Consumer Compliance Outlook: Fourth Quarter 2008

The Community Reinvestment Act and Minority-Owned Financial Institutions

Minority-owned financial institutions (minority institutions1) play an important role in addressing financial services needs in the minority and low-income communities they serve. This article discusses how majority-owned financial institutions (majority institutions) may aid minority institutions in achieving their goals and at the same time fulfill their obligations under the Community Reinvestment Act (CRA).

Congress amended §2903(b) of the CRA in 1992 to state specifically that majority institutions may obtain CRA credit for helping minority institutions.2 To clarify this issue, the Federal Financial Institutions Examination Council (FFIEC) agencies added CRA questions and answers3 that provide guidance on how providing assistance to minority institutions may qualify for CRA consideration, including examples of such activities. The agencies also reaffirmed this in a joint letter to Congress in January 2006.4

Under the CRA, majority institutions may receive favorable CRA consideration when they provide investments, loans, financial services, and technical assistance to minority institutions. In turn, these activities allow minority institutions to respond effectively to demand for affordable financial products and services in economically distressed markets and by low- and moderate-income individuals, consistent with safe and sound banking practices.

Investments in Minority Institutions

An institution may receive favorable CRA consideration if it invests in a minority institution that serves low- or moderate-income areas or individuals, even if the minority bank is not located in the assessment area of the investing bank, or within the broader statewide or regional areas that include the investing bank's assessment area. A qualified community development investment may be in the form of a lawful investment, deposit, grant, or donation, or in-kind contribution of property. Some examples of qualified investments are:

  • A majority institution may buy certificates of deposit from a minority bank serving mainly low- and moderate-income communities.
  • A majority institution may purchase the stock of a minority bank to provide the capital needed to expand its franchise [Regulation H, §208.22].
  • A majority institution with assessment areas in other parts of the country may make a qualified capital investment in a minority bank serving an area affected by hurricanes Katrina and Rita.
  • A majority institution may donate, sell on favorable terms, or make available to a minority bank on a rent-free basis a branch of the bank that is located in a predominantly minority neighborhood [Regulation BB, §228.23(d)].

Lending to Minority Institutions

A majority institution may receive favorable CRA consideration if it makes a loan to a minority institution that serves low- or moderate-income areas or individuals. Community development loans include both direct loans and loan participations purchased by majority institutions. Minority and majority institutions may establish two-way correspondent relationships on loan business as follows: 

  • A majority institution may purchase participations in loans made by a minority institution to businesses in the minority bank's community to help reduce the credit exposure of the minority bank.
  • Likewise, a majority institution may invite a minority bank to participate in a large commercial credit facility, the proceeds of which were used to provide credit to a business located in the minority institution's assessment area.

Providing Services to Minority Institutions

A majority institution may receive favorable CRA consideration if it provides financial services to a minority institution that serves low- or moderate-income areas or individuals. Community development services include providing technical assistance on financial matters to a minority bank. For example:

  • Majority institutions may permit officers to sit on the boards of directors of minority banks to provide technical assistance on financial matters, provided they conform to the “small market share” exemption to management interlocks [Regulation L, §212.5].
  • A majority institution may develop a relationship with a minority institution in the majority institution's area to allow the minority institution's customers to use ATM machines in the majority institution's area. The availability of no fee or low fee ATM access provides low- and moderate-income consumers greater access to banking services.
  • Majority institutions may offer employee training or consulting on bank operations to minority institutions.

Conclusion

When a majority institution engages in qualified CRA activities with a minority institution, both institutions benefit: The majority institution receives CRA credit while helping the minority institution reach its goals. If you have questions about whether your bank will receive CRA credit for specific loans, investments, or services provided to a minority institution, please consult with the consumer compliance contact at your supervising Reserve Bank or your primary regulator.