Pub. 6 2016 Issue 2

F O R MANY INSTITUTIONS, FINDING SECURITIES THAT QUALIFY FOR THE INVESTMENT TEST COMPO- NENT OF THE CRA (COMMUNITY Reinvestment Act) exam can be analogous to “finding a needle in a haystack.” Banks must determine and document that each qualifying instrument promotes a community development purpose in its assessment area(s) or a broader statewide or re- gional area that includes its assessment area(s) 1 . Single and multifamily MBS most easily qualify under these crite- ria, but institutions need not restrict themselves to mortgage-backed securi- ties when building their stock of CRA qualified investments. A deeper, more nuanced analysis of certain municipal securities shows that they too can fulfill the criteria of the CRA investment test. Municipalities issue debt to meet the most fundamental needs of their com- munities — to improve sewers, to build parks, and to finance school buildings. Logically, they should be excellent vehicles through which banks can rein- vest in their communities. Practically, however, obtaining and documenting both the specific purpose and granular income levels of the individuals served by a municipal bond series can be chal- lenging. Even when both the purpose and incomes can be easily determined, institutions must ask if the practice is a feasible exercise, especially when com- peting for scarce, fast moving supply in the secondary market. For these reasons, where institutions do apply municipal bonds towards their investment test, we find that they generally focus on four distinct types of municipal debt whose characteristics make it easy to identify the purpose of the borrowing and income of the indi- viduals served. School District Bonds INCOME Institutions that utilize school district debt to meet their CRA needs gener- ally rely on the percentage of students who participate in the USDA’s Na- tional School Lunch Program (NSLP) to determine whether the district or building services low-to-moderate in- come individuals. Not only is this data readily available from state department of education websites, it is also spe- cifically mentioned in the FDIC’s CRA compliance manual as a way in which an institution could determine that community services are offered to low- or-moderate income individuals 2 : “The community service is provided to students or their families from a school at which the majority of students qualify for free or reduced-price meals under the U.S. Department of Agricul- ture’s National School Lunch Program.” The CRA Investment Test THOUGHTS ON QUALIFIED MUNICIPAL INVESTMENTS 22 www.azbankers.org