In March, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller of the Currency (“OCC”) issued a Joint Statement noting the potential for favorable Community Reinvestment Act (“CRA”) consideration for certain retail banking services and retail lending activities in a financial institution’s assessment areas that are responsive to the needs of low- and moderate-income individuals, small businesses, and small farms affected by COVID-19 and that are consistent with safe and sound banking practices.1
As a consequence of the COVID-19 outbreak and executive orders in the various states demanding the shut-down of non-essential businesses, many small businesses are facing significant disruptions, struggling to pay employees and operational expenses without their typical revenue. Recognizing the significant and immediate needs of these small businesses, the U.S. Congress authorized extensive small business lending programs through the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, providing up to $376 billion in relief for workers and small businesses.
When making loans under these small business programs, such as the Paycheck Protection Program (“PPP”), depository institutions should remember that these loans may qualify as either community development loans or small loans to businesses and farms under the CRA. Loans that qualify should be captured and reported.
Small Business Lending Programs
The CARES Act authorized three small business lending programs, administered by the Small Business Administration (“SBA”) and the Department of the Treasury (“Treasury”). The largest of these programs is the PPP, which expands the SBA’s existing loan program under Section 7(a) of the Small Business Act to provide up to $349 billion in new loan guarantees and subsidies. The SBA has published its interim final rule outlining key components of the PPP and Treasury has also issued guidance on the program. The CARES Act also created the Economic Injury Disaster Loan (“EIDL”) program under Section 7(b) of the Small Business Act. The EIDL program provides funds to small businesses to cover economic injury resulting from the outbreak, such as a loss of revenue. Another funding option for small businesses under the CARES Act is an SBA Express Bridge Loan, through which small businesses that currently have a business relationship with an SBA Express Lender can quickly obtain a loan of up to $25,000.
The CRA establishes a framework through which the federal financial regulators assess a depository institution’s record of helping to meet the credit needs of local communities. As a part of this assessment, financial institutions must collect and report information about certain small loans to businesses and farms and loans that support community development initiatives. Federal regulators may consider some of the small business loans made under the CARES Act as loans eligible for CRA consideration when assessing a depository institution’s performance under the CRA.
In particular, the following types of loans, among others, are reportable under the CRA:
- small loans to businesses and farms (“SLBF loans”), including:
- loans of $1,000,000 or less to businesses for commercial and industrial purposes or secured by non-farm, non-residential real estate; and
- loans in amounts of $500,000 or less that are made to finance agricultural production, are made to farmers, or are secured by farmland; and
- community development loans, including:
- loans to companies that meet the size eligibility standards of the SBA’s Development Company or Small Business Investment Company programs and support permanent job creation, retention, and/or improvement for persons who are currently low- or moderate-income, or support permanent job creation, retention, and/or improvement either in low- or moderate-income geographies or in areas targeted for redevelopment by Federal, state, local, or tribal governments; and
- loans to businesses that have gross annual revenues of $1 million or less and that will support permanent job creation, retention, and/or improvement for persons who are currently low- or moderate-income, or support permanent job creation, retention, and/or improvement either in low- or moderate-income geographies or in areas targeted for redevelopment by Federal, state, local, or tribal governments.
Key Information to Collect on Small Business Loans
Depository institutions should ensure that they capture all necessary data on small business loans that may be eligible for CRA credit and report any loans that are in fact eligible. Key information to collect includes: the lender’s unique identifier for the loan, the borrower’s complete legal name, the borrower’s principal place of business, the date of origination, and the loan amount at the time of origination. In addition, for SLBF loans, the lender should collect information about the business’s gross annual revenue. For community development loans, the lender should also collect information on how the loan proceeds will be used for economic development.
Additional guidance on which loans are eligible for CRA credit and how to report those loans is available in the relevant regulations issued by the OCC (12 CFR Parts 25 and 195), the Federal Reserve (12 CFR Part 228), and the FDIC (12 CFR Part 345), as well as the Interagency Questions and Answers Regarding Community Reinvestment.
Other Mayer Brown Regulatory Updates
For further information on the small business lending programs under the CARES Act, please see our COVID-19 Portal or COVID-19 Regulatory Page:
1 Joint Statement on CRA Consideration for Activities in Response to COVID-19 https://www.fdic.gov/news/news/financial/2020/fil20019a.pdf