If you’re interested in CRA Credit, there’s new changes effective April 1, 2024!
On October 24, 2023, the Federal Reserve, the FDIC, and the OCC issued a Final Rule amending the agencies’ Community Reinvestment Act (CRA) regulations. The agencies are adopting the proposed regulations with minor changes as it relates to bank loans made in partnership with the SBA 504 loan program. The Final Rule is effective April 1, 2024.
In the Final Rule, any bank loan made in conjunction with the SBA 504 loan program will automatically qualify as economic development and meet the Community Development Financing Test for CRA credit. This includes bank loans made for the interim financing and the third party loan. As detailed under the “Final Rule” heading beginning on page 191, the agencies are adopting, with revisions, the proposed “Community Development” category of economic development by establishing three components –
- Government-related support for small businesses and small farms (final § __.13(c)(1)), which includes activities undertaken in conjunction or in syndication with Federal, State, local, or tribal governments and comprises two subcomponents:
- Loans, investments, and services other than direct loans to small businesses and small farms (final § __.13(c)(1)(i)); and
- Direct loans to small businesses and small farms (final § __.13(c)(1)(ii)).
- Intermediary support for small businesses and small farms (final § __.13(c)(2)), which provides for support to small businesses or small farms through intermediaries.
- Other support for small businesses and small farms (final § __.13(c)(3)), which addresses for other assistance to small businesses or small farms, such as financial counseling, shared space, technology, or administrative assistance, to small businesses or small farms.
For purposes of the SBA 504 loan program, component 1.b. above applies – “Direct loans to small businesses and small farms.” Bank loans to small businesses made under the SBA 504 loan program (both the interim financing and the permanent third party loan) must meet a size test and a purpose test to qualify as economic development under the Community Development Test.
- Size Test – the small business receiving the loan must be “small” under traditional SBA size standards – either the industry or alternative size standards can be used. All small businesses receiving 504 financing meet this requirement.
- Purpose Test – the loan proceeds must be used to promote permanent job creation or retention for low- or moderate- income individuals or in low- or moderate-income census tracts. The Final Rule establishes that loans made in conjunction with a CDC or SBIC presumptively qualify under the purpose test – “loans that are made by a bank directly to small businesses or small farms in conjunction or in syndication with a Small Business Development Company (this refers to CDCs and the 504 loan program) or a Small Business Investment Company (SBIC) presumptively qualify under this prong….”
Additionally, other loans to small businesses can qualify under the new “Retail Lending Test.” Any size loan to a small business with $1 million or less in gross annual revenues can qualify for CRA credit under this test. Under CRA’s previous “small business lending test,” loans of $1 million or less made to a small business with $1 million or less in gross annual revenues qualified for CRA credit; loans larger than $1 million were eligible to be considered economic development loans under Community Development. And in the Final Rule, the agencies have agreed that certain loans to small businesses may be considered under both the new Community Development Financing Test and the new Retail Lending Test, if they qualify under both tests.
NADCO thanks the Agencies for incorporating comments submitted by NADCO and its members, SBA, and others advocating for these important clarifications that encourage bank lending to small businesses as a community development activity promoting economic development and job creation.
To access this TI Memo or the notice via the NADCO website, please click below.