Q: § __.12(g)(3) – 1: “Community development” includes activities that promote economic development by financing businesses or farms that meet certain size eligibility standards. Are all activities that finance businesses and farms that meet the size eligibility standards considered to be community development?
A: No. The concept of ‘‘community development’’ under 12 CFR __.12(g)(3) involves both a ‘‘size’’ test and a ‘‘purpose’’ test that clarify what economic development activities are considered under CRA. An institution’s loan, investment, or service meets the ‘‘size’’ test if it finances, either directly, or through an intermediary, businesses or farms that either meet the size eligibility standards of the Small Business Administration’s Development Company (SBDC) or Small Business Investment Company (SBIC) programs, or have gross annual revenues of $1 million or less. For consideration under the “size test,” the term financing is considered broadly and includes technical assistance that readies a business that meets the size eligibility standards to obtain financing. To meet the ‘‘purpose test,’’ the institution’s loan, investment, or service must promote economic development. These activities are considered to promote economic development if they support
• permanent job creation, retention, and/or improvement
o for low- or moderate-income persons;
o in low- or moderate-income geographies;
o in areas targeted for redevelopment by Federal, state, local, or tribal governments;
o by financing intermediaries that lend to, invest in, or provide technical assistance to start-ups or recently formed small businesses or small farms; or
o through technical assistance or supportive services for small businesses or farms, such as shared space, technology, or administrative assistance; or
• Federal, state, local, or tribal economic development initiatives that include provisions for creating or improving access by low- or moderate-income persons to jobs or to job training or workforce development programs.
The agencies will presume that any loan or service to or investment in a SBDC, SBIC, Rural Business Investment Company, New Markets Venture Capital Company, New Markets Tax Credit-eligible Community Development Entity, or Community Development Financial Institution that finances small businesses or small farms, promotes economic development. (See also Q&As § __.42(b)(2) – 2, § __.12(h) – 2, and § __.12(h) – 3 for more information about which loans may be considered community development loans.)
Examiners will employ appropriate flexibility in reviewing any information provided by a financial institution that reasonably demonstrates that the purpose, mandate, or function of the activity meets the “purpose test.” Examiners will also consider the qualitative aspects of performance. For example, activities will be considered more responsive to community needs if a majority of jobs created, retained, and/or improved benefit low- or moderate-income individuals.
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