ABA Bank Compliance - July/August, 2009

the investment as well as the dollar amount.

Available investments may be smaller in dollar amount, but examiners consider more than just the dollar amounts. For all banks they must consider the responsiveness of investments to local community development needs and opportunities. For large banks they must also consider the innovativeness or complexity of the investments, along with the degree to which the qualified investments are not routinely provided by private investors.

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Don’t forget to provide the examiners with information about investments that were made during the prior evaluation period that remain on the bank’s books. Examiners consider and qualitatively weigh both current and prior-period investments. For example, a prior-period outstanding investment with a multi-year impact that addresses assessment area community development needs may receive more consideration than a current period investment of a comparable amount that is less responsive to area community development needs. And as always, investments must benefit the bank’s assessment area or the broader statewide or regional area that includes the bank’s assessment area. ⁸

CRA and “Other Real Estate
Owned” (OREO)

One of the consequences of the current economic climate has been a sizeable increase in bank ownership of “other real estate owned” or OREO. Banks may employ a variety of strategies for removing these nonearning assets from their balance sheets. Two strategies in particular may result in positive CRA consideration as qualified investments.

Qualified investments include donations to CRA-qualified organizations, i.e., organizations whose primary purpose is consistent with the definition of community development in the CRA regulation. A bank

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may make a cash donation or an “in-kind donation” to a CRA-qualified organization. An “in-kind” donation could include things such as furniture, computers, or even real property, such as OREO.

Fair market value* of oreo

$150,000

sale price

50,000

With the significant downturn in the national economy and the mortgage-backed securities market, banks are finding it difficult to find qualified investments. Some banks have also reduced their charitable donations. What kind of qualified investments are available now?

Opportunities to make qualified investments may have changed, but there are still needs; in fact, the need for investments related to providing community services for low- or moderate-income individuals in your assessment area may have increased. Qualified investments include

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but are not limited to the following:

■ donations to local organizations that provide credit counseling to low- and moderate-income individuals

■ financing community services to low- and moderate-income individuals, such as affordable day care for working parents, health care, and other services

■ funding foreclosure-prevention programs that have the objective of providing affordable, sustainable, long-term loan restructurings or modifications to homeowners in low- and moderate-income geographies, consistent with safe and sound banking practices, that help to revitalize and stabilize those low- and moderate-income areas

■ donating “other real estate owned” to CRA-qualified community development organizations as “in-kind” donations

investment

$100,000

*FMV is determined by a current, independent appraisal.

In addition to an outright donation of OREO, a bank may sell OREO at a discount to a CRA-qualified organization. The difference between the fair market value and the selling price would be considered an in-kind donation. See OREO accounting rules for more

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information about booking and selling OREO.

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The investment value of OREO sold at discount is calculated as follows:

Would donations of OREO to a government-owned
land bank be considered qualified investments
under the CRA?

Generally, no. A donation to a government-owned land bank is not typically a qualified investment because the primary purpose of government is not consistent with the definition of community development. However, if the land bank is a separate entity with a clear purpose that is consistent with the definition of community development, such activity could be considered a qualified investment. The bank would need to provide enough information to demonstrate that the primary purpose of the land bank is consistent with the definition of community development in the CRA regulation.