12.2 Community Development, Ratings and Performance Context

The Intermediate Small Bank (ISB) Community Development Test

Under 12 CFR § 25.26(a)(2) / § 228.26(a)(2) / § 345.26(a)(2), the ISB Community Development Test evaluates an intermediate small bank's responsiveness to community development needs through four criteria:

• The number and dollar amount of community development loans originated;
• The number and dollar amount of qualified community development investments (including grants and deposits);
• The provision of community development services by bank officers and staff; and
• The bank's overall responsiveness to the community development credit and service needs of its assessment areas.

Large Bank Performance Tests

Large institutions undergo a multi-faceted evaluation that assesses retail and wholesale community engagement:

• Lending Test (50% Weight): Evaluates retail lending volume (mortgages, small business, small farm, and consumer loans); assessment area concentration; geographic distribution across census tract income tiers; borrower distribution across income levels; community development lending volume; and the institution's use of innovative or flexible lending practices to address community credit needs.
• Investment Test (25% Weight): Evaluates the dollar volume of qualified community development investments, grants, and equity contributions; the innovativeness or complexity of the investments; the degree to which investments are not routinely provided by private market investors; and responsiveness to pressing local credit needs.
• Service Test (25% Weight): Evaluates retail banking services (branch distribution across LMI census tracts, record of opening and closing branch offices, availability of alternative delivery systems like ATMs and mobile banking, range of services offered across branches) and community development services provided by bank personnel using professional financial expertise.

The Statutory Definition of Community Development

For a loan, investment, or service to receive CRA credit, it must satisfy the regulatory definition of Community Development (CD) codified at 12 CFR § 25.12(g) / § 228.12(g) / § 345.12(g). Community development is strictly circumscribed across four statutory prongs:

1. Affordable Housing: Developing, financing, or rehabilitating affordable housing (including single-family homeownership and multifamily rental housing) targeted to low- or moderate-income individuals.
2. Community Services: Providing community services targeted specifically to low- or moderate-income individuals (e.g., healthcare clinics, childcare centers, youth educational programs, financial literacy initiatives, and job training programs operating in or serving LMI communities).
3. Economic Development: Activities must meet both the size and economic-development purpose tests. Eligible businesses or farms meet SBA Development Company or SBIC size standards or have gross annual revenues of one million dollars or less. The purpose test includes qualifying permanent job creation, retention or improvement for low- or moderate-income people or in qualifying geographies, and other activities recognized in the interagency CRA questions and answers. Small-business financing alone does not establish the purpose test.
4. Revitalization or Stabilization: Activities that revitalize or stabilize:
   • Low- or moderate-income census tracts;
   • Designated federal or state disaster areas; or
   • Distressed or underserved nonmetropolitan middle-income geographies (designated annually by the FFIEC based on poverty rates, unemployment, or population loss).

CRA Statutory Ratings and Downgrade Triggers

The Four Statutory Rating Tiers

Under 12 U.S.C. § 2906, the supervisory agencies assign one of four statutory ratings to an institution's overall CRA performance, and applicable state or multistate MSA evaluations; assessment-area analyses contribute to ratings rather than each necessarily receiving a separate statutory rating:

1. Outstanding: Exceptional performance across all evaluated tests; proactive leadership in community development and comprehensive retail distribution.
2. Satisfactory: Meets community credit needs; adequate geographic and borrower distribution; satisfactory community development responsiveness. (In large bank examinations, this is administratively divided into High Satisfactory and Low Satisfactory).
3. Needs to Improve: Substantial deficiencies in lending distribution, inadequate community development responsiveness, or failure to serve LMI tracts.
4. Substantial Noncompliance: Severe and pervasive failure to meet community credit needs; unacceptable loan-to-deposit ratio; complete absence of community development engagement.

Impact of Fair Lending Violations and Discriminatory Practices

Under 12 CFR § 25.28 / § 228.28 / § 345.28, an institution's CRA performance rating is adversely affected by evidence of discriminatory or other illegal credit practices.

• Covered Statutory Violations:
  • Equal Credit Opportunity Act (ECOA - Regulation B, 12 CFR Part 1002);
  • Fair Housing Act (FHA, 42 U.S.C. § 3601 et seq.);
  • Section 5 of the Federal Trade Commission Act (FTC Act, 15 U.S.C. § 45) and CFPA Section 1031 (UDAAP, 12 U.S.C. § 5531);
  • Home Ownership and Equity Protection Act (HOEPA, 12 CFR § 1026.32);
  • Real Estate Settlement Procedures Act (RESPA Section 8, 12 CFR § 1024.14);
  • Truth in Lending Act (TILA - Regulation Z, 12 CFR Part 1026); and
  • Servicemembers Civil Relief Act (SCRA, 50 U.S.C. § 3901 et seq.).
• Supervisory Downgrades: When examiners substantiate illegal credit practices (such as redlining, discriminatory interest rate markups, abusive add-on fees, or improper foreclosure practices), the supervisory agency evaluates the extent, frequency, severity, and remediation history. Supervisory findings can lead to an rating downgrade after consideration of the rule’s factors (e.g., from Satisfactory to Needs to Improve) or preclude an institution from receiving an Outstanding rating.
• Corporate Application Restrictions: A CRA rating below Satisfactory creates severe statutory barriers under the Bank Holding Company Act and Federal Deposit Insurance Act. Regulatory agencies will generally deny, delay, or condition approvals for bank mergers, bank acquisitions, new branch openings, deposit facility relocations, and deposit insurance applications.