Demystifying the CRA Credits and the SBA 504 Loan Program
If you're navigating the world of small business lending and Community Reinvestment Act (CRA) credits, the recently issued Final Rule effective April 1, 2023 has some exciting changes for you.
The Basics: SBA 504 Loan Program and CRA Credit
The Final Rule amended the Federal Reserve, FDIC and OCC regulations, creating more CRA options. In a nutshell, any bank loan tied to the Small Business Administration (SBA) 504 loan program now automatically qualifies as economic development, meeting the Community Development Financing Test for CRA credit. This includes both the interim and permanent third party loans.
The Three Components of Economic Development
The Final Rule establishes three components under the "Community Development" category of economic development:
Government-related Support for Small Businesses and Farms
Involves activities in collaboration with Federal, State, local, or tribal governments.
Subcomponents include investments, services, and loans, both direct and indirect.
Intermediary Support for Small Businesses and Farms
Provides support through intermediaries to small businesses or farms.
Other Support for Small Businesses and Farms
Addresses additional assistance like financial counseling, shared space, technology, or administrative aid.
SBA 504 Loan Program Focus: Direct Loans to Small Businesses
For the SBA 504 loan program, direct loans to small businesses are the focus. To qualify under the Community Development Test, these loans must pass two crucial tests:
Size Test:
The small business must be deemed “small” by the SBA size definition, either by industry or alternative standards. View our Desk Guide for more information.
Purpose Test:
Loan proceeds must promote permanent job creation or retention for low- or moderate-income individuals or in specific census tracts. However, loans made in conjunction with a CDC (Certified Development Company) or SBIC (Small Business Investment Company) presumptively qualify under the purpose test.
Retail Lending Test: A New Inclusion
The Final Rule introduces the "Retail Lending Test”. Any size loan to a small business with $1 million or less in gross annual revenues can potentially qualify for CRA credit. This expands flexibility for banks and encourages banks to expand access to credit.
Overlapping Opportunities
Certain loans to small businesses can now be considered under both the Community Development Financing Test and the Retail Lending Test if they meet the criteria of both.
The recent changes provide a more inclusive and flexible framework for CRA credit eligibility, opening doors for small businesses to thrive. The SBA 504 loan program continues to be an excellent solution to finance deserving small businesses while providing a credit enhancement and CRA credit to the bank.