Community Reinvestment Act credit
Banks have long used SBIC investments in their CRA strategies because investments in SBIC funds can be treated as “qualified investments” under the CRA. Under the current CRA framework, a “qualified investment” is one whose primary purpose is community development. Community development includes activities that promote economic development by financing businesses that meet the size eligibility standards of the SBA’s Development Company or SBIC programs. 8, 9 The interagency CRA guidance lists SBIC funds among its examples of qualified investments and presumes that an investment in an SBIC fund promotes economic development, which addresses the purpose element of the agencies’ size-and-purpose analysis. On July 31, 2026, the OCC and Federal Deposit Insurance Corporation (FDIC) issued a notice of proposed rulemaking that would amend the existing CRA framework for the banks they supervise. The Federal Reserve did not join the rulemaking, which is significant because it could result in the application of different CRA standards depending on which agency regulates a given bank. 10 The proposal would continue to credit financing of businesses that meet SBIC size standards, would expressly name SBIC funds as qualifying small business programs and would drop the requirement that such activities create or retain jobs for low and moderate-income individuals or areas. It would also eliminate credit for activities that benefit a broader statewide or regional area in favor of a capped allowance for activities outside a bank’s assessment areas. 11 Banks should monitor this proposed rule and related rulemaking developments. To maximize the likelihood of receiving CRA credit for its investment in an SBIC fund, a bank should undertake additional diligence to confirm that the SBIC fund’s purpose, mandate or function includes serving the bank’s assessment area(s) or a broader statewide or regional area that includes them. 12 This is often accomplished through a deeper understanding of the SBIC fund’s target investment markets and through covenants and reporting obligations in the bank’s side letter with the SBIC fund, discussed in greater detail below. As noted above, the pending OCC and FDIC proposal would change the treatment of broader statewide or regional areas, if adopted.
Commercial banking relationships
For many banks, the strategic value of investing in SBIC funds extends beyond the investment return. Portfolio companies need treasury management, deposit services, revolving lines of credit, acquisition and equipment financing, letters of credit, and other bank products. SBIC fund managers also see companies that fit a bank’s senior credit profile better than the SBIC fund’s own mandate. The OCC has observed that SBIC funds often refer portfolio companies needing commercial banking services to the banks that invested in them as limited partners. 13 These opportunities are best viewed as additional upside to an SBIC investment, rather than a core part of the base case for making such an investment but can nonetheless yield attractive ancillary benefits to a bank. While a limited partner commitment in an SBIC fund does not entitle a bank to portfolio company business, a thoughtful manager can become a lasting source of introductions, particularly where the SBIC fund’s target geography overlaps with the bank’s footprint. 3. Diligence Best Practices Before Investing in an SBIC Fund A disciplined bank investor will underwrite the SBIC fund manager and its strategy first and foremost, and then evaluate regulatory fit and the potential for ancillary business within that qualified subset of SBIC fund managers. Typical diligence includes: Manager and team. Who makes investment decisions? How long has the team worked together? How much is the team committing to invest in the SBIC fund? How is the realized and unrealized track record attributed? Strategy and portfolio construction. Is the SBIC fund primarily credit, mezzanine, equity or a blend? What leverage will it use at the portfolio company and fund levels? Which sectors and geographies are targeted? Which are excluded? SBA leverage plan. How much leverage does the SBIC fund manager expect to use, and when? How sensitive are projected returns and liquidity to higher financing costs, slower exits or portfolio losses? CRA fit. What share of expected activity is likely to benefit the bank’s assessment areas? What CRA reporting and
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