In-Depth: CRA Services

MBPA Principals on Community Reinvestment Act Services

Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires the three federal bank supervisory agencies, the Board of Governors of the Federal Reserve  System (“FRB”), the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”) (the FRB, OCC and FDIC are collectively referred to herein as the "Agencies"), to encourage most banks and other FDIC-insured depository  institutions to help meet the credit needs of their local communities including, particularly, low and moderate income (“LMI”) neighborhoods, consistent with the safe and sound operation of such institutions.

Each agency has promulgated substantially similar rules and regulatory guidance for evaluating and rating an institution’s CRA performance which vary according to an institution’s asset size and business strategy.

In summary, the requirements of the Community Reinvestment Act encourage each insured depository institution to help meet the credit needs of the communities in which it operates.

The CRA requires that each federal financial supervisory agency assess the record of each covered depository institution in helping to meet the credit needs of its entire community, including low and moderate income neighborhoods, consistent with safe and sound operations, and take that record into consideration when evaluating applications by the institution to engage in certain activities, such as establishing a new branch or acquiring another institution.

Performance by a bank for purposes of CRA analysis is based upon a review of its lending, service, and investment activities. In their review, the Agencies place a greater weight on loans than on investments or services. However, investments that qualify for CRA credit are important to a financial institution and will enhance its component test rating.

Accordingly, Qualified Investments that are determined by the Agencies to provide community development activities in the institution’s assessment area, or, in some instances, its regional area will be of benefit to the bank.

Municipal Bond Portfolio Analysis, LLC strives to solve a bank’s investment test requirement through the use of municipal bond obligations which conform to a bank’s credit requirements as well as meet the CRA investment test parameters.

An analysis of the benefit of the purchase of any municipal bond for CRA purposes must consider the following matters:

  1. does the bond constitute a Qualified Investment;
  2. if it is determined to be a Qualified Investment, is it within the bank’s assessment area(s); and
  3. if the bond is not within the bank’s assessment area(s), is it within and does it benefit an area within a region (either national or regional) that includes the institution's assessment area(s).

 

MBPA’s CRA Qualified Investment Approach

Separately Managed Accounts

In summary the managed account works in the following manner:

  1. the bank would decide how much it wished to invest in municipal bonds that would provide CRA credit, as well as the specific maturities of such bonds, and their security types and credit criteria; and
  2. the bank would advise MBPA of the specific assessment areas that required CRA investments and the amount of such investments in each respective AA.

 

MBPA’s duties would be several fold:

  1. MBPA would select bonds in the required amounts that involved projects located in the relevant assessment areas; the bonds, of course, would have the pre-determined duration and credit quality.
  2. MBPA would provide the bank with the required pre-purchase credit analysis and, on an annual basis, the required follow-up credit analysis for each bond acquired by the bank.
  3. MBPA would also provide the bank with a written analysis of the reasons why each bond constituted a qualified investment under the Community Reinvestment Act and actively monitor the CRA eligibility throughout the term of our agreement.

 

The foregoing approach provides the bank with the following benefits:

  1. the bonds are held by the bank with its normal custodian;
  2. the bank may designate the bonds as either held-to-maturity or as available-for-sale;
  3. the bonds may be easily sold individually; and
  4. as previously stated, the bank would determine the bonds’ duration.

 

Fund Approach
The Fund Approach is pursuant to Interagency Questions and Answers Regarding Community Reinvestment effective March 11, 2010, as most recently revised on November 20, 2013, the federal bank supervisory agencies state that nationwide funds are important sources of investments for LMI and underserved communities throughout the country and can be an efficient vehicle for institutions in making Qualified Investments that help meet community development needs.

The supervisory agencies indicate that in most cases, Qualified Investments are required to be responsive to the community development needs of a financial institution’s delineated CRA assessment area or a broader statewide or regional area that includes the institution’s assessment area.
However, institutions that invest in nationwide funds wholly outside of their assessment area may receive CRA credit, provided they have otherwise adequately addressed their assessment area needs.

Investments in nationwide funds must be performed in a safe and sound manner, consistent with an institution’s capacity to oversee those activities, and may not be conducted in lieu of, or to the detriment of, activities in the institution’s assessment area(s). 

The supervisory agencies further provides guidance for regional funds, and stated, in part, that it isn’t necessary that there be an “immediate or direct benefit to the institution’s assessment area(s) to satisfy the regulations’ requirement that qualified investments…benefit an institutions assessment area(s) or a broader statewide or regional area that includes the institution’s assessment area(s).” It concludes by stating that “[t]he institution’s assessment area(s) need not receive an immediate or direct benefit from the institution’s participation in the organization or activity, provided that the purpose, mandate or function of the organization or activity includes serving geographies or individuals located within the institution’s assessment area(s).”

MBPA feels the most efficient method for the fund approach is the creation of tax exempt regional funds throughout the country. The benefits to each bank owner of the fund is safe and sound investments, the receipt of CRA credits as well as tax exempt interest.

In addition, MBPA will provide on an annual basis credit reports in compliance with the Dodd-Frank requirements to support the safety and soundness of each investment in the fund.

MBPA also provides reports setting forth facts and information on each investment as to how each investment complies with the regulations of the Community Reinvestment Act in support of the designation as a Qualified Investment.

Worth T. Blackwell, Principal
H. Gilmer Nix, Principal
Andrew V. Pittman, Principal

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