderate-income individuals and small businesses and small farms and its efforts to comply with applicable consumer protection laws.” Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease (Referred to as COVID-19) – as of May 27, 2020.

For the reasons cited below, we believe that this FAQ response concerns the CRA reporting requirements for large banks or small banks that have adopted the large bank reporting standards, and not those of small banks.

CRA Performance Thresholds:

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).

Since the Bank had assets of $149 million as of December 31, 2019, it is considered a small bank for CRA purposes.

Exemption of Small Bank from Reporting Requirements:

If a small bank has not opted to be evaluated under the large bank standard, then it is exempt from the requirement to report the aggregate data for loans made to businesses and farms with gross annual revenues of $1 million or less. 12 CFR 228.42(a),(b)(1)(iv).

The Interagency Questions and Answers Regarding Community Reinvestment provides the following:

“§___42(a)(4) – 2. 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.”

This means that the reporting requirement discussed above only pertains to institutions that are not exempt from data collection and reporting.

CRA Small Bank Performance Test:

The CRA performance of a small bank is evaluated under a lending test that has five performance criteria:

  1. The Bank’s loan-to-deposit ratio, adjusted for seasonal variation, and, as appropriate, other lending-related activities, such as loan originations for sale to the secondary markets, community development loans, or qualified investments
  2. The percentage of loans and, as appropriate, other lending-related activities located in the Bank’s assessment area(s)
  3. The Bank’s record of lending to and, as appropriate, engaging in other lending-related activities for borrowers of different income levels as well as businesses and farms of different sizes
  4. The geographic distribution of the Bank’s loans
  5. The Bank’s record of acting, if warranted, in response to written complaints about its performance in helping to meet credit needs in its assessment area(s). 12 CFR 228.26(a)(1),(b).

During a CRA examination, if an analysis of lending to borrowers of different income or revenue cannot be performed (e.g., income data had not been obtained for certain loans), an examiner may use proxies such as analyzing the distribution by loan size as a substitution for income or revenues of the borrower. Small Institution CRA Examination Procedures, OCC, FRB, FDIC, February 2006.

These criteria mean that, as a small bank, the Bank is not required to obtain revenue information for the borrowers of its loans, including Paycheck Protection Program loans. The examiners will still consider loans to borrowers of different sizes, such as small businesses, but they can do so utilizing other factors for revenue. For this reason, even though the Bank did not obtain revenue information for the borrowers receiving Paycheck Protection Program loans, such loans will still be considered in its CRA performance evaluation.

Community Development:

Under the small bank performance standard, if the average net loans-to-deposit ratio does not appear reasonable in the light of the performance context, then the examiner will consider, among other things, the innovativeness or complexity of community development loans. Small Institution CRA Examination Procedures, OCC, FRB, FDIC, February 2006.

Regulation BB, which implements the CRA, 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 five lending purposes:

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

FDIC on Paycheck Protection Program and CRA Reporting:

In recent guidance, the FDIC has 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 interests 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. In addition, 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 having a community development purpose if jobs are created, retained, or under revitalization/stabilization and 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.

It should be noted that the thresholds referred to by the FDIC pertain to financial institutions that are subject to the CRA reporting requirements.

Loans 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.
  • FEMA declared New Jersey to be a disaster area on March 25, 2020 (DR-4488).

The Joint Statement on CRA Consideration on Activities in Response to COVID-19 (March 19, 2020) indicates that financial institutions will receive CRA consideration for community development activities of this nature.

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

This entry was posted on Monday, June 15th, 2020 at 9:31 am.

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