CRA Opportunity, Customer Service Opportunity, or Both?
The Board of Governors of the Federal Reserve System (Board) and the Consumer Financial Protection Bureau (CFPB) combined to issue four seemingly unrelated letters that, taken together, appear to reopen the ability of a bank to safely reenter the small dollar loan market as well as secure Community Reinvestment Act (CRA) credit in broadened areas. On May 20, 2020, the Board released the Interagency Lending Principles for Making Responsible Small Dollar Loans. Since the creation of the CFPB, the primary federal bank regulators have frowned upon banks making small loans that were viewed as deposit anticipation loans. Over the past several months, the banking regulators have recognized that consumers have a genuine need for small dollar credit and can benefit more by securing such credit from a bank rather than payday lenders or other nonbank lenders. Shortly thereafter, on May 22, the CFPB released a letter to the Bank Policy Institute containing a no-action letter template that banks with over $10 billion in assets may submit a request for a no-action letter for standardized, small dollar credit products.
On May 21, the Board issued a letter that certain investments in “elevated poverty areas” qualify as investments in low- or moderate-income (LMI) areas. An LMI area is one or more census tracts where the median family income is less than 80% of the median family income of the relevant Metropolitan Statistical Area (MSA) or state, as appropriate. Elevated poverty areas are areas in which the poverty rate is 20% or more and is not based on income relative to the MSA or state in which the area is located. Because the LMI definition is based on relative income, areas with a high absolute poverty rate are sometimes not considered LMI areas because they are located in a state in which median incomes are low in general. In other words, the median income of an area with a high absolute poverty rate may not be significantly less than the generally low median income of the MSA or state as a whole. For this reason, the Board determined that investments in elevated poverty areas will receive the same credit as if the investment had been made in an LMI area, although the area may not be designated as such
Finally, on May 27, the Board, along with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (agencies) issued Frequently Asked Questions on CRA Consideration for Activities in Response to the Coronavirus. Under the Q&A, COVID-19 affected states and jurisdictions are considered CRA-designated disaster areas. Therefore, the agencies will grant consideration for activities that revitalize or stabilize areas by protecting public health and safety, particularly for LMI individuals, LMI geographies, distressed or underserved non-metropolitan middle-income geographies, and, as noted before, high poverty areas. Examples include loans, investments, or community development services that support emergency medical care, purchase and distribution of personal protective equipment, provision of emergency food supplies, or assistance to local governments for emergency management. The time frame for this consideration extends six months after the national emergency declaration is has ended. Of particular note, loans, including Paycheck Protection Program (PPP) loans, in amounts of $1 million or less to for-profit businesses or to nonprofit organizations are reported and considered as small business loans under the applicable CRA retail lending tests. PPP loans will be considered particularly responsive if made to small businesses with gross annual revenues of $1 million or less or to businesses located in LMI geographies or high poverty areas. PPP loans in amounts greater than $1 million may be considered as community development loans if the loans also have a primary purpose of community development as defined under the CRA.
Question 11 relates back to the Interagency Lending Principles for Making Responsible Small Dollar Loans. Answer 11 states that CRA encourages activities that benefit LMI individuals and families, which would include individuals and families who have recently become low- or moderate-income due to loss of jobs, decreased hours, or furloughs that reduce income due to the COVID-19 emergency.
These seemingly unrelated letters work together to give banks both an incentive and a reward to make bankable loans to entities and individuals located in LMI areas or high poverty areas in order to reduce financial stress as individuals return to the workforce and entities reopen, offering employment opportunities to those individuals. Such efforts should be well documented for CRA credit.