prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 1.



Report 2: According to VA officials and Omaha donor group representatives, two main factors coalesced to become the impetus for the CHIP-IN Act  One factor was an Omaha donor group’s interest in constructing an ambulatory care center that could help address the needs of veterans in the area, given uncertainty about when or whether VA would be able to build a planned replacement medical center  In 2011, VA allocated $56 million for the design of the replacement medical center in Omaha, which had a total estimated cost of $560 million  However, VA officials told us that given the agency’s backlog of construction projects, the replacement medical center was not among its near-term projects  In the meantime, according to VA officials and the Omaha donor group, they discussed a change in the scope of the project— from the original plan of a replacement medical center to a smaller- scope project for a new ambulatory care center—that could potentially be constructed using the existing appropriation of $56 million plus a donation from the Omaha donor group  Another factor was the Congress’s and VA’s broader interest in testing innovative approaches to meeting VA’s infrastructure needs  According to VA officials, the agency was interested in constructing medical facilities in a more expeditious manner and developing legislation that allowed private money to help address VA’s needs  The CHIP-IN Act authorized a total of five pilot projects but did not name any specific project locations  Subsequently, the Omaha donor group applied to participate in the pilot program—with the construction of an ambulatory care center—and VA executed a donation agreement in April 2017  VA may accept up to four more real property donations under the pilot program, which is authorized through 2021  The CHIP-IN Act places certain requirements on donations under the pilot program  VA may accept CHIP-IN donations only if the property: (1) has already received appropriations for a VA facility project, or (2) has been identified as a need as part of VA’s long-range capital planning process and the location is included on the Strategic Capital Investment Planning process priority list provided in VA’s most recent budget submission to Congress  The CHIP-IN Act also requires that a formal agreement between VA and the non-federal entity provide that the entity conduct necessary environmental and historic preservation due diligence, obtain permits, and use construction standards required of VA, though the VA Secretary may permit exceptions  VA entered into an agreement with the Omaha donor group for the design and construction of an ambulatory care center in April 2017—4 months after enactment of the CHIP-IN Act  According to this agreement, which establishes the terms of the donation, the Omaha donor group will complete the design and construction of the facility and consult with VA  The facility will provide approximately 158,000 gross square feet of outpatient clinical functions, including primary care, an eye clinic, general purpose radiology and ambulatory surgery, specialty care, and mental health care  According to VA officials, planning for the facility began in April 2017, after the donation agreement was executed, and the project broke ground in April 2018  This donation agreement includes the mutually agreed- upon design and construction standards, which incorporate both VA’s standards and private sector building standards  The donation agreement also sets the terms of VA’s review of the design and construction documents and establishes escrow operations for the holding and disbursement of federal funds  Upon the Omaha donor group’s completion of the facility (scheduled for summer 2020) and VA’s acceptance, the Omaha donor group will turn the facility over to VA  The total estimated project cost is approximately $86 million  VA is contributing the $56 million that had already been appropriated for the design of the replacement medical facility  The Omaha donor group will donate the remaining approximately $30 million in private sector donations needed to build the facility  As shown in figure 2 and described below, VA officials told us that several offices are involved in various aspects of the CHIP-IN pilot—such as executing the Omaha project, seeking additional partnerships, and establishing the overall pilot program effort  The VA Office of Construction and Facilities Management (CFM) includes its Office of Real Property (ORP) and Office of Operations  ORP has taken a lead role in establishing the pilot program, while CFM Operations has led the execution of the Omaha project  Other VA offices that have been involved at different stages include the Office of General Counsel and the Secretary’s Center for Strategic Partnerships  Within the Veterans Health Administration (VHA), the local medical-center leadership was involved with developing the Omaha project, and the Office of Capital Asset Management, Engineering, and Support (Capital Asset Management Office) has contributed to efforts to identify additional projects  Some of these offices are involved with a steering committee created to implement the CHIP-IN Act (CHIP-IN steering committee)  This steering committee met for the first time in September 2018  In 2016, we identified five leading practices for designing a well- developed and documented pilot program: articulating an assessment methodology, developing an evaluation plan, assessing scalability, and ensuring stakeholder communication  (See fig  3 ) These practices enhance the quality, credibility, and usefulness of pilot program evaluations and help ensure that time and resources are used effectively  While each of the five practices serves a purpose on its own, taken together, they form a framework for effective pilot design  VA officials have worked to communicate with relevant stakeholders, but have not yet established objectives, developed an assessment methodology and evaluation plan, or documented how they will make decisions about scalability of the pilot program  In 2016, we reported that clear, measurable objectives can help ensure that appropriate evaluation data are collected from the outset of a pilot program  Measurable objectives should be defined in qualitative or quantitative terms, so that performance toward achieving the objectives can be assessed, according to federal standards for internal control  For example, broad pilot objectives should be translated into specific researchable questions that articulate what will be assessed  Establishing well-defined objectives is critical to effectively implementing the other leading practices for a pilot program’s design  Objectives are needed to develop an assessment methodology to help determine the data and information that will be collected  Objectives also inform the evaluation plan because performance of the pilot should be evaluated against these objectives  In addition, objectives are needed to assess the scalability of the pilot, to help inform decisions on whether and how to implement a new approach in a broader context (i e , whether the approach could be replicable in other settings)  Relevant VA stakeholders have not yet collectively agreed upon and documented overall objectives for the CHIP-IN pilot program, but the stakeholders said they are planning to do so  However, at the time of our review, each of the VA offices we interviewed presented various ideas of what the objectives for the pilot should be, reflecting their varied missions and roles in the CHIP-IN pilot  For example, A senior VHA official said the objectives should include (1) determining whether the CHIP-IN donation partnership approach is an effective use of VA resources and (2) defining general principles for the pilot, including a repeatable process for future CHIP-IN projects  A senior VA official who has been closely involved with the pilot said one objective should be determining how VA can partner with the private sector for future construction projects, whether through donation partnerships or other means  Officials from ORP, who have taken a lead role in establishing the pilot, told us their objectives include identifying the four additional projects authorized by the CHIP-IN Act, developing a process to undertake potential projects, and determining whether a recommendation should be made that Congress extend VA’s CHIP-IN authority beyond the 5-year pilot  ORP officials said they have written some of these objectives in an early draft of plans for the CHIP-IN steering committee, but they have also discussed other objectives that are not yet documented  While the various VA offices involved may have somewhat different interests in the pilot program, developing a set of clear, measureable objectives is an important part of a good pilot design  For example, several VA officials who are involved in the pilot told us that it would be useful for relevant internal stakeholders to collectively agree upon and document overall objectives  ORP officials told us that the newly formed CHIP-IN steering committee will discuss and formalize objectives for the pilot  However, at the time of our review, a draft of these objectives had not been developed and a timeline for developing objectives was not yet established  A discussion of objectives was planned for the steering committee’s first meeting in September but had been rescheduled for the next meeting in October 2018  VA officials told us that they did not immediately move to establish a framework for the pilot program—which would include objectives for the pilot—for various reasons  Some officials said that VA and the Omaha donor group entered into formal discussions shortly after the CHIP-IN Act was enacted, and that their focus at the time was on negotiating and then executing a donation agreement for that particular project  As such, formal efforts to establish the framework for the overall pilot effort were in initial stages at the time of our review  ORP officials also said that the enactment of the CHIP-IN Act was not anticipated at the time CFM was planning and budgeting its resources for fiscal years 2017 and 2018, so work on the pilot had to be managed within available resources, largely as an additional duty for staff  In addition, a senior VHA official said a meeting to agree upon the pilot program’s objectives was needed but had not been held yet, noting that VA has competing priorities and vacancies at the senior executive level  ORP officials said they are now following project management principles in implementing the pilot  As part of this effort, they said that they intend to develop foundational documents for review by the CHIP-IN steering committee—such as a program plan containing objectives—but they have not done so yet  Without clearly defined and agreed-upon objectives, stakeholders within VA may have different understandings of the pilot’s purpose and intended outcomes  As a result, the agency risks pursuing projects that may not contribute to what VA hopes to learn or gain from the pilot  While VA officials are planning to establish objectives as they formalize the CHIP-IN steering committee, at the time of our review these objectives had not been documented and no timeline has been established for when they would be  Without clear, measurable objectives, VA will be unable to implement other leading practices for pilot design, such as determining how to make decisions about scalability  Further, not defining objectives in the near future would ultimately affect VA’s ability to evaluate the pilot and provide information to Congress about its results  We have reported that developing a clearly articulated assessment methodology and a detailed evaluation plan are leading practices for pilot design  The assessment methodology and evaluation plan should be linked to the pilot’s objectives so that evaluation results will show successes and challenges of the pilot, to help the agency draw conclusions about whether the pilot met its objectives  The assessment methodology and evaluation plan are also needed to determine scalability, because evaluation results will show whether and how the pilot can be expanded or incorporated into broader efforts  Given that several VA offices are involved in the pilot’s implementation, it is important for relevant stakeholders to be involved with defining and agreeing upon the assessment methodology and evaluation plan  VA has not yet fully developed and documented either an assessment methodology or evaluation plan for the pilot, but VA officials told us they plan to do so  For example, ORP officials said they intend to collect lessons learned and then evaluate the pilot at its end in 2021 by reviewing this information with relevant stakeholders  However, more specific details for this assessment methodology have not been defined in accordance with this leading practice  For example, we found that ORP has not yet determined which offices will contribute lessons learned, how frequently that information will be collected, or who will collect it  Similarly, details for an evaluation plan have not been defined, including who will participate in the evaluation and how information will be analyzed to evaluate the pilot’s implementation and performance  Now that the CHIP- IN steering committee has met for the first time, this group intends to discuss assessment of the pilot at a future meeting, but it is not clear when that discussion will occur, what leading practices will be considered, and when plans will be defined and documented  According to VA officials, an assessment methodology and evaluation plan have not been developed because, as discussed above, after the CHIP-IN Act was enacted, efforts were focused on negotiating the Omaha donation agreement and then executing that project  As such, formal efforts to establish the pilot through the CHIP-IN steering committee were in initial stages at the time of our review  Further, until VA has agreed- upon and documented objectives for the pilot program, it may be difficult to determine what information is needed for an assessment methodology and how the pilot will be evaluated  Unless VA establishes a clear assessment methodology that articulates responsibilities for contributing and documenting lessons learned, VA may miss opportunities to gather this information from the pilot  For example, while some stakeholders are documenting lessons learned relevant to their roles in the pilot, others are not  Specifically, ORP and CFM Operations are documenting lessons learned, but other VA offices and the Omaha donor group have not, though some told us they would be willing to share lessons learned if asked  Without an assessment methodology, there may also be confusion about who is responsible for documenting lessons learned  For example, a senior CFM official said that the Omaha donor group was compiling lessons learned from the pilot overall and would subsequently share those with VA  However, representatives from the donor group told us they have not been asked to share lessons learned with VA, but they would be willing to do so  When key individuals leave their positions—a situation that has occurred a number of times during implementation of the CHIP-IN pilot—their lessons learned may not be captured  For example, VA officials and donor group representatives told us that two VA officials who were involved in developing the pilot have since left the agency  In addition, stakeholders’ memories of lessons learned may fade unless they record them  Waiting to develop an evaluation plan—which should include details about how lessons learned will be used to measure the pilot’s performance—may ultimately affect VA’s preparedness to evaluate the pilot and provide information to Congress about its results  The purpose of a pilot is to generally inform a decision on whether and how to implement a new approach in a broader context—or in other words, whether the pilot can be scaled up or increased in size to a larger number of projects over the long term  Our prior work has found that it is important to determine how scalability will be assessed and the information needed to inform decisions about scalability  Scalability is connected to other leading practices for pilot design, as discussed above  For example, criteria to measure scalability should provide evidence that the pilot objectives have been met, and the evaluation’s results should inform scalability by showing whether and how the pilot could be expanded or how well lessons learned from the pilot can be incorporated into broader efforts  VA officials have begun to implement this leading practice by considering the pilot as a means of testing the viability of the donation partnership approach; however, plans for assessing scalability have not been fully defined and documented  A senior VA official said scalability is seen as a way to determine if the donation approach or other types of private sector partnerships are a viable way to address VA’s infrastructure needs  Similarly, ORP officials told us they are first considering scalability in terms of whether the CHIP-IN donation approach is an effective or feasible way of delivering VA projects  These officials said scalability will be largely determined by whether all five authorized projects can be executed before authorization for the CHIP-IN pilot program sunsets  For example, if VA can find four additional projects and execute donation agreements before the pilot’s authority expires, then potentially VA could seek congressional reauthorization to extend the program beyond the 5- year pilot  ORP officials are also considering scalability in terms of any changes to the program, such as incentives for donors, that could potentially increase its effectiveness  However, ORP officials explained that scalability may be limited because the types of projects that can be accomplished with the CHIP-IN donation approach may not be the projects that are most needed by VA  Along with other pilot design topics, the CHIP-IN steering committee intends to discuss scalability at a future meeting, but it is not clear when that discussion will occur  Thus, while VA officials have considered what scalability might look like, they have not fully determined and documented how to make decisions about whether the pilot is scalable  Since VA has not defined and documented the pilot’s objectives and its evaluation plans, it may be more difficult to determine how to make decisions about scalability  Considering how the pilot’s objectives and evaluation plans will inform decisions about scalability is critical to providing information about the pilot’s results  For example, at the end of the pilot, VA and Congress will need clear information to make decisions about whether the CHIP-IN donation approach could be extended beyond a pilot program, if any changes could enhance the program’s effectiveness, or if particular lessons learned could be applied to VA construction projects more broadly  Without clear information about scalability, VA may be limited in its ability to communicate quality information about the achievement of its objectives  Such communication is part of the federal standards for internal control  We have reported that appropriate two-way stakeholder communication and input should occur at all stages of the pilot, including design, implementation, data gathering, and assessment  To that end, it is critical that agencies identify who or what entities the relevant stakeholders are and communicate with them early and often  This process may include communication with external stakeholders and among internal stakeholders  Communicating quality information both externally and internally is also consistent with federal standards for internal control  VA has begun to implement this practice, with generally successful communication with the Omaha donor group  While VA has experienced some external and internal communication challenges about the pilot, officials have taken steps to help resolve some of these challenges  External communication  VA officials and representatives from the Omaha donor group generally described excellent communication between their two parties  For example, donor group representatives told us that in-person meetings helped to establish a strong relationship that has been useful in negotiating the donation agreement and executing the project to date  Further, VA officials and donor group representatives said that all relevant stakeholders—such as the donor group’s construction manager, general contractor, and architect, as well VA’s engineer, project manager, and medical center director—were included in key meetings once the Omaha project began, and said that this practice has continued during the construction phase  Although the Omaha donor group reported overall effective relations and communications with VA, donor group representatives noted that additional public relations support from VA would have been helpful  For example, after the CHIP-IN project was initiated in Omaha, the donor group encountered a public relations challenge when news reports about unauthorized waiting lists at the Omaha medical center jeopardized some donors’ willingness to contribute to the project  While donor group representatives said this challenge was addressed when the donor group hired a public relations firm, they also explained that it would be helpful for VA headquarters to provide more proactive public relations support to the local areas where future CHIP-IN projects are located  VA officials stated that they experienced some initial challenges communicating pilot requirements to external entities that are interested in CHIP-IN donation partnerships, but officials said that in response the agency has changed its outreach approach  As discussed below, the donation commitment aspect of the pilot can be a challenge
Report 2:  Contracting officials generally view the training and tools they received as beneficial  For example, several DHS contracting officials we interviewed said that the agency’s new course provided a helpful review on the topic, while one contracting officer specifically noted that the course materials are useful to new staff, to help them understand the Act’s waivers and exceptions  DHS also revised its acquisition manual in December 2017 to add further detail regarding the Buy American Act requirements  Specifically, DHS updated its acquisition manual to provide contracting officers more explicit FPDS-NG reporting instructions for procurements subject to the Buy American Act, as well as discretion to purchase domestic end products at or below the micro-purchase threshold  Additional changes include increasing the documentation and level of managerial review required to use several of the exceptions to the Buy American Act  For example, prior to 2018—which includes the time period in which the DHS contracts and orders we reviewed were awarded—the head of individual contracting offices had the authority to approve domestic non-availability and unreasonable cost exceptions, with a notification made to the DHS Chief Procurement Officer  But under the new policy, the use of these exceptions must have the concurrence of the HCA—who is responsible for contracting activities within individual DHS components—and be approved by the department’s Chief Procurement Officer  Table 3 outlines these changes  In September 2017, VA issued guidance to reinforce existing Buy American Act requirements  The policy memorandum encourages the HCAs within VA to institute reviews of awarded contracts subject to the Buy American Act to ensure compliance  As of September 2018, policy officials did not know how many HCAs had taken this step  Further, the guidance emphasizes the importance of Buy American Act training for its acquisition workforce  VA policy officials explained that the Buy American Act is introduced in several VA training courses, but the agency does not have a specific course on implementing the Buy American Act requirements or provide additional instruction or tools  During the course of our review, VA officials said that some of the HCAs had added internal training on the Buy American Act  In addition, VA contracting staff has the option of taking training offered outside the agency, such as the updated Defense Acquisition University course on the Buy American Act  This training is not required  Contracting officials we spoke to at VA said they struggled with the details of awarding contracts subject to Buy American Act requirements because they are not provided sufficient agency-specific training and guidance on the topic  Moreover, several contracting staff noted an increased need for training due to recent changes in VA contracting practices  Specifically, in response to a 2016 Supreme Court decision, VA has increased contracting efforts with veteran-owned small businesses through the Veterans First Contracting Program  As a result, contracting officials explained they have reduced their use of schedule contracts, in which the determinations related to the Buy American Act requirements were made with the initial awards  As one contracting officer explained, prior to this change, more than 90 percent of her division’s procurements were through VA schedule contracts in which Buy American Act applicability had already been established  However, this shift in contracting practices means contracting officers will more frequently need to consider the applicability of the Buy American Act, but contracting officers have not received specific guidance or training to do so  Noting the significance of this change, one contracting officer stated she approached VA management to obtain Buy American Act training for her division, but such training was not available  Federal internal controls state that agencies should ensure that training is aimed at developing and retaining employee knowledge, skills, and abilities to meet changing organizational needs  In September 2018, we reported that VA was experiencing difficulties implementing multiple aspects of the Veterans First policy, and we recommended that VA provide more targeted implementation training  As VA moves forward to implement this training, incorporating the Buy American Act requirements will be important to provide greater assurance that staff has the knowledge and skills needed to navigate the changing procurement environment  HHS does not have agency-level Buy American training or guidance  The HHS Acquisition Regulation Supplement does not address foreign acquisitions  HHS officials told us that efforts to develop guidance that would address Buy American Act requirements are underway, but they do not know when they will be finalized and made available to contracting officers, and could not describe the extent to which they will address Buy American Act implementation  The HHS contracting officers we interviewed discussed informal Buy American Act training their divisions had developed because department-level training was not available  For example, at HHS’ National Institutes of Health, a contracting official told us about a training course she recently developed because her office was taking on the administration of additional contracts for which the Buy American Act requirements would apply  Contracting officers at HHS’ Office of Biomedical Advanced Research and Development Authority described informal training on the agency’s contract writing system— included as part of their weekly internal staff meetings—that provides additional guidance on how to appropriately complete certain data fields relevant to the Buy American Act  In our analysis of 38 contracts from across the four agencies, we found that agencies faced various levels of challenge in applying the Trade Agreements Act waivers and Buy American Act exceptions to acquire foreign end products  This was particularly apparent in cases where contracting officers had to determine if a trade agreement applied or cases which required a determination that a domestic end product was not sufficiently available, in accordance with the domestic non-availability exception to the Buy American Act requirements  Contracting staff also had difficulty determining the origin of products in light of incomplete or conflicting information  Of the six contracts we reviewed reporting that a trade agreement applied to the foreign end products purchased, we found two cases in which this waiver did not apply to the contracts in question  The value of the contract is one determining factor for whether a trade agreement waives the Buy American Act requirements, although the FAR also states additional factors that would affect applicability under a trade agreement  The two contracts we found, both from VA, had total dollar values at award— $8,435 and $11,950, respectively—that were less than any of the thresholds at which trade agreement waivers of the Buy American Act are applicable  Both contracts were for products from countries that are party to the World Trade Organization Government Procurement Agreement, so the value of the acquisition would have to be equal to or exceed $191,000—the threshold that was in effect at the time of award—for waivers from Buy American requirements to apply  Contracting officials in both cases were generally unaware that the applicable threshold was not met, making the trade agreement waiver inapplicable  Although VA has added Buy American Act guidance since these contracts were awarded early in fiscal year 2017, the information currently available does not provide sufficient detail to assist contracting officers when awarding contracts in these situations  For example, the guidance VA provided contracting officers in September 2017 does not emphasize consideration of the applicable trade agreement thresholds or include information on how contracting officers should determine the applicable waiver or exception  When contracting officers procure foreign end products, the type of waiver or exception used to support the purchase matters—particularly when required additional steps and review are not completed because the wrong waiver or exception was applied  We found that the two VA contracts with foreign end products were incorrectly reported as the Trade Agreements Act waiver having applied  If one of the other Buy American Act exceptions permitting purchases of foreign end products had applied, contracting officers may have been required to obtain higher-level review or complete a written determination  In addition, we reviewed contracts that show some of the complexities contracting officers face beyond applying the dollar thresholds when determining if an award for foreign end products is eligible under the Trade Agreements Act waiver of the Buy American Act  Specifically, we found instances where DHS contracting officials took different approaches for non-competed awards for similar foreign-manufactured products  For example, we reviewed a non-competed $58 million DHS award for acquiring spare aircraft parts from an original equipment manufacturer located in a foreign country that is party to the World Trade Organization Government Procurement Agreement  DHS reported in FPDS-NG that the procurement was waived by the Trade Agreements Act  However, we also reviewed two other sole-source awards from DHS for similar products—spare aircraft parts from two separate manufacturers in foreign countries that are also party to the World Trade Organization Government Procurement Agreement—that were instead reported as subject to the Buy American Act, but excepted due to the non-availability of domestic products  Contracting officers may come to different conclusions for similar products, in part, because of the multiple factors that have to be considered when determining whether an acquisition is subject to the Buy American Act and whether any waivers or exceptions apply  However, available guidance does not always address these complexities  For example, agencies need to decide if other conditions, such as the procurement of products deemed indispensable for national security or national defense purposes apply to an acquisition that would make a trade agreement inapplicable  Further, if the product’s country of origin is considered a designated country under the World Trade Organization Government Procurement Agreement, officials need to determine that the product is eligible under that agreement  DHS updated its training and guidance for the Buy American Act, which includes a job aid outlining at what dollar values solicitation provisions and contract clauses under a trade agreement waiver are applicable  However, it does not address other situations in which contracts may not be eligible under the Trade Agreements Act, such as non-eligible products or products for national defense purposes  For the other agencies in our review, we found that DOD’s updated Buy American Act training and its acquisition supplement both address trade agreement eligibility, but HHS does not yet have Buy American guidance to address this topic  Federal internal control standards state that agencies should communicate quality information internally to achieve their objectives and that they should select the appropriate methods of communication  When written guidance is not available, agencies may miss opportunities to ensure appropriate steps are taken to meet Buy American Act requirements  Our review of 38 contracts also included 8 contracts for foreign end products pursuant to the domestic non-availability exception  In certain situations, such as when contracts are awarded without full and open competition, this exception requires an approved written determination  The FAR establishes requirements for domestic non-availability determinations, but agencies can delegate the level of review required or specify information to be included in the determination  Three of the agencies we reviewed—DOD, DHS, and VA—provide supplemental guidance on the process for making determinations, including who must make the determination when applying a domestic non-availability exception  However, DHS policy officials told us that when the agency uses the domestic non-availability exception for a sole-source acquisition, the written justification that the FAR requires for non- competed awards should suffice as the documentation to support the non-availability determination as well  The practice of using sole-source justifications to support Buy American determinations is not addressed in DHS guidance  According to DHS policy updated in 2018, determinations of domestic non-availability must be concurred with by the HCA and approved by the Chief Procurement Officer  Federal and DHS acquisition regulations, however, state that some justifications can be approved at a lower level  In the absence of further guidance, this difference in approval levels could result in inconsistent application within the department  In addition, as previously noted HHS does not yet have Buy American Act guidance so the department does not provide information on how to make determinations  According to federal internal control standards, agencies should communicate quality information internally to achieve their objectives and that they should select appropriate communication methods  When written guidance is not available, agencies may miss opportunities to ensure that contracting officers take the steps needed to meet requirements when applying a domestic non-availability exception  Knowing the country of origin of the products the federal government buys is necessary to implement the Buy American Act, but contracting officers do not always have access to accurate information on originating countries  The FAR and the DFARS provide various clauses which, when incorporated into contracts, require vendors to certify that the end products they provide to the government are domestic and, if necessary, declare the foreign countries from which they provide products  Vendors frequently certify this information through the System for Award Management (SAM), the government-wide system used to collect vendors’ annual representations and certifications  Contracting officers may rely on the information vendors provide about their product origins, but they are generally expected to take actions to verify incomplete or conflicting information when they have reason to believe that a vendor will be providing a non-compliant product  We found that SAM certifications and offers did not always include accurate information on end products from foreign countries  In 6 of the 38 contracts that we reviewed—from DHS, HHS, and VA—the vendors certified that they only provided domestic end products although the end products provided were foreign  In all of these cases, the contracting officers knew that the acquisitions included foreign end products  For example, we reviewed two DHS awards for spare aircraft parts from an Italian-based company, one of which was reported in FPDS-NG under the domestic non-availability exception to the Buy American Act, and the other which was incorrectly reported as being manufactured in the United States but has since been corrected  Contracting officials said they knew the parts were made in Italy based on extensive experience contracting with the company and, in part, because they had visited the production location  Contracting officials—including some at HHS and VA—said they use SAM as their primary source to determine whether the vendor is offering domestic end products  Others reported some awareness of the limitations of SAM certifications  At all four agencies, contracting officials emphasized that it is important to ask questions when end product origin information is not readily available—or if there is conflicting information—but agency guidance that we reviewed does not address this need or provide information on how to do so  Only the local training offered by DOD’s DLA addresses other sources of information, which officials said was helpful because it is specific to the industries with which they work  Instead, some officials described how they rely on their experience to know how to verify products’ origins but this can be problematic, particularly with newer staff  For example, in one contract we reviewed VA contracting officials acknowledged that a new contracting specialist at VA did not follow-up when the product origin certification was not provided and assumed all of the items procured were domestic  During the course of our review, the contracting specialist’s supervisor said that she contacted the vendor and learned that some of the items provided were in fact foreign end products  The foreign products were not considered to account for the preponderance of the contract so were not reported in FPDS-NG, but the contracting officer was acting with incomplete information at the time of award  Further, in 4 of the 38 contracts that we reviewed, it is not clear how contracting staff took steps to obtain product origin information in situations where it was not provided in SAM  In these cases—which include contracts for both domestic and foreign end products—the vendors had opted not to certify their product origins in SAM, but instead said that they would provide the information with their individual proposals  However, based on the information in the contract files, the proposals did not include this information  For example: Three of the contracts we reviewed from HHS—all reported as purchasing end items manufactured in the United States—did not certify product origin in SAM  The supervising contracting officer for two of the awards explained that his contracting staff regularly check the vendor’s written representations and certifications provided in the offer, because the SAM certifications are general and do not always apply to the specific equipment they buy  However, the three contract files we reviewed did not include manufacturing or origin information  The vendor for a DHS contract that was reported as manufactured in the United States did not certify this information in SAM  The contracting officer said that he checks SAM for product origin information, but in the documents we reviewed there is no evidence of the information in the contract file  Federal internal control standards state that agencies should communicate the necessary quality information needed to achieve the agency’s objectives, thereby enabling personnel to address risks  Providing guidance regarding the situations in which contracting officers should verify product origin information with vendors may help agencies better meet the requirements of the Buy American Act  Although purchases for foreign end products account for less than 5 percent of federal procurement spending in fiscal year 2017, it is important that these purchases be consistent with the domestic- purchasing restrictions in the Buy American Act  This requires that Buy American Act exceptions and trade agreement waivers be used only when applicable, and that agencies report accurate data on the extent to which they are used  However, data reporting errors by contracting staff and FPDS-NG limitations mean that data on the use of exceptions and waivers are not fully captured  The federal agencies all have responsibilities to ensure Buy American Act data are accurate and complete  The lack of good data can hinder congressional oversight of the extent to which foreign end products are procured as authorized by one of the exceptions or waivers of the Buy American Act  Agencies have taken varied approaches for providing information to contracting officers that navigate the complexities and nuances associated with applying the different Buy American Act exceptions or trade agreement waivers  DOD has added such detailed information through its revised training course and policy guidance  Adding these types of targeted information to address challenging areas would help contracting officers at other agencies implement the Buy American Act’s domestic preferences, as well as related exceptions and waivers  Further, to accurately determine how exceptions and waivers apply requires complete product origin information  Although the responsibility to certify the origins of products supplied to the federal government rests with the contractors, contracting officers would benefit from resources that help them identify information that may be inconsistent, to ensure that accurate information is available  We are making four recommendations, one each to the Office of Management and Budget, DHS, VA, and HHS  The Director of the Office of Management and Budget should instruct the Office of Federal Procurement Policy: To facilitate additional training to improve the understanding of the contracting workforce regarding the Buy American Act requirements; and To facilitate clarifying revisions to FPDS-NG, where needed, and provide training and guidance for recording Buy American Act information in FPDS-NG to improve the accuracy of the Buy American data  (Recommendation 1) The Secretary of Homeland Security should clarify existing guidance in the Homeland Security Acquisition Manual or update training to help contracting officials: Identify the factors that should be considered in order to determine the applicability of the Trade Agreements Act and waiver of the Buy American Act; Document determinations of the use of Buy American exception for domestic non-availability and ensure the required approvals are obtained, particularly when such determinations are evidenced through justifications for other than full and open competition; and Identify sources of information available for determining product origin and the steps they should take to verify information that is inconsistent  (Recommendation 2) The Secretary of Veterans Affairs should clarify existing guidance, or provide training or other instruction, to help contracting officials: Address the applicability of the Buy American Act requirements and provide instruction on how to implement the requirements, including in any training developed to implement the Veterans First policy; Identify the factors that should be considered in order to determine the applicability of the Trade Agreements Act and waiver of the Buy American Act; and Identify sources of information available for determining products’ origins and the steps they should take to verify information that is inconsistent  (Recommendation 3) The Secretary of Health and Human Services should provide guidance, training, or other instruction to help contracting officials: Identify the factors that should be considered in order to determine the applicability of the Trade Agreements Act and waiver of the Buy American Act; Document determinations of the use of Buy American exceptions for domestic non-availability and ensure the required approvals are obtained; and Identify sources of information available for determining products’ origins and the steps they should take to verify information that is inconsistent  (Recommendation 4) We provided a draft of this report to DOD, HHS, DHS, VA, and the Office of Management and Budget for review and comment  DOD reviewed the report, but did not offer comments  HHS, DHS, and VA provided written responses, which are reproduced in Appendices IV, V, and VI of this report, respectively  A senior official within the Office of Federal Procurement Policy (OFPP) at the Office of Management and Budget provided a response via email  In addition, HHS, DHS, and OFPP provided technical comments, which we incorporated into the report where appropriate  In their responses, HHS, DHS, VA agreed, and OFPP generally agreed, with our findings and recommendations  The written response from HHS and DHS included information on the steps each agency plans to take to address the recommendations  Specifically, HHS stated that the agency will evaluate ways to provide additional training and guidance to contracting officials  DHS stated that it will provide guidance on the applicability of the Buy American Act and the Trade Agreements Act in certain situations and the documentation and approvals required when awarding non-competed contracts that require an exception  Additionally, DHS plans to update training regarding actions contracting officers should take when there are discrepancies in product origin information  VA concurred with our three-part recommendation and described some of the actions the agency plans to take in response  However, VA’s comments do not fully address our recommendation  Specifically, we recommended that VA clarify guidance or provide training to identify factors that could help contracting officers determine the applicability of Trade Agreements Act waivers of the Buy American Act  The comments from VA, however, only restate the existing Buy American Act exceptions and make no mention of Trade Agreements Act waivers  Further, we recommended that VA identify sources of information regarding product origin and the steps to be taken to verify inconsistent product origin information  VA’s response only noted that contracting officers are responsible for conducting market research and ensuring that all product origin requirements are met  VA did not outline any additional steps the agency would take to help contracting officers navigate the complexities inherent in this area  Going forward, VA will need to develop a more robust and responsive approach in order to fully implement our recommendation  We are sending copies of this report to the appropriate congressional committees; the Secretaries of the Departments of Defense, Health and Human Services, Homeland Security, and Veterans Affairs; the Director of the Office of Management and Budget; and other interested parties  In addition, the report is available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact me at (202) 512-4841 or woodsw@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix VII  The objectives of this report are to assess the extent to which (1) the federal government procures foreign products through Buy American Act exceptions and waivers; and (2) selected agencies provide training and guidance to implement the Buy American Act requirements  To address both of these objectives, we reviewed relevant laws and policies, such as sections of the Federal Acquisition Regulation (FAR); the Buy American Act as amended; the Trade Agreements Act of 1979 as amended; federal acquisition regulation supplements from audited agencies such as the Department of Defense Federal Acquisition Regulation Supplement (DFARS); the Executive Order “Buy American, Hire American” of 2017; the World Trade Organization’s Agreement on Government Procurement; and memorandums, policy, guidance, and instructions related to the Buy American Act  To assess the federal government procurement of foreign products, including those procured through citing exceptions and waivers of the Buy American Act, we analyzed data from the Federal Procurement Data System-Next Generation (FPDS-NG) for fiscal year 2017, which was the most recent and complete data available at the time of our review  We analyzed procurement data in FPDS-NG across the federal government in fields relevant to the Buy American Act’s domestic preference requirements, including the product service code, country of product origin, and place of manufacture, in addition to fields such as the contract value and dollars obligated  We reviewed the place of manufacture field in particular as it contains information on how the Buy American Act applies to the contract, including whether the preponderance of the obligations is for manufactured end products and, if so, whether they are manufactured in or outside of the United States  When manufactured outside of the United States, this field also captures the reason the purchase was permissible, which we analyzed to assess the dollar obligations associated with the various Buy American exceptions or trade agreement waiver reported, as well as when products were used outside of the United States  We also analyzed data from FPDS-NG to identify the countries where foreign end products were reported to be manufactured and the associated dollars obligated in fiscal year 2017  In addition, we met with officials from the Office of Management and Budget, Office of Federal Procurement Policy to better understand ongoing reviews of the data in FPDS-NG that pertains to the Buy American Act  In our analysis of FPDS-NG data, we took steps to minimize issues that might affect data reliability  Specifically, we analyzed FPDS-NG data to identify potential errors and inconsistencies, such as non-eligible agencies reporting the use of exceptions for DOD qualifying countries, or reporting trade agreement waivers for contracts valued less than minimum thresholds for trade agreements  We made minor adjustments to minimize potential data reporting issues, including aggregating the exceptions reported, and where appropriate, limiting our analysis to one year of data, fiscal year 2017  Based on these steps, we determined that FPDS-NG data were sufficiently reliable to allow us to calculate the approximate extent of obligations for foreign end products and the use of the Buy American Act exceptions and the Trade Agreements Act waiver  However, we are unable to precisely determine the amount spent on foreign end products through the use of exceptions and waivers because of the reporting errors and data system limitations we identified in this report  Using FPDS-ND data, we identified four agencies—the Departments of Defense (DOD), Health and Human Services (HHS), Homeland Security (DHS), and Veterans Affairs (VA)—that had the highest fiscal year 2017 obligations in the product codes for manufactured products, which are potentially subject to the Buy American Act restrictions  In addition, to identify trends and determine if there were variations in reported obligations for foreign end products in the past, we reviewed FPDS-NG data on the Buy American exceptions and trade agreement waivers in fiscal years 2013 through 2017  To assess the extent to which selected agencies are providing training and guidance to implement the requirements of the Buy American Act, we reviewed training course materials and regulations, policies, and other guidance available at the four agencies in our review—DOD, HHS, DHS, and VA—to determine the extent to which they address the Buy American Act requirements  In addition, we reviewed training materials available to government employees through sources such as the Federal Acquisition Institute  We interviewed policy officials from the four agencies to understand how training and guidance had been implemented  We further reviewed relevant inspector general reports from the DOD Inspector General issued between 2015 and 2018, which made several recommendations to improve compliance with the Buy American Act, among other requirements  Within the four agencies, we selected contracting offices that reported obligating fiscal year 2017 dollars for awards with foreign end products and awards with US-manufactured end products  We specifically focused on offices that reported a sufficient amount of foreign end product obligations and a sufficient number of contract awards to allow us to select multiple contracts  We also considered offices with a variety of Buy American exceptions and waiver types reported, in order to select a mix of contracts  The contracting offices selected were as follows: DOD: Defense Logistics Agency, Land and Maritime HHS: National Institutes of Health and the HHS Office of the Assistant Secretary for Preparedness and Response DHS: United States Coast Guard VA: Veterans Health Administration From these offices, we selected a non-generalizable sample of 38 contracts and delivery orders awarded in fiscal year 2017  At each agency, we selected awards to include a mix of end items produced by domestic and foreign manufacturers and, when products were reported as foreign manufactured, a mix of the various exceptions and waivers cited  We also include awards across a range of value for dollars obligated above the micro purchase threshold—ranging from approximately $5,000 to more than $100 million—to ensure we reviewed awards both above and below the various thresholds at which the Trade Agreements Act waiver might apply  Additionally, our sample included awards for similar types of end products across agencies, including aircraft parts at DOD and DHS and medical supplies at HHS and VA, to compare practices in different agencies  We originally selected 40 awards for review—10 from each agency—but removed two awards from our sample  One was an HHS award that we determined was awarded using Other Transaction Authority and was not subject to the Buy American Act  The second excluded contract was from DHS, which was modified after award to reflect that it was an information technology service rather than a product  As a service, it would not be subject to the Buy American Act  We reviewed the contract files for each of the 38 awards in our sample, including documentation such as the contract and task order award, solicitations, vendors’ offers or response to proposals, determination and finding memos, and FPDS-NG output documents  In addition, we reviewed the certifications each vendor provided in the System for Award Management (SAM) at the time of contract award  We interviewed contracting officials responsible for each of the 38 contracts and task orders to understand how they addressed the Buy American Act requirements, including how they determined exception or waiver applicability and product origin  We also reviewed any agency-specific or local training and guidance, tools, or job aids available to assist contracting officers in implementing the Act’s requirements We conducted this performance audit from October 2017 to December 2018 in accordance with generally accepted government auditing standards  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on audit objectives  The United States maintains trade relationships with other countries whose specific negotiated terms results in different levels and types of applicability for waivers and exceptions to the Buy American Act  Figure 4 depicts the range of relationships that the United States maintains with other nations that allow for less restrictive purchasing of foreign end products by the federal government  The federal government purchases foreign end products from various countries  Figure 5 highlights the different amounts of contract obligations for foreign end products from these countries for fiscal year 2017  The highest category, over $500 million, includes 4 countries that account for almost 40 percent of all federal procurement of foreign end products  Countries where the federal government obligated less than $5 million for the procurement of foreign end products are not included  In addition to the contact named above, Candice Wright, Assistant Director; and Jennifer Dougherty, Analyst-in-Charge, managed this review  Skip McClinton; Erin Stockdale; Adam Cowles; Stephanie Gustafson; Julia Kennon; Anne Louise Taylor; and Robin Wilson made key contributions to this report 

ground_truth: The Community Reinvestment Act (CRA; P.L. 95-128, 12 U.S.C. §§2901-2908) addresses how banking institutions meet the credit needs of the areas they serve, particularly in low- and moderate-income (LMI) neighborhoods. The federal banking regulatory agencies—the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC)—currently implement the CRA. The regulators issue CRA credits, or points, where banks engage in qualifying activities—such as mortgage, consumer, and business lending; community investments; and low-cost services that would benefit LMI areas and entities—that occur with a designated assessment area. These credits are then used to issue each bank a performance rating. The CRA requires these ratings be taken into account when banks apply for charters, branches, mergers, and acquisitions among other things. The CRA, which was enacted in 1977, was subsequently revised in 1989 to require public disclosure of bank CRA ratings to establish a four-tiered system of descriptive performance levels (i.e., Outstanding, Satisfactory, Needs to Improve, or Substantial Noncompliance). In 1995, the CRA examination was customized to account for differences in bank sizes and business models. In 2005, the bank size definitions were revised and indexed to the Consumer Price Index. The 2005 amendments also expanded opportunities for banks to earn CRA credit for public welfare investments (such as providing housing, services, or jobs that primarily benefit LMI individuals). Qualifying activities under the CRA have evolved to include consumer and business lending, community investments, and low-cost services that would benefit LMI areas and entities. Congressional interest in the CRA stems from various perceptions of its effectiveness. Some have argued that, by encouraging lending in LMI neighborhoods, the CRA may also encourage the issuance of higher-risk loans to borrowers likely to have repayment problems (under the presumption that low-income is correlated with lower creditworthiness), which can translate into losses for lenders. Others are concerned that the CRA is not generating sufficient incentives to increase credit availability to qualified LMI borrowers, which may impede economic recovery for some, particularly following the 2007-2009 recession. This report informs the congressional debate concerning the CRA's effectiveness in incentivizing bank lending and investment activity to LMI borrowers. After a discussion of the CRA's origins, it presents the CRA's examination process and bank activities that are eligible for consideration of CRA credits. Next, it discusses the difficulty of determining the CRA's influence on bank behavior. For example, the CRA does not specify the quality and quantity of CRA-qualifying activities, meaning that compliance with the CRA does not require adherence to lending quotas or benchmarks. In the absence of benchmarks, determining the extent to which CRA incentives have influenced LMI credit availability relative to other factors is not straightforward. Banks also face a variety of financial incentives—for example, capital requirements, the prevailing interest rate environment, changes in tax laws, and technological innovations—that influence how much (or how little) they lend to LMI borrowers. Because multiple financial profit incentives and CRA incentives tend to exist simultaneously, it is difficult to determine the extent to which CRA incentives have influenced LMI credit availability relative to other factors.

prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 2.

Report 1: Congress passed the Community Reinvestment Act of 1977 (CRA; P L  95-128 , 12 U S C  §§2901-2908) in response to concerns that federally insured banking institutions were not making sufficient credit available in the local areas in which they were chartered and acquiring deposits  According to some in Con gress, the granting of a public bank charter should translate into a continuing obligation for that bank to serve the credit needs of the public where it was chartered  Consequently, the CRA was enacted to "re-affirm the obligation of federally chartered or insured financial institutions to serve the convenience and needs of their service areas" and "to help meet the credit needs of the localities in which they are chartered, consistent with the prudent operation of the institution " The CRA requires federal banking regulators to conduct examinations to assess whether a bank is meeting local credit needs  The regulators issue CRA credits, or points, where banks engage in qualifying activities—such as mortgage, consumer, and business lending; community investments; and low-cost services that would benefit low- and moderate-income (LMI) areas and entities—that occur within assessment areas (where institutions have local deposit-taking operations)  These credits are then used to issue each bank a performance rating from a four-tiered system of descriptive performance levels (Outstanding, Satisfactory, Needs to Improve, or Substantial Noncompliance)  The CRA requires federal banking regulators to take those ratings into account when institutions apply for charters, branches, mergers, and acquisitions, or seek to take other actions that require regulatory approval  Congress became concerned with the geographical mismatch of deposit-taking and lending activities for a variety of reasons  Deposits serve as a primary source of borrowed funds that banks may use to facilitate their lending  Hence, there was concern that banks were using deposits collected from local neighborhoods to fund out-of-state as well as various international lending activities at the expense of addressing the local area's housing, agricultural, and small business credit needs  Another motivation for congressional action was to discourage redlining practices  One type of redlining can be defined as the refusal of a bank to make credit available to all of the neighborhoods in its immediate locality, including LMI neighborhoods where the bank may have collected deposits  A second type of redlining is the practice of denying a creditworthy applicant a loan for housing located in a certain neighborhood even though the applicant may qualify for a similar loan in another neighborhood  This type of redlining pertains to circumstances in which a bank refuses to serve all of the residents in an area, perhaps due to discrimination  The CRA applies to banking institutions with deposits insured by the Federal Deposit Insurance Corporation (FDIC), such as national banks, savings associations, and state-chartered commercial and savings banks  The CRA does not apply to credit unions, insurance companies, securities companies, and other nonbank institutions because of the differences in their financial business models  The Office of the Comptroller of the Currency (OCC), the Federal Reserve System, and the FDIC administer the CRA, which is implemented via Regulation BB  The CRA requires federal banking regulatory agencies to evaluate the extent to which regulated institutions are effectively meeting the credit needs within their designated assessment areas, including LMI neighborhoods, in a manner consistent with the federal prudential regulations for safety and soundness   The CRA's impact on lending activity has been publicly debated  Some observers are concerned that the CRA may induce banks to forgo more profitable lending opportunities in nontargeted neighborhoods by encouraging a disproportionate amount of lending in LMI communities  Furthermore, some argue that the CRA compels banks to make loans to higher-risk borrowers that are more likely to have repayment problems, which may subsequently compromise the financial stability of the banking system  For example, some researchers have attributed the increase in risky lending prior to the 2007-2009 recession to banks attempting to comply with CRA objectives  Others are concerned that enforcement of CRA objectives has not been stringent enough to compel banks to increase financial services in LMI areas  Almost all banks receive Satisfactory or better performance ratings (discussed in more detail below) on their CRA examinations, which some may consider indicative of weak enforcement  This report informs the congressional debate concerning the CRA's effectiveness in incentivizing bank lending and investment activity to LMI customers  It begins with a description of bank CRA examinations, including how a bank delineates its assessment area; the activities that may qualify for points under the three tests (i e , lending, investment, and service) that collectively make up the CRA examination; and how the composite CRA rating is calculated  Next, the report analyzes the difficulty in attributing bank lending decisions to CRA incentives  For example, the CRA does not specify the quality and quantity of CRA-qualifying activities, meaning that CRA compliance does not require adherence to lending quotas or benchmarks  Without explicit benchmarks, linking the composition of banks' loan portfolios to either too strong or too weak CRA enforcement is difficult  Banks are also unlikely to get CRA credit for all of the loans they make to LMI customers  Specifically, higher-risk loans that banking regulators explicitly discourage are unlikely to be eligible for CRA consideration  Furthermore, greater mobility of lending and deposit-taking activity across regional boundaries due to various financial market innovations has complicated the ability to geographically link various financial activities  Hence, many banks' financial activities occurring in a designated assessment area that are eligible for CRA consideration may simply be profitable, meaning they may have occurred without the CRA incentive  Finally, this report summarizes recent policy discussions regarding modernization of the CRA  As noted above, the federal banking regulators conduct regular examinations of banks to assess whether they meet local credit needs in designated assessment areas  The regulators issue CRA credits, or points, when banks engage in qualifying activities—such as mortgage, consumer, and business lending; community investments; and low-cost services that would benefit LMI areas and entities—that occur within assessment areas  Regulation BB provides the criteria that a bank's board of directors must use to determine the assessment area(s) in which its primary regulator will conduct its CRA examination  The assessment area typically has a geographical definition—the location of a bank's main office, branches, and deposit-taking automatic teller machines, as well as surrounding areas where the bank originates and purchases a substantial portion of loans  Assessment areas must generally include at least one metropolitan statistical area (MSA) or at least one contiguous political subdivision, such as a county, city, or town  Regulation BB also requires that assessment areas may not reflect illegal discrimination, arbitrarily exclude LMI geographies, and extend substantially beyond an MSA boundary or a state boundary (unless the assessment area is located in a multistate MSA)  Banking regulators regularly review a bank's assessment area delineations for compliance with Regulation BB requirements as part of the CRA examination  Instead of a more conventionally delineated assessment area, certain banking firms may obtain permission to devise a strategic plan for compliance with Regulation BB requirements  For example, wholesale and limited purpose banks are specialized banks with nontraditional business models  Wholesale banks provide services to larger clients, such as large corporations and other financial institutions; they generally do not provide financial services to retail clients, such as individuals and small businesses  Limited purpose banks offer a narrow product line (e g , concentration in credit card lending) rather than provide a wider range of financial products and services  These banking firms typically apply to their primary regulators to request designation as a wholesale or limited purpose bank and, for CRA examination purposes, are evaluated under strategic plan options that have been tailored for their distinctive capacities, business strategies, and expertise  The option to develop a strategic plan of pre-defined CRA performance goals is available to any bank subject to the CRA  The public is allowed time (e g , 30 days) to provide input on the draft of a bank's strategic plan, after which the bank submits the plan to its primary regulator for approval (within 60 days after the application is received)  Regulation BB does not impose lending quotas or benchmarks  Instead, Regulation BB provides banks with a wide variety of options to serve the needs of their assessment areas  Qualifying CRA activities include mortgage, consumer, and business lending; community investments; and low-cost services that would benefit LMI areas and entities  For example, banks may receive CRA credits for such activities as investing in special purpose community development entities (CDEs), which facilitate capital investments in LMI communities (discussed below); providing support (e g , consulting, detailing an employee, processing transactions for free or at a discounted rate, and providing office facilities) to minority- and women-owned financial institutions and low-income credit unions (MWLIs), thereby enhancing their ability to serve LMI customers; serving as a joint lender for a loan originated by MWLIs; facilitating financial literacy education to LMI communities, including any support of efforts of MWLIs and CDEs to provide financial literacy education; opening or maintaining bank branches and other transactions facilities in LMI communities and designated disaster areas; providing low-cost education loans to low-income borrowers; and offering international remittance services in LMI communities  The examples listed above are not comprehensive, but they illustrate several activities banks may engage in to obtain consideration for CRA credits  The banking regulators will consider awarding CRA credits or points to a bank if its qualifying activities occur within an assigned assessment area  The points are then used to compute a bank's overall composite CRA rating  Regulators apply up to three tests, which are known as the lending , investment , and service tests, respectively, to determine whether a bank is meeting local credit need in designated assessment areas  The lending test evaluates the number, amount, and distribution across income and geographic classifications of a bank's mortgage, small business, small farm, and consumer loans  The investment test grades a bank's community development investments in the assessment area  The service test examines a bank's retail service delivery, such as the availability of branches and low-cost checking in the assessment area  The point system for bank performance under the lending, investment, and service tests is illustrated in Table 1   The lending test is generally regarded as the most important of the three tests, awarding banks the most points (CRA credits) in all rating categories  As shown in Table 1 , banks receive fewer credits for making CRA-qualified investments than for providing direct loans to individuals under the lending test  In some instances, an activity may qualify for more than one of the performance tests  Federal banking regulators evaluate financial institutions based upon their capacity, constraints, and business strategies; demographic and economic data; lending, investment, and service opportunities; and benchmark against competitors and peers  Because these factors vary across banks, the CRA examination was customized in 1995 to account for differences in bank sizes and business models  In 2005, the bank size definitions were revised to include small , intermediate small , and large banks  The bank regulators also indexed the asset size thresholds—which are adjusted annually—to inflation using the Consumer Price Index  As of January 1, 2019, a small bank is defined as having less than $1 284 billion in assets as of December 31 of either of the prior two calendar years; an intermediate small bank has at least $321 million as of December 31 of both of the prior two calendar years but less than $1 284 billion as of December 31 of either of the prior two calendar years; and a large bank has $1 284 billion or more in assets  Small banks are typically evaluated under the lending test  Regulators review (1) loan-to-deposit ratios; (2) percentage of loans in an assessment area; (3) lending to borrowers of different incomes and in different amounts; (4) geographical distribution of loans; and (5) actions on complaints about performance  Intermediate small banks are subject to both the lending and investment tests  Large banks are subject to all three tests  As mentioned previously, direct lending to borrowers, taking place in what is referred to as primary lending markets , qualify for CRA credit under the lending test  Investments taking place in secondary lending markets , in which investors purchase loans that have already been originated (such that little or no direct interaction occurs between investors and borrowers), qualify for CRA credit under the investment test  Secondary market investors may assume the default risk associated with a loan if the entire loan is purchased  Alternatively, if a set of loans are pooled together, then numerous secondary investors may purchase financial securities in which the returns are generated by the principal and interest repayments from the underlying loan pool, thereby sharing the lending risk  Direct ownership of loans or purchases of smaller portions (debt securities) of a pool of loans, therefore, are simply alternative methods to facilitate lending  As shown in Table 1 above, a bank may receive CRA consideration under the lending test for making a loan to LMI individuals that is guaranteed by a federal agency, such as the Federal Home Administration (FHA)  If, however, a bank purchases securities backed by pools of FHA-guaranteed mortgage originations, this activity receives credit under the investment test  Thus, the bank receives less CRA credit when the financial risk is shared with other lenders than it would for making a direct loan (and holding all of the lending risk) even though it would still facilitate lending to LMI borrowers  In 2005, the activities that qualify for CRA credit were expanded to encourage banks to make public welfare investments  More specifically, qualifying activities include a public welfare investment (PWI) that promotes the public welfare by providing housing, services, or jobs that primarily benefit LMI individuals; and a community development investment (CDI), economic development investment , or project that meets the PWI requirements  Examples of CDI activities include promoting affordable housing, financing small businesses and farms, and conducting activities that revitalize LMI areas  Banks may engage in certain activities that typically would not be permitted under other banking laws as long as these activities promote the public welfare and do not expose institutions to unlimited liability  For example, banks generally are not allowed to make direct purchases of the preferred or common equity shares of other banking firms; however, banks may purchase equity shares of institutions with a primary mission of community development (discussed in more detail in the Appendix ) up to an allowable CDI limit  The Financial Services Regulatory Relief Act of 2006 ( P L  109-351 ) increased the amount that national banking associations and state banks (that are members of the Federal Reserve System) may invest in a single institution from 10% to 15% of a bank's unimpaired capital and unimpaired surplus  CDIs that benefit a bank's designated assessment area may qualify for CRA credit  For CRA purposes, the definition of a CDI was expanded in 2005 to include "underserved and distressed" rural areas and "designated disaster areas" to aid the regional rebuilding from severe hurricanes, flooding, earthquakes, tornados, and other disasters  The disaster area provision allows banks anywhere in America to receive consideration for CRA credit if they facilitate making credit available to a distressed location or geographic area outside of their own assessment areas  Thus, the 2005 revisions to the PWI and CDI definitions made more banking activities eligible for CRA credits  The banking regulators would consider awarding full CRA credits under the lending test to banks that make CDI loans directly in their assessment areas  Under the investment test, however, the banking regulators may choose to prorate the credits awarded to indirect investments  The Appendix provides examples of CDI activities that would qualify for CRA consideration under the investment test  Any awarded CRA credits could be prorated given that investing banks typically would have less control over when and where the funds are loaned  The CRA was revised in 1989 to require descriptive CRA composite performance ratings that must be disclosed to the public  The composite ratings illustrated in Table 2 are tabulated using the points assigned from the individual tests (shown in Table 1 above)  Grades of Outstanding and Satisfactory are acceptable; Satisfactory ratings in both community development and retail lending are necessary for a composite Satisfactory   Large banks must receive a sufficient amount of points from the investment and service tests to receive a composite Outstanding rating  Regulators include CRA ratings as a factor when lenders request permission to engage in certain activities, such as moving offices or buying another institution  Denying requests, particularly applications for mergers and acquisitions, is a mechanism that may be applied against banking organizations with ratings below Satisfactory   In 2005, the banking regulators also ruled that any evidence of discrimination or credit practices that violate an applicable law, rule, or regulation by any affiliate would adversely affect an agency's evaluation of a bank's CRA performance  Applicants with poor ratings may resubmit their applications after making the necessary improvements  Covered institutions must post a CRA notice in their main offices and make publicly available a record of their composite CRA performance  Given that the CRA is not a federal assistance program and that several regulators implement it separately, no single federal agency is responsible for evaluating its overall effectiveness  In 2000, Congress directed the Federal Reserve to study the CRA's effectiveness  The Federal Reserve's study reported that lending to LMI families had increased since the CRA's enactment but found it was not possible to directly attribute all of that increase to the CRA  For example, advancements in underwriting over the past several decades have enabled lenders to better predict and price borrower default risk, thus making credit available to borrowers that might have been rejected prior to such technological advances  This section examines the difficulty linking bank lending outcomes directly to the CRA, considering questions raised about the subjectivity of the CRA examination itself, whether prudential regulators use CRA to encourage banks to engage in high-risk lending, and whether the increased lending to LMI borrowers since CRA's enactment can be attributed to other profit-incentives that exist apart from the CRA  Questions have been raised as to whether the CRA examination itself is effective at measuring a bank's ability to meet local credit needs  For example, the CRA examinations have an element of subjectivity in terms of measuring both the quality and quantity of CRA compliance  In terms of quality, regulators determine the "innovativeness or flexibility" of qualified loan products; the "innovativeness or complexity" of qualified investments; or the "innovativeness" of ways banks service groups of customers previously not served  The number of points some CRA-qualifying investments receive relative to others is up to the regulator's judgment given that no formal definition of innovativeness has been established (although regulators provide a variety of examples as guidelines for banks to follow)  In terms of quantity, there is no official quota indicating when banks have done enough CRA-qualified activities to receive a particular rating  Without specific definitions of the criteria or quotas, the CRA examination may be considered subjective  Almost all banks pass their CRA examinations  Figure 1 shows the average annual composite scores of banks that received CRA examinations as well as the annual number of bank examinations by size  In general, most banks receive a composite Satisfactory or better rating regardless of the number of banks examined in a year  For all years, approximately 97% or more of banks examined received ratings of Satisfactory or Outstanding   Whether the consistently high ratings reflect the CRA's influence on bank behavior or whether the CRA examination procedures need improvement is difficult to discern  Another issue raised is whether the CRA has resulted in banks making more high-risk loans given that it encourages banks to lend to LMI individuals (perhaps under the presumption that LMI individuals are less creditworthy relative to higher-income individuals)  Since passage of the CRA, however, innovations have allowed lenders to better evaluate the creditworthiness of borrowers (e g , credit scoring, the adoption of automated underwriting), thus enhancing credit availability to both high credit quality and credit-impaired individuals  Credit-impaired borrowers can be charged higher interest rates and fees than those with better credit histories to compensate lenders for taking on greater amounts of credit or default risk  Nontraditional loan products (e g , interest-only, initially low interest rate) allow borrowers to obtain lower regular payments during the early stages of the loan, perhaps under the expectation that their financial circumstances may improve in the later stages as the loan payments adjust to reflect the true costs  The ability to charge higher prices or offer such nontraditional loan products may result in greater higher-risk lending  Because these technological developments in the financial industry occurred after enactment of the CRA, banks' willingness to enter into higher-risk lending markets arguably cannot be attributed solely to the CRA  Regulators arguably are more reluctant to award banks CRA credit for originating higher-risk loans given the scrutiny necessary to determine whether higher loan prices reflect elevated default risk levels or discriminatory or predatory lending practices  Primary bank regulators are concerned with both prudential regulation and consumer protection  It is difficult for regulators to monitor how well borrowers understood the disclosures regarding loan costs and features, or whether any discriminatory or predatory behavior occurred at the time of loan origination  Regulators use fair lending examinations to determine whether loan pricing practices have been applied fairly and consistently across applicants or if some steering to higher-priced loan products occurred  Nevertheless, although it is not impossible for banks to receive CRA credits for making some higher-priced loans, regulators are mindful of practices such as improper consumer disclosure, steering, or discrimination that inflate loan prices  Prudential regulators are also unlikely to encourage lending practices that might result in large concentrations of high-risk loans on bank balance sheets  Hence, certain lending activities—subprime mortgages and payday lending—have been explicitly discouraged by bank regulators, as discussed in more detail below  Although no consensus definition has emerged for subprime lending, this practice may generally be described as lending to borrowers with weak credit at higher costs relative to borrowers of higher credit quality  In September 2006, the banking regulatory agencies issued guidance on subprime lending that was restrictive in tone  The guidance warned banks of the risk posed by nontraditional mortgage loans, including interest-only and payment-option adjustable-rate mortgages  The agencies expressed concern about these loans because of the lack of principal amortization and the potential for negative amortization  Consequently, a study of 2006 Home Mortgage Disclosure Act data reported that banks subject to the CRA and their affiliates originated or purchased only 6% of the reported high-cost loans made to lower-income borrowers within their CRA assessment areas  Banks, therefore, received little or no CRA credit for subprime mortgage lending  Instead, federal regulators offered CRA consideration to banks that helped mitigate the effects of distressed subprime mortgages  On April 17, 2007, federal regulators provided examples of various arrangements that financial firms could provide to LMI borrowers to help them transition into affordable mortgages and avoid foreclosure  The various workout arrangements were eligible for favorable CRA consideration  Banks are unlikely to receive CRA consideration for originating subprime mortgages going forward  The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act; P L  111-203 ) requires lenders to consider consumers' ability to repay before extending them mortgage credit, and one way for lenders to comply is to originate qualified mortgages (QMs) that satisfy various underwriting and product-feature requirements  For example, QMs may not have any negative amortization features, interest-only payments, or points and fees that exceed specified caps of the total loan amount; in most cases, borrowers' debt-to-income ratios shall not exceed 43%  QM originations will give lenders legal protections if the required income verification and other proper underwriting procedures were followed  Given the legal protections afforded to QMs, some banks might show greater reluctance toward making non-QM loans  With this in mind, the federal banking regulators announced that banks choosing to make only or predominately QM loans should not expect to see an adverse effect on their CRA evaluations; however, the regulators did not indicate that CRA consideration would be given for non-QMs  Arguably, the federal banking regulators appear less inclined to use the CRA to encourage lending that could be subject to greater legal risks  Banks have demonstrated interest in providing financial services such as small dollar cash advances, which are similar to payday loans, in the form of subprime credit cards, overdraft protection services, and direct deposit advances  However, banks are discouraged from engaging in payday and similar forms of lending  Legislation, such as the Credit Card Accountability Responsibility and Disclosure Act of 2009 ( P L  111-24 ), placed restrictions on subprime credit card lending  In addition, federal banking regulators expressed concern when banks began offering deposit advance products due to the similarities to payday loans  Specifically, on April 25, 2013, the OCC, FDIC, and Federal Reserve expressed concerns that the high costs and repeated extensions of credit could add to borrower default risks and issued final supervisory guidance regarding the delivery of these products  Many banks subsequently discontinued offering deposit advances  In general, these legislative and regulatory efforts explicitly discourage banks from offering high-cost consumer financial products and thus such products are unlikely to receive CRA consideration  When various financial products are deemed unsound by bank regulators and not offered by banks, a possible consequence may be that some customers migrate to nonbank institutions willing to provide these higher-cost products  Accordingly, the effectiveness of the CRA diminishes if more individuals choose to seek financial products from nonbank institutions  In general, it can be difficult to determine the extent to which banks' financial decisions are motivated by CRA incentives, profit incentives, or both  Compliance with CRA does not require banks to make unprofitable, high-risk loans that would threaten the financial health of the bank  Instead, CRA loans have profit potential; and bank regulators require all loans, including CRA loans, to be prudently underwritten  As evidenced below, it may be difficult to determine whether banks have made particular financial decisions in response to profit or CRA incentives in cases where those incentives exist simultaneously  For example, banks increased their holdings of municipal bonds in 2009  Although banks may receive CRA consideration under the investment test for purchasing state and local municipal bonds that fund public and community development projects in their designated assessment areas, banks may choose this investment for reasons unrelated to CRA  During recessions, for example, banks may reduce direct (or primary market) lending activities and increase their holdings of securities in the wake of declining demand for and supply of direct loan originations that occur during economic slowdowns and early recovery periods  In addition, a provision of the American Recovery and Reinvestment Act of 2009 ( P L  111-5 ) provided banks with a favorable tax incentive to invest in municipal bonds in the wake of the 2007-2009 recession  Hence, determining whether banks increased their municipal holdings because of a turn to securities markets for higher yields following a recession, a favorable tax incentive, or the CRA incentive is challenging  Similarly, banks increased their investments in Small Business Investment Corporations (SBICs, defined in the Appendix ) in 2010  Investments in SBICs allow banks to provide subordinate financing (rather than senior debt) to businesses  Senior lenders have first claims to the business's assets in case of failure; however, subordinate financiers provide funds in the form of mezzanine capital or equity, requiring a higher return because they are repaid after senior lenders  Banks generally are not allowed to act as subordinate financiers because they are not allowed to acquire ownership interests in private equity funds, unless such investments promote public welfare  Hence, attributing community development financing activities, such as SBIC investments, to CRA incentives may arguably be easier (relative to other financing activities) because the ability to engage in subordinate financing activities typically represents a CRA exemption from ordinary permissible banking activities  Following the 2007-2009 recession, however, U S  interest rates dropped to historically low levels for an abnormally long period of time  Because low-yielding interest rate environments squeeze profits, banks were likely to search for higher-yielding and larger-sized lending opportunities, such as investments in SBICs  Hence, it remains difficult to determine whether a particular bank's decision to increase SBIC financing activities was driven by normal profit or CRA-related incentives  Between June 2016 and June 2017, more than 1700 U S  bank branches were closed  Many branch closings occurred primarily in rural and low-income tract areas, raising concerns that banks would be able to circumvent their CRA obligation to lend and be evaluated in these areas  A traditional bank business model, however, relies primarily on having access to core deposits , a stable source of funds used to subsequently originate loans  Banks value geographic locations with greater potential to attract high core deposit volumes, which is also consistent with the CRA's requirement that assessment areas include at least one MSA or contiguous political subdivision (as previously discussed)  Furthermore, using FDIC and U S  Census Bureau data, the Federal Reserve noted that the number of branches per capita in 2017 was higher than two decades ago  Hence, determining whether branch closures reflect a bank's intentions to circumvent CRA compliance or to facilitate its ability to attract core deposits is challenging  On April 3, 2018, the U S  Department of Treasury (Treasury) released recommendations to modernize CRA in a memorandum to the federal banking regulators (OCC, FCIC, and the Fed)  Treasury highlighted four of its recommendations, summarized below  When the CRA was enacted in 1977, banks received deposits and made loans primarily through geographical branches  Assessment areas defined geographically arguably may not fully reflect the community served by a bank because of technology developments, such as the internet and mobile phone banking, prompting Treasury to call for revisiting the approach for determining banks' assessment areas  In 2016, the banking regulators issued Interagency Questions and Answers (Q&As) to provide banks guidance pertaining to CRA-eligible activities; however, Treasury noted that each regulator provides its examiners with additional guidance  Also, the Interagency Q&As illustrate past CRA-qualifying activities, but Treasury noted that no formal process currently exists to help determine whether potential (complex, innovative, or innovative) activities would qualify for CRA credit  Treasury recommends establishing clearer standards for CRA-qualifying activities and flexibility (expanding the types of loans, investments, and services that qualify for CRA credit), which may encourage banks to venture beyond activities that typically receive CRA credit  Treasury reports that each bank regulator follows a different examination schedule; the examinations are lengthy; and delays associated with the release of performance evaluations may limit the time banks can react to recommendations before their next CRA examination  Treasury recommends increasing the timeliness of the CRA examination process  Treasury recommends incorporating performance incentives that might result in more efficient lending activities  For example, CRA-qualifying loans may receive credit in the year of origination, but equity investments may receive credit each year that the investment is held  Treasury recommends consistent treatment of loans and investments, which may encourage banks to make more long-term loans (rather than sequences of short-term loans for the sake of being awarded CRA credits at each CRA examination)  On August, 28, 2018, the OCC released an Advance Notice of Proposed Rulemaking (ANPR) to seek comments on ways to modernize the CRA framework  The ANPR solicited comments on the issues raised by Treasury among other things  The OCC's ANPR does not propose specific changes, but its content and the questions posed suggest that the OCC is exploring the possibility of adopting a quantitative metric-based approach to CRA performance evaluation, changing how assessment areas are defined, expanding CRA-qualifying activities, and reducing the complexity, ambiguity, and burden of the regulations on the bank industry  When the comment period closed on November 19, 2018, the OCC had received 1584 comments  The Federal Reserve and the FDIC did not join the OCC in releasing the ANPR  The Federal Reserve System, however, did host research symposiums around the country to gather comments pertaining to CRA reform  As reported by the Federal Reserve, some banking industry comments suggested, among other things, the need for consistency of the CRA examinations to facilitate CRA compliance  Yet some tailoring may still be necessary with respect to determining assessment areas that better reflect each bank's business models, particularly for models that use technology to deliver products and services  The regulators also heard from community and consumer groups  While expressing the need to retain focus on the historical context of the CRA, these groups highlighted the need to address issues pertaining to banking deserts in underserved communities  Community development investments (CDIs) that meet public welfare investment (PWI) requirements are those that promote the public welfare, primarily resulting in economic benefits for low- and moderate-income (LMI) individuals  This appendix provides examples of CDI activities that would qualify for consideration under the CRA investment test  In many cases, covered banks are more likely to take advantage of these optional vehicles to obtain CRA credits if they perceive the underlying investment opportunities to have profit potential  Loan Participations Banks and credit unions often use participation (syndicated) loans to jointly provide credit  When a financial firm (e g , bank, credit union) originates a loan for a customer, it may decide to structure loan participation arrangements with other institutions  The loan originator often retains a larger portion of the loan and sells smaller portions to other financial institutions willing to participate  Suppose a financial firm originates a business or mortgage loan in a LMI neighborhood  A bank may receive CRA investment credit consideration by purchasing a participation, thus becoming a joint lender to the LMI borrower  An advantage of loan participations is that the default risk is divided and shared among the participating banks (as opposed to one financial firm retaining all of the risk)  CRA consideration is possible if the activity occurs within the designated assessment area  For all participating banks to receive credit, some overlap in their designated assessment areas must exist  An exception is made for participations made to benefit designated disaster areas, in which all participating banks would receive CRA consideration regardless of location  State and Local Government Bonds State and local governments issue municipal bonds, and the proceeds are used to fund public projects, community development activities, and other qualifying activities  The interest that nonbank municipal bondholders receive is exempt from federal income taxes to encourage investment in hospitals, schools, infrastructure, and community development projects that require state and local funding  Legislative actions during the 1980s eliminated the tax-exempt status of interest earned from holdings of municipal bonds for banks  Although banks no longer have a tax incentive to purchase municipal bonds, they still consider the profitability of holding these loans, as they do with all lending opportunities  Furthermore, banks receive CRA investment consideration when purchasing state and local municipal bonds that fund public and community development projects in their designated assessment areas  CRA-Targeted Secondary Market Instruments Secondary market financial products have been developed to facilitate the ability of banks to participate in lending activities eligible for CRA consideration, such as purchasing mortgage-backed securities (MBSs) or shares of real estate investment trusts (REITs)  A MBS is a pool of mortgage loans secured by residential properties; a multifamily MBS is a pool of mortgage loans secured by multifamily properties, consisting of structures designed for five or more residential units, such as apartment buildings, hospitals, nursing homes, and manufactured homes  CRA-MBSs are MBSs consisting of loans that originated in specific geographic assessment areas, thereby allowing bank purchases into these pools to be eligible for CRA consideration under the investment test  Similarly, REITs may also pool mortgages, mortgage MBSs, and real estate investments (e g , real property, apartments, office buildings, shopping malls, hotels)  Investors purchase shares in REIT pools and defer the taxes  Banks may only invest in mortgage REITs and MBS REITs  Similar to the CRA-MBSs, the REITs must consist of mortgages and MBSs that would be eligible for CRA consideration  The Community Development Trust REIT is an example of a REIT that serves as a CRA-qualified investment for banks  Community Development Financial Institutions and Equity Equivalent Investments The Community Development Financial Institutions (CDFI) Fund was created by the Riegle Community Development Regulatory Improvement Act of 1994 (the Riegle Act; P L  103-325 )  The CDFI Fund was established to promote economic development for distressed urban and rural communities  The CDFI Fund, currently located within the U S  Department of the Treasury, is authorized to certify banks, credit unions, nonprofit loan funds, and (for-profit and nonprofit) venture capital funds as designated CDFIs  In other words, a bank may satisfy the requirements to become a CDFI, but not all CDFIs are banks  The primary focus of institutions with CDFI certification is to serve the financial needs of economically distressed people and places  The designation also makes these institutions eligible to receive financial awards and other assistance from the CDFI Fund  In contrast to non-CDFI banks, some CDFI banks have greater difficulty borrowing funds and then transforming them into loans for riskier, economically distressed consumers  The lack of loan level data for most CDFI banks causes creditors to hesitate in making low-cost, short-term loans to these institutions  Specifically, the lack of information on loan defaults and prepayment rates on CDFI banking assets is likely to result in limited ability to sell these loan originations to secondary loan markets  Consequently, the retention of higher-risk loans, combined with limited access to low-cost, short-term funding, makes CDFI banks more vulnerable to liquidity shortages  Hence, CDFIs rely primarily on funding their loans (assets) with net assets , which are proceeds analogous to the equity of a traditional bank or net worth of a credit union  CDFI net assets are often acquired in the form of awards or grants from the CDFI Fund or for-profit banks  Funding assets with net assets is less expensive for CDFIs than funding with longer-term borrowings  Banks may obtain CRA investment credit consideration by making investments to CDFIs, which provides CDFIs with net assets (equity)  Under PWI authority, banks are allowed to make equity investments in specialized financial institutions, such as CDFIs, as long as they are considered by their safety and soundness regulator to be at least adequately capitalized   Furthermore, the final Basel III notification of proposed regulation (NPR) allows for preferential capital treatment for equity investments made under PWI authority, meaning equity investments to designated CDFIs may receive more favorable capital treatment  Consequently, banks often provide funds to CDFIs through equity equivalent investments (EQ2s), which are debt instruments issued by CDFIs with a continuous rolling (indeterminate) maturity  EQ2s, from a bank's perspective, are analogous to holding convertible preferred stock with a regularly scheduled repayment  Hence, banks may view EQ2s as a potentially profitable opportunity to invest in other specialized financial institutions and receive CRA consideration, particularly when the funds are subsequently used by CDFIs to originate loans in the banks' assessment areas  Small Business Investment Companies The Small Business Administration (SBA) was established in 1953 by the Small Business Act of 1953 (P L  83-163) to support small businesses' access to capital in a variety of ways  Although issuing loan guarantees for small businesses is a significant component of its operations, the SBA also has the authority to facilitate the equity financing of small business ventures through its Small Business Investment Company (SBIC) program, which was established by the Small Business Investment Act of 1958 (P L  85-699)  SBICs that are licensed and regulated by the SBA may provide debt and equity financing and, although not a program requirement, educational (management consulting) resources for businesses that meet certain SBA size requirements  Banks may act as limited partners if they choose to provide funds to SBICs, which act as general partners  Banks may establish their own SBICs, jointly establish SBICs (with other banks), or provide funds to existing SBICs  SBICs subsequently use bank funding to invest in the long-term debt and equity securities of small, independent (SBA-eligible) businesses, and banks may receive CRA investment consideration if the activities benefit their assessment areas  Community banks invest in SBICs because of the profit potential as well as the opportunity to establish long-term relationships with business clients during their infancy stages  Banks that are considered by their regulators to be adequately capitalized are allowed to invest in these specialized financial institutions under PWI authority, but the investments still receive risk-based capital treatment  SBIC assets, similar to CDFIs, are illiquid given the difficulty to obtain credit ratings for SBIC investments; thus, they cannot be sold in secondary markets  Because banks risk losing the principal of their equity investments, they are required to perform the proper due diligence associated with prudent underwriting  Tax Credits The low-income housing tax credit (LIHTC) program was created by the Tax Reform Act of 1986 ( P L  99-514 ) to encourage the development and rehabilitation of affordable rental housing  Generally speaking, government (federal or state) issued tax credits may be bought and, in many cases, sold like any other financial asset (e g , stocks and bonds)  Owners of tax credits may reduce their tax liabilities either by the amount of the credits or by using the formulas specified on those credits, assuming the owners have participated in the specified activities that the government wants to encourage  For LIHTCs, banks may use a formula to reduce their federal tax liabilities when they provide either credit or equity contributions (grants) for the construction and rehabilitation of affordable housing  If a bank also owns a LIHTC, then a percentage of the equity grant may be tax deductible if the CDFI uses the funds from the grant to finance affordable rental housing  Furthermore, banks may receive consideration for CRA-qualified investment credits  After a domestic corporation or partnership receives designation as a Community Development Entity (CDE) from the CFDI Fund, it may apply for New Markets Tax Credits (NMTCs)  Encouraging capital investments in LMI communities is the primary mission of CDEs, and CDFIs and SBICs automatically qualify as CDEs  Only CDEs are eligible to compete for NMTCs, which are allocated by the CDFI Fund via a competitive process  Once awarded an allocation of NMTCs, the CDE must obtain equity investments in exchange for the credits  Then, the equity proceeds raised must either be used to provide loans or technical assistance or deployed in eligible community investment activities  Only for-profit CDEs, however, may provide NMTCs to their investors in exchange for equity investments  Investors making for-profit CDE equity investments can use the NMTCs to reduce their tax liabilities by a certain amount over a period of years  As previously discussed, a bank may receive CRA credit for making equity investments in nonprofit CDEs and for-profit subsidiaries, particularly if the investment occurs within the bank's assessment area  Furthermore, banks may be able to reduce their tax liabilities if they can obtain NMTCs from the CDEs in which their investments were made 


Report 2:  When interested entities contact VA to request information on the CHIP-IN pilot, VA officials told us they find the entities are often surprised by the donation commitment  For example, two entities that responded to VA’s RFI told us they were not clear about the donation requirement or the expected level of donation, or both  One respondent did not understand the pilot required a donation and would not provide an opportunity for a financial return on investment  Another respondent indicated that when they asked VA for clarification about the expected project’s scope, personnel from a headquarters office and the local VA medical center could not fully answer their questions  VA officials acknowledged these challenges and said they have changed their outreach efforts to focus on certain potential CHIP-IN locations, rather than RFIs aimed at a broader audience  Further, VA officials said that when speaking with potential donors going forward, they plan to involve a small group of officials who are knowledgeable about the pilot and its donation approach  Internal communication  While VA initially experienced some challenges in ensuring that all relevant internal stakeholders have been included in the pilot’s implementation, according to officials, the agency has taken recent steps to address this concern and involve appropriate internal offices  For example, officials from the Capital Asset Management Office said they could have assisted ORP in narrowing the list of potential projects in the RFIs but were not consulted  Later, after revising the marketing approach, ORP reached out to the Capital Asset Management Office and other relevant offices for help in determining priority locations for additional CHIP-IN projects, according to an ORP official  Officials from the Capital Asset Management Office told us that with improved engagement they were able to participate more actively in discussions about the pilot  In addition, initial plans for the CHIP-IN steering committee did not include VHA representation  However, in summer 2018 ORP expanded the planned steering committee to include VHA representatives, a plan that some other VA offices told us is needed to ensure that the pilot addresses the agency’s healthcare needs and that VHA offices are informed about pilot efforts  Based on the experience with the Omaha project, the CHIP-IN donation approach can result in potential cost and time savings—through the leveraging of private-sector funding, contracting, and construction practices—according to VA officials and the Omaha donor group  Regarding cost savings, one VA official stated that using donations makes VA’s appropriated funds available to cover other costs  In addition, based on the experience with the Omaha project, other VA officials told us that a CHIP-IN project can potentially be completed for a lower cost because of practices resulting from private sector leadership  Specifically, VA estimated that the Omaha ambulatory care center would cost about $120 million for VA to build outside of a donation partnership—as a standard federal construction project  Under the CHIP-IN pilot, however, the total estimated cost of the Omaha facility is $86 million—achieving a potential $34 million cost savings  Regarding time savings, CHIP-IN projects can potentially be completed at a faster pace because of the use of certain private sector practices and because projects can be addressed earlier than they otherwise would be, according to VA officials  The use of private-sector building practices can result in cost and time savings in a number of ways, according to VA officials and the Omaha donor group, as follows: The use of private-sector building standards contributed to cost savings for the Omaha project, according to VA officials and donor group representatives  VA and the donor group negotiated a combination of industry and VA building standards  A CFM official told us that using this approach and working with the private sector donor group encouraged the design team to think creatively about the risk assessment process and about how to meet the intent of VA’s physical security standards, but at a lower cost than if they were required to build a facility using all of VA’s building standards as written  For example, when assessing the safety and physical-security risk, the donor group and VA identified a location where two sides of the facility will not have direct exposure to the public or roadway traffic  Prohibiting exposure to roadways on two sides of the facility will mean spending less money to harden (i e , protect) the facility against threats such as vehicular ramming  According to VA officials, using the combined standards did not compromise security on the Omaha project  Involving the general contractor early on in the design for the Omaha project, an approach VA does not typically take, contributed to both time and cost savings  VA officials told us that engaging the general contractor during the project’s design stage allowed the project to begin more quickly and was also helpful in obtaining information about costs and keeping the project within budget  However, VA officials said that depending on the project and contracting method used, it might not be possible to apply this contracting practice to VA construction projects outside of the pilot program  A private-sector design review method helped to save time  The Omaha donor group used a software package that allowed all design- document reviewers to simultaneously review design documents and then store their comments in a single place  VA officials said this approach was more efficient than VA’s typical review method and cut about 18 weeks from the project’s timeline  VA officials also said use of this software was a best practice that could be applied to VA construction projects more broadly  In addition, the donor group and VA employed fewer rounds of design reviews than VA typically uses; this streamlining also helped to save time during the design process, according to VA officials  Further, VA officials said that the CHIP-IN donation approach can allow VA to address projects more quickly because they are addressed outside of VA’s typical selection and funding process  For example, VA officials told us that because of the agency’s current major construction backlog, using the CHIP-IN donation approach allowed work on the Omaha project to begin at least 5 years sooner than if the CHIP-IN approach had not been used  The Omaha project’s priority was low relative to other potential projects, so that it was unlikely to receive additional funding for construction for several years  For example, one agency official noted that even if the project was at the top of VA’s priorities, there is a backlog of 20 major construction projects worth $5 billion ahead of it—meaning the Omaha project would probably not be addressed for at least 5 years  VA officials also told us that as they consider future CHIP-IN projects, they are looking for other projects that, like the one in Omaha, are needed, but may not be a top priority given available funding and could be moved forward with a private sector donation  In addition, use of the CHIP-IN donation approach and decision to pursue an ambulatory care center contributed to an earlier start on a project to address veterans’ needs  However, as mentioned earlier, VA officials said that future construction projects will be necessary to address some needs that were part of the original replacement medical center plan  A main challenge to establishing pilot partnerships is the reliance on large philanthropic donations, according to VA officials, the Omaha donor group, and RFI respondents  In general, the potential donor pool may not be extensive given the size of the expected donations—in some cases tens or hundreds of millions of dollars—and the conditions under which the donations must be made  For example, as discussed earlier, VA officials said that when interested entities contact them about the pilot, they are often surprised by the donation commitment  When we spoke with two entities that responded to VA’s RFI, one told us that they “could not afford to work for free” under the pilot while another told us that developers are more likely to participate in the pilot if they see an incentive, or a return on their financial contribution  Also, VA officials told us that some potential project locations have not received any appropriations—making the projects’ implementation less appealing to potential donors  The Omaha donor group noted that a VA financial contribution at or above 50 percent of a project’s estimated cost is essential for demonstrating the agency’s commitment and for leveraging private-sector donations  To address challenges involving the philanthropic nature of the pilot, ORP officials told us that VA has tried to identify strategies or incentives that could encourage donor involvement  For example, the CHIP-IN steering committee is considering what incentives might be effective to encourage greater participation  One ORP official told us that such incentives could include potential naming opportunities (that is, authority to name items such as facility floors, wings, or the actual facility), although offering such incentives may require changes in VA’s authority  Further, because it may be difficult to secure donations for larger, more costly projects, some VA officials, donor group representatives, and one RFI respondent we spoke to suggested that VA consider developing less costly CHIP-IN projects—giving VA a better chance of serving veterans by filling gaps in service needs  Other VA officials, however, said they wanted to focus on larger projects because the pilot allows only five projects  Another challenge is that VA generally does not possess marketing and philanthropic development experience  VA officials told us that this makes the inherent challenge of finding donors more difficult  While VA officials have used the assistance of a nonprofit entity that has marketing expertise, they also said that going forward it would be helpful to have staff with relevant marketing and philanthropic development experience to assist with identifying donors  VA officials said this expertise could possibly be acquired through hiring a contractor, but funding such a hire may be difficult within their existing resources  As discussed above, the CHIP-IN pilot presents an uncharted approach to VA’s implementation of projects, and using CHIP-IN has aspects of an organizational transformation in property acquisition for the agency because it leverages donation partnerships and streamlines VA’s typical funding process  We have found that a key practice of organizational transformation includes a dedicated implementation team to manage the transformation process and that leading practices for cross-functional teams include clear roles and responsibilities, and committed members with relevant expertise  VA officials and Omaha donor group representatives acknowledged that a dedicated CHIP-IN team could help focus pilot implementation—and that no such team existed within the agency  ORP officials told us that the newly formed CHIP-IN steering committee would provide the necessary leadership for pilot implementation  They anticipate that a working group will be part of the committee and serve as a dedicated team for the pilot  However, as discussed below, roles and responsibilities have not been defined and staff resource decisions have not been made  Clear and documented roles and responsibilities  Several VA officials told us that responsibility for managing the overall pilot effort had not been assigned, and that they had different interpretations of which office had responsibility for leading the pilot  Some officials identified ORP as the leader, while others thought it was CFM or the Center for Strategic Partnerships  One CFM official told us that a clear definition of responsibilities is needed under the pilot along with a dedicated office or person with the ability to make decisions when an impasse across offices exists  Similarly, a senior VHA official told us that leadership roles and responsibilities for the pilot are not fully understood within the agency, which has made establishing partnerships under the pilot a challenge  For example, both VA officials and Omaha donor group representatives identified the lack of a senior-level leader for the pilot as a challenge and emphasized the need for strong pilot leadership going forward  Now that a CHIP-IN steering committee is being formed to provide pilot leadership, ORP officials intend to discuss committee members’ roles and responsibilities  This discussion was planned for the first committee meeting but was rescheduled for the next meeting in October 2018  ORP officials, however, told us that they do not expect to assign individual members’ roles and responsibilities until a future date  VA officials did not have a timeline for when committee or individual members’ roles and responsibilities would be formally documented  ORP officials said that roles and responsibilities for the pilot have not been defined because after enactment of the CHIP-IN Act, their first priority was to engage the Omaha donor group and negotiate an agreement  Later, after the Omaha project was progressing, ORP officials said they turned their attention to formalizing the pilot program and identifying additional donation partnerships  While it is important to concentrate on completion of individual projects, it is also important to plan for the overall pilot’s implementation—to help ensure that the pilot’s purpose and goals are met and in a timely manner  We have found that clarifying roles and responsibilities is an important activity in facilitating strong collaboration and building effective cross-functional teams  In addition, we have found that articulating roles and responsibilities is a powerful tool in collaboration and that it is beneficial to detail such collaborations in a formal, written document  Committed team members  Various VA offices and staff members have worked on the CHIP-IN pilot in addition to their other responsibilities, but several VA officials told us the resources currently dedicated to the pilot are insufficient  During our review, an ORP official told us that two ORP staff each spent about 4 to 6 hours per week on the pilot, as collateral duties  However, since that time, one of these two staff members has left the agency  A senior VA official told us that ORP and the Center for Strategic Partnerships could each use two to three more dedicated staff members to work solely on the pilot  While one ORP official said that additional staff would likely be assigned after other CHIP-IN projects are identified, a Center for Strategic Partnerships official said a specified percentage of staff time should be dedicated now to identifying potential donors  As mentioned above, VA officials told us they anticipate a working group will be part of the CHIP-IN steering committee and will serve as the dedicated team to implement the pilot  However, VA has not yet documented how it will staff the working group, including how it will obtain the needed expertise within its existing resources  According to one VA official, staff had not been initially dedicated to the pilot because the CHIP-IN Act did not provide resources to fund a dedicated team for the pilot, so VA has needed to implement the pilot within its existing resources  This VA official also told us that they were not certain VA could support a dedicated team with existing resources  Another official indicated that VA would need to consider how to incorporate CHIP-IN into the agency’s operations if the pilot program were expanded beyond the initial pilot and then dedicate needed resources  Dedicating a strong and stable implementation team is important to ensuring that the effort receives the focused, full-time attention needed  Team members with relevant knowledge and expertise  As previously discussed, VA officials told us that it would be helpful for a CHIP-IN team to include stakeholders with certain expertise, such as marketing and philanthropic development experience  In addition, representatives from the Omaha donor group said going forward, proactive public relations expertise is needed from VA headquarters (in particular, for external communications outside of the partnership) to quickly and positively address any incidents that could negatively impact VA’s ability to encourage donor participation in the pilot at the local level  For example, in the event of critical news reports about a local VA facility, such as what occurred in Omaha, donor group representatives said that additional public relations support would be helpful  VA officials also told us that a CHIP-IN team should be a collaborative effort across several offices  Specifically, one senior VA official said a cross-functional team with representation from ORP, CFM Operations, the Center for Strategic Partnerships, VHA, and the Office of Asset Enterprise Management (which has budget and finance expertise) would be useful in focusing and implementing the pilot  Leading practices for cross-functional teams include having members with a wide diversity of knowledge and expertise  Having a dedicated team or working group that consists of committed members with clear roles and responsibilities could assist VA in implementing the CHIP-IN pilot  For example, the working group could focus time and attention on strengthening design of the pilot program as a whole, instead of implementing projects on a piecemeal basis  Further, clearly identifying and documenting roles and responsibilities could help relevant stakeholders define and agree upon pilot objectives as well as an assessment methodology and evaluation plan  In addition, including stakeholders with relevant expertise on the dedicated team may assist VA in identifying viable projects and negotiating partnership agreements more readily  The CHIP-IN pilot is a unique, time-limited opportunity for VA to test a new way of building needed medical facilities by using non-federal funding sources—donors—to leverage federal funds  Though the first project is still under way, stakeholders have already noted benefits of the donation partnership approach, including potential cost and time savings as well as learning about private sector practices that could be applied more broadly to VA construction  However, VA is not yet collecting the information it needs to support decisions by VA or Congress about the pilot  Without a strengthened pilot design—including measurable objectives, an assessment methodology, and an evaluation plan—that can help inform decisions about the scalability of the pilot, it may not be clear to VA and Congress whether the CHIP-IN approach could be part of a longer-term strategy or how lessons learned could enhance other VA construction efforts  While leadership for the pilot had not been previously assigned, a newly formed CHIP-IN steering committee is meant to focus on the pilot’s implementation  Defining and documenting roles and responsibilities for this committee—and identifying the resources needed to effectively implement the pilot—could assist VA in partnering with additional donors and creating new opportunities to meet the urgent needs of veterans  We are making the following three recommendations to VA  The Secretary of VA should ensure that internal stakeholders—such as the CHIP-IN steering committee’s members—agree to and document clear, measurable objectives for the CHIP-IN pilot that will help inform decisions about whether and how to scale the program  (Recommendation 1) The Secretary of VA should ensure that internal stakeholders—such as the CHIP-IN steering committee’s members—develop an assessment methodology and an evaluation plan that are linked to objectives for the CHIP-IN pilot and that help inform decisions about whether and how to scale the program  (Recommendation 2) The Secretary of VA should ensure that the CHIP-IN steering committee documents the roles and responsibilities of its members and identifies available staff resources, including any additional expertise and skills that are needed to implement the CHIP-IN pilot program  (Recommendation 3) We provided a draft of this report to VA for comment  In its written comments, reproduced in appendix I, VA concurred with our recommendations and stated that it has begun or is planning to take actions to address them  VA also provided a general comment on the role of VHA in the CHIP-IN pilot, which we incorporated in our report  We are sending copies of this report to the appropriate congressional committees, the Secretary of Veterans Affairs, and other interested parties  In addition, the report is available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions regarding this report, please contact me at (213) 830-1011 or vonaha@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix II  In addition to the contact named above, Cathy Colwell (Assistant Director), Kate Perl (Analyst in Charge), Melissa Bodeau, Jennifer Clayborne, Peter Del Toro, Shirley Hwang, Terence Lam, Malika Rice, Crystal Wesco, and Elizabeth Wood made key contributions to this report 

ground_truth: VA has pressing infrastructure needs. The Communities Helping Invest through Property and Improvements Needed for Veterans Act of 2016 (CHIP-IN Act) authorized VA to accept donated real property—such as buildings or facility construction or improvements—through a pilot program. VA has initiated one project in Omaha, Nebraska, through a partnership with a donor group. VA can accept up to five donations through the pilot program, which is authorized through 2021. The CHIP-IN Act includes a provision for GAO to report on donation agreements. This report (1) examines the extent to which the VA's pilot design aligns with leading practices and (2) discusses what VA has learned from the pilot to date. GAO reviewed VA documents, including plans for the pilot program, and visited the Omaha pilot project. GAO interviewed VA officials, the Omaha donor group, and three non-federal entities that responded to VA's request seeking donors. GAO compared implementation of VA's pilot to leading practices for pilot design, organizational transformation, and cross-functional teams. The Department of Veterans Affairs (VA) is conducting a pilot program, called CHIP-IN, that allows VA to partner with non-federal entities and accept real property donations from them as a way to help address VA's infrastructure needs. Although VA signed its first project agreement under the program in April 2017, VA has not yet established a framework for effective design of the pilot program. Specifically, VA's pilot program design is not aligned with four of five leading practices for designing a well-developed and documented pilot program. VA has begun to implement one leading practice by improving its efforts to communicate with relevant stakeholders, such as including external stakeholders in key meetings. However, the VA offices involved have not agreed upon and documented clear, measurable objectives for the pilot program, which is a leading practice. Further, VA has not developed an assessment methodology or an evaluation plan that would help inform decisions about whether or how the pilot approach could be expanded. While VA officials said they intend to develop these items as tasks for the newly formed CHIP-IN steering committee, they have no timeline for doing so. Without clear objectives and assessment and evaluation plans, VA and Congress may have difficulty determining whether the pilot approach is an effective way to help address VA's infrastructure needs. To date, the CHIP-IN pilot suggests that donation partnerships could improve construction projects, but identifying donors and establishing a team for the pilot program have presented challenges. Officials from VA and the donor group for the first pilot project—an ambulatory care center in Omaha, Nebraska—said they are completing the project faster than if it had been a standard federal construction project, while achieving potential cost savings by using private sector practices. However, VA officials said it is challenging to find partners to make large donations with no financial return, and VA's lack of marketing and philanthropic development experience exacerbates that challenge. VA and the donor group agreed that a dedicated team of individuals with relevant expertise could facilitate the pilot's implementation. The new CHIP-IN steering committee could serve this purpose, but it lacks documented roles and responsibilities. Establishing a team with clear roles and responsibilities and identifying both available and needed staff resources could assist VA in partnering with additional donors and creating new opportunities to meet veterans' needs. GAO is recommending that VA: (1) establish pilot program objectives, (2) develop an assessment methodology and an evaluation plan, and (3) document roles and responsibilities and identify available and needed staff resources. VA concurred with GAO's recommendations.