RSK.IQ Question of the Week 7/13/20

The CRA and Charitable Contributions


If the Bank makes numerous donations to nonprofit and community organizations, can it receive Community Reinvestment Act (“CRA”) credit for such?

Response Summary

Charitable contributions made by a financial institution are considered qualified investments, provided that the primary purpose is for community development. Even if the Bank does not receive credit for the contribution, the Bank can enhance the narrative that is presented to the federal examiners by claiming such contributions and demonstrating how they will help the needs of the Bank’s community.

Response Detail

As defined in Regulation BB, a financial institution will receive consideration for charitable contributions as qualified investments, so long as the primary purpose for such contributions is community development. Community Reinvestment Act: Interagency Questions and Answers (“Interagency Q&A”), §___.12(t) – 5.

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 non-metropolitan middle-income geographies designated by a federal banking regulator based on factors such as rates of poverty, unemployment, or population density. 12 CFR §228.12(g).

An activity is considered to have a “primary purpose” of community development when it is designed for the express purpose of fulfilling any of the above designated purposes.  In making this determination, the federal banking agencies apply one of two approaches:

  1. If most of the dollars or beneficiaries of the activity are identifiable to one or more of the enumerated community development purposes, then the activity will be considered to possess the requisite primary purpose.
  2. If the measurable portion of any benefit bestowed or dollars applied to the community development purpose is less than most of the entire activity’s benefits or dollar value, then the activity may still be considered to possess the requisite primary purpose, and a financial institution may still receive CRA consideration for the entire activity, so long as the following are true:
    • The expressed bona fide purpose of the activity, as stated in a prospectus, loan proposal, or community action plan, is primarily one or more of the enumerated community development purposes.
    • The activity is specifically structured to achieve the expressed community development purpose (given a relevant legal or market constraints).
    • The activity is reasonably certain to accomplish the purpose involved. Interagency Q&A, §___.12(h)—8.

Community development activities are not limited to those that promote economic development, and can include community-based child care as well as educational, health, or social services targeted to low or moderate-income persons. In addition, a community development activity does not need to occur within a low or moderate-income area in order for the Bank to receive CRA consideration for such, so long as such activities target low to moderate-income persons.  Interagency Q&A, §___.12(g) – 1,2.

This means that the Bank can seek credit under the CRA for any activity that has a benefit to low and moderate-income individuals or geographies within its assessment area.  The Bank must be able to present a narrative to evidence that the activity is placed within the context of the overall health of the community.

At the Bank’s discretion, the federal regulatory agency may consider services performed by an affiliate or third party on the institution’s behalf under the service test if such services enable the Bank to help meet the credit needs of its community. Indirect services that can be quantified and enhance the Bank’s ability to deliver credit products or deposit services within its community may be considered under the service test. In contrast, while donations to a community organization that offers services to low or moderate-income individuals may be considered under the investment test, such would not be eligible for consideration under the service test. Interagency Q&A, §___.12(e) – 5.

The investment test evaluates a financial institution’s record for helping to meet the credit needs of its assessment area through qualified investments that benefit the assessment area, or a broader statewide or regional area that includes the assessment area. A “qualified investment” is defined as “a lawful investment, deposit, membership share or grant that has as its primary purpose community development”. 12 CFR §228.12(t);(23(a).

It is not necessary for there to be an immediate or direct benefit to the Bank’s assessment area in order to receive CRA credit. An institution’s activity is considered a qualified investment if it supports an organization or activity that covers an area that is larger than, but includes, the institution’s assessment area, and the purpose of the organization or activity includes serving geographies or individuals within the institution’s assessment area. Interagency Q&A, §___.12(h) – 6.

If the Bank were to claim credit for the charitable contributions, it should be prepared to demonstrate the following:

  • The charitable contribution is a qualified investment, in that it has community development as the primary purpose.
  • The work of the charitable or community organization receiving the donation benefits low to moderate-income individuals.
  • At least some of the low to moderate-income individuals that are targeted live within the Bank’s assessment area.

The Bank should document the purpose or activities of the organization receiving the contribution, such as through public statements or a prospectus, in order to demonstrate that the contribution is a qualified investment with community development as its primary purpose.

Regardless of whether the Bank receives CRA credit for a charitable contribution, such donations will nevertheless enhance the narrative of the Bank concerning its efforts to address the credit needs of its community.

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

This entry was posted on Monday, July 13th, 2020 at 9:26 am.

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