The Community Reinvestment Act business.

Author:Snow, Jane Moss

New legal requirements to lend in ways that help communities may actually be good business.


Along the once-decaying corridors of inner city Washington, D.C., new hope has been built brick-by-brick, much of it with community development mortgage loans from the city's own American Security Bank. Since 1986, the bank's community investment has climbed to $250 million in profitable loans, according to Karen Kollias, vice president of American Security's community development group, a real estate division.

San Francisco's First Nationwide Bank generated $25 million in community loans in 1989 alone, says Ann Winchester, first vice president for community lending.

In New York, Norstar Mortgage Corporation has originated roughly $100 million in subsidized single-family housing loans in the past two years according to Vice President Lawrence Strauss.

Stories like these have surfaced from coast-to-coast, as aggressive bankers probe the potential of community reinvestment and attempt to convert social responsibilities into a profitable facet of their overall real estate involvement. But the issue facing financial institutions is more serious than the potential development of a profitable, relatively untapped market. Reinvestment in communities is mandatory for lenders today, both from a regulatory and business standpoint.

Reinvest--or else

Much of this activity has been promoted by the Community Reinvestment Act (CRA), passed in 1977. Headlines brought the news of a recent challenge by community groups to the $2.2 billion merger of Virginia's Sovran Financial Corporation and Atlanta's Citizens and Southern Corporation on grounds the institutions hadn't lived up to their CRA obligation.

Further, Jake Lewis, a professional staff members of the House Banking, Finance and Urban Affairs Committee says, "We are still getting a lot of evidence about discriminatory practices in lending...[demonstrating that] the act has not done all it should."

CRA requires banks and thrifts to help meet the credit needs of their communities by participating in programs to assist low- and moderate-income housing, rehabilitation, home improvement, farm lending, community development and commercial lending activities. Institutions are encouraged to describe their efforts and make reports that are reviewed and readily available for public inspection.

Enforcement of CRA regulations has been charged to the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision. Historically, these agencies have been slow to show their enforcement fangs. In an unusual instance, Chicago-based, Continental Illinois National Bank was challenged under CRA regulations during its purchase of an Arizona bank. In this rare CRA challenge by federal regulators, the purchasing transaction was denied.

In other cases, however, this seeming lack of attention created an outcry for better enforcement regulations that were written into the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). A group of influential legislators such as Henry B. Gonzalez, chairman of the House Banking, Finance and Urban Affairs Committee, and Donald W. Riegle, Jr., chairman of the Senate Banking, Housing and Urban Affairs Committee, pushed these regulations through as a part of the thrift reform law.

CRA regulators have begun rating financial institutions on their awareness of community credit needs; marketing and types of credit extended to serve those needs; and community development activities. CRA ratings of institutions will be on a scale of one to four--outstanding, satisfactory, needs to improve and substantial noncompliance--in meeting community credit needs. These ratings must be disclosed to the public on or before July 1, 1990.

CRA compliance notices, which all financial institutions must post, now will state that a current "CRA performance evaluation" is available. What's more, ratings will remain in force until a new examination takes place, which could be up to one year or more.

What happens to the institution with the poor CRA showing? Its expansion plans could be denied or delayed by regulators, as was the case with the proposed Sovran and Continental transactions. Regulators assess CRA records when considering permits to open or close branches, to change charters, and to acquire or merge institutions. Third parties can petition the regulatory agencies to deny these applications if the institution has a poor CRA record. Aside from this, the effect of the ensuing poor press and public relations are enough to make most financial institutions tremble.

Hidden opportunities

Compliance with CRA, however, offers some lenders an immediate market. They cannot only sell mortgages, but they can sell their know-how. Soon, every bank and thrift is going to be on the prowl for new community development business, and may even come courting lenders who have developed the expertise for such projects.

Savvy entrepreneurs are not going to be sitting around waiting to be asked. They will use their ability to help CRA lenders meet the criteria and better position themselves to purchase correctly structured products.

Traditionally, smaller mortgage brokers have filled inner-city financial needs to a greater extent than banks. In turn, banks have done a better job than thrifts, according to a survey based on Federal Home Loan Bank and census tract data by the Center for Community Change, Washington, D.C.


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