Q: § __.22(b)(5) – 1: What do examiners consider in evaluating the innovativeness or flexibility of an institution’s lending under the lending test applicable to large institutions?
A: In evaluating the innovativeness or flexibility of an institution’s lending practices (and the complexity and innovativeness of its community development lending), examiners will not be limited to reviewing the overall variety and specific terms and conditions of the credit product themselves. Examiners also consider whether, and the extent to which, innovative or flexible terms or products augment the success and effectiveness of the institution’s community development loan programs or, more generally, of its loan programs that address the credit needs of low- or moderate-income geographies or individuals. Historically, many institutions have used innovative and flexible lending practices to customize loans to their customers’ specific needs in a safe and sound manner. However, an innovative or flexible lending practice is not required in order to obtain a specific CRA rating. See Q&A § __.28 – 1. Examples of lending practices that are considered innovative or flexible include:
• In connection with a community development loan program, an institution may establish a technical assistance program under which the institution, directly or through third parties, provides affordable housing developers and other loan recipients with financial consulting services. Such a technical assistance program may, by itself, constitute a community development service eligible for consideration under the service test of the CRA regulations. In addition, the technical assistance may be considered as an innovative or flexible practice that augments the success and effectiveness of the related community development loan program.
• In connection with a small business lending program in a low- or moderate-income area and consistent with safe and sound lending practices, an institution may implement a program under which, in addition to providing financing, the institution also contracts with the small business borrowers. Such a contracting arrangement would not, itself, qualify for CRA consideration. However, it may be considered as an innovative or flexible practice that augments the loan program’s success and effectiveness, and improves the program’s ability to serve community development needs by helping to promote economic development through support of small business activities and revitalization or stabilization of low- or moderate-income geographies.
• In connection with a small dollar loan program with reasonable terms and offered in a safe and sound manner, which includes evaluating an individual’s ability to repay, an institution may establish outreach initiatives or financial counseling targeted to low- or moderate-income individuals or communities. The institution’s efforts to encourage the availability, awareness, and use of the small dollar loan program to meet the credit needs of low- and moderate-income individuals, in lieu of higher-cost credit, should augment the success and effectiveness of the lending program. Such loans may be considered responsive under Q&A § __.22(a) – 1, and the use of such outreach initiatives in conjunction with financial literacy education or linked savings programs also may be considered as an innovative or flexible practice to the extent that they augment the success and effectiveness of the related loan program. Such initiatives may receive consideration under other performance criteria as well. For example, an initiative to partner with a nonprofit organization to provide financial counseling that encourages responsible use of credit may, by itself, constitute a community development service eligible for consideration under the service test.
• In connection with a mortgage or consumer lending program targeted to low- or moderate-income geographies or individuals, consistent with safe and sound lending practices, an institution may establish underwriting standards that utilize alternative credit histories, such as utility or rent payments, in an effort to evaluate low- or moderate-income individuals who lack sufficient conventional credit histories and who would be denied credit under the institution’s traditional underwriting standards. The use of alternative credit histories in this manner to demonstrate that consumers have a timely and consistent record of paying their obligations may be considered as an innovative or flexible practice that augments the success and effectiveness of the lending program.
This Interagency Q&A, and others, was released in July 2016.
The 2016 Q&As consolidates and supersedes all previously published “Interagency Questions and Answers Regarding Community Reinvestment,” and were noted as being effective immediately. They may be found here: http://www.ffiec.gov/cra/qnadoc.htm