Banks have operated under the Community Reinvestment Act (CRA) for 31 years. The CRA requires banks to help meet the needs of low- and moderate-income (LMI) persons and distressed geographies through lending, investment, and service. Over this period, banks have responded in many creative and impactful ways to the needs of their communities, particularly in investments. Examinations have also changed as examiners have recognized new methods and presented them as examples for other banks to follow. The result has been an increase in the complexity of CRA investments and, in turn, regulator expectations under the Investment Test. This article focuses on that Test, and how banks can succeed in meeting it.
THE CONTEXT FOR PERFORMANCE AND EVALUATION
Banks, businesses, public and private organizations and institutions, and the people who run them help residents form and sustain communities. These communities exist within a local economy. All of these organizations, their communities, and the local economy establish the context in which examiners evaluate a bank’s CRA investment performance and determine its rating.
Examiners use their understanding of this performance context to identify and estimate the range and depth of needs the bank should be serving, and they evaluate each bank’s effort and effectiveness in making relevant investments. Leading banks are able to use their own knowledge of the performance context to position themselves and obtain the rating they seek.
Within this context, these banks select from a myriad of often complex lending and investment tools to make appropriate investments. Examples include Mortgage Backed Securities, New Market Tax Credits, tax credits, bonds, equity in projects and more. Even grants, historically a mainstay of CRA Investment Test Compliance, have become more complex tools.
INVESTMENT TEST RATINGS
As the chart below shows, the Investment Test accounts for approximately 25% of a bank’s total CRA score. Regulators use the Investment Test to evaluate whether each bank:
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