The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
P BANKING & COMMUNITY FEDERAL RESERVE BANK OF DALLAS SECOND QUARTER 1997 erspectives The Power To Move Public/Private Partnership Allows Auto Shop Owner to Expand Sengchanh “Sam” Khamphoumanivong, owner of Sam’s Auto Repair, and Bill Doeppenschmidt, a vice president at CaminoReal Bank, stand in front of the expanded business. INSIDE . . . . . . . . . . . . . . . . . . . . . . . . The once-empty building is humming with business again. The former service station about 10 miles east of downtown San Antonio had been sitting idle for about a year. It was just what Sengchanh “Sam” Khamphoumanivong needed to expand his auto repair business. Since its opening in 1993, Sam’s Auto Repair had been located in a cramped, one-car garage without an automotive lift. Khamphoumanivong and his employees had to work outside because of limited space, even during The Numbers bad weather. The old garage lot he was Show Improvement renting wasn’t paved. His new location In Lending Ä A Different Kind of Club Ä CRA Information On the Internet and buildings would attract new customers and allow him to work year-round, regardless of the weather. And after working in the auto repair field for more than 12 years, Khamphoumanivong would truly be able to grow his business. Thanks to a public/private partnership involving CaminoReal Bank, three San . . . . . . . . . . . . . . . . . . . . . . . . Antonio-area organizations that assist small businesses and a lot of hard work from Khamphoumanivong, Sam’s Auto Repair opened at its new site in April 1996. A loan package worth $200,250 allowed Khamphoumanivong to buy the closed service station, which has a threebay shop, a three-bay garage with lifts, and a service station with a small office and convenience store. “The loan has improved my business a great deal,” Khamphoumanivong said. “The new location has better access, and having a paved lot is a big improvement. I have a lot more business now since my location is bigger. The convenience store has added business, too.” Putting the loan package together wasn’t easy. It required meetings of Khamphoumanivong and representatives of CaminoReal Bank, the San Antonio Local Development Co. Inc. (SALDC), the San Antonio Business Development continues on page 2 P ublic & Private Partnership Doeppenschmidt referred Kham- continued from page 1 phoumanivong to the local Small Business Fund (SABDF) and the local Small Development Center for assistance with Business Development Center (SBDC). a business plan and projections. “Sam had a great idea when he Doeppenschmidt then brought together approached us about buying the location, representatives of the loan funds and the but he needed help to get it done,” said Bill Doeppenschmidt, a vice president at CaminoReal Bank. “You’ve got to put a lot of effort into these types of loans. They don’t happen overnight. But when it works out, it’s a good way to put a good loan on the books.” The loan package Khamphoumanivong received to expand his auto repair business has helped bring in new customers. Additional income comes from the convenience store. Khamphoumanivong had been development center, and the property . . . . . . . . . . . . . . . . . . . . . . . . seller and Khamphoumanivong. With the bank as the convener, a deal was struck. CaminoReal Bank gave Khamphoumanivong a $97,500 loan with a 15-year amortization to purchase and improve the property. The loan has a five-year term, after which the borrower’s credit and the loan rate are Small business loans can make it possible to add reevaluated. CaminoReal Bank has a jobs in a community. Sam’s Auto Repair now first lien on the property. employs 10 people. San Antonio Local Development Co., which administers the Economic Development Administration’s revolving loan fund, facilitated a $68,000 loan to Khamphoumanivong and holds a second lien. The fund offers belowmarket, fixed-rate financing for up to 33 percent of project cost. The San Antonio Business Development Fund, a multibank community development corporation, participated in the financing package with a $25,000 loan to Khamphoumanivong and holds a third lien. This development fund was created by a consortium of banks and the city of San Antonio to provide equity a customer of CaminoReal Bank for and debt financing to small emerging several years with a business checking companies, with an emphasis on account. When Doeppenschmidt started minority- and women-owned businesses. working with Khamphoumanivong in SABDF President Gilbert Gonzalez October 1995 on the loan package, said his agency knew it would be a Khamphoumanivong did not have equity tough deal to put together but that it capital, working capital or a business could be structured so all the players plan, which made it difficult for him to would be comfortable with the loan. qualify for traditional bank financing. Gonzalez said concerns about collateral were put aside, and the loan was based . . . . . . . . . . . . . on Khamphoumanivong’s character and repayment history. “We saw a lot of potential in Sam’s business,” said Mike Mendoza, a senior loan officer for San Antonio Local Development Co., which is part of the city of San Antonio’s economic development department. “The San Antonio Business Development Fund loan also enhanced Khamphoumanivong’s position and made it easier to get our part of the loan package approved by our board. As a development agency, we are maximizing the use of federal funds by participating with a private bank and a community development bank. That’s a good use of federal dollars.” With approximately $260 million in total assets, about 10 percent of CaminoReal Bank’s portfolio consists of small business loans. Doeppenschmidt said his bank is committed to small businesses, and working with area development agencies makes good business sense. 3 FEDERAL RESERVE BANK OF DALLAS Fast Facts SECOND QUARTER 1997 Fast Facts Sam’s Auto Repair “Participating in these programs Sam’s Auto Repair had the opportunity to expand from a one-car allows us to make a loan to a company garage to a six-bay garage and convenience store because of a or an individual to expand a business public/private partnership. The total development package was that normally we couldn’t do as a $200,250, of which $175,000 was used to purchase the land and conventional loan,” Doeppenschmidt improvements, $20,000 was used for working capital and the bal- said. “You can add jobs, sometimes add ance of $5,250 covered closing costs. All the loans have five-year beauty to a community and keep a small terms after which time they can be paid in full or possibly can be business operating. And that makes this rolled into one loan with CaminoReal Bank. country go round.” Khamphoumanivong said his new CaminoReal Bank, $97,500 location on a main street offers greater Fifteen-year amortization with a five-year term at Wall Street Journal visibility. He employs a total of 10 people, prime rate plus 2 percent (10.5 percent) and a first lien position including his sister, father, brother and sister-in-law. Clear goals and lots of long San Antonio Local Development Co. Inc., $68,000 hours have been a key part of his Economic Development Administration revolving loan fund success, he said. Fifteen-year amortization with a five-year term at 8 percent and a “The biggest improvement was the second lien position location. The old shop had a gravel drive. My customers would drive their Mercedes and BMWs to me and get them dirty. They thought I was a good mechanic but didn’t like the location,” Khamphoumanivong said. He plans on adding gasoline sales this year, as part of his business plan. He also has been expanding his customer base with commercial fleet contracts and with the neighborhood residents who shop at the convenience store. Doeppenschmidt encourages banks and development agencies to form longterm working relationships to overcome potential roadblocks. “The biggest problem is there are so many programs out there that we don’t know about. Education of lending officers at banks is important,” Doeppenschmidt said. “You’ve got to go the extra mile. Every loan that comes in your front door might not be able to work on face value. But if you use these business development groups and the funds that are out there, you can make these things work.” Ä . . . . . . . . . . . . . San Antonio Business Development Fund, $25,000 Multibank community development corporation Ten-year amortization with a five-year term at 13 percent and a third lien position Owner Equity, $9,750 Total — $200,250 For more information: Bill Doeppenschmidt, vice president CaminoReal Bank (210) 491-3628 Mike Mendoza, senior loan officer San Antonio Local Development Co. Inc. (210) 223-5626 Gilbert Gonzalez, president San Antonio Business Development Fund (210) 738-0312 C ommentary The Numbers Show Improvement In Lending Lawrence B. Lindsey resigned from the Federal Reserve Board of . . . . . . . . . . . . . Governors in February and has joined the American Enterprise Institute in Washington, D.C., and a New York economic advisory firm. Drawing on his experience as chairman of the Fed’s oversight committee on consumer and community affairs, he is planning a Lawrence B. Lindsey— book about community development, former member of the Federal Reserve tentatively titled Beyond Abuse and Board of Governors Neglect. The following remarks were excerpted from a speech he gave at a steady upswing in mortgages granted the Federal Reserve Bank of Dallas’ to these groups, including significant community development lending double-digit increases during 1992-94. conference in October 1996. The numbers show that we have reached a point where raceor ethnic-based discrepencies seem to have largely disappeared Access to credit by individuals and communities that are the target of our economic development efforts has reached unprecedented levels. The data for 1995 indicate that in a The numbers show that we . . . . . . . . . . . . . have reached a point where raceor ethnic-based discrepancies seem to have largely disappeared. For example, if the market for conventional, non-government-assisted loans is defined as families who earned $50,000 or more in 1994, then the proportion of such families getting mortgages in 1995 was 9.6 percent for whites, 8 percent for blacks and 11.6 percent for Hispanics. Including all mortgages, conventional and government-assisted, and dropping the income threshold to $25,000 shows that 6.4 percent of year when the number of conventional whites, 6 percent of blacks and 7.2 home purchase loans decreased percent of Hispanics got mortgages in overall from 1994, lending to African- 1995. Confining the base to married Americans, Hispanics and Native families with children —those most Americans went up. The 1995 figures likely to be in the market—produces are part of a four-year trend reflecting an even more compelling case that FEDERAL RESERVE BANK OF DALLAS disparities have largely disappeared. The Federal Reserve’s Survey of Consumer Finances gives good reason to believe that the penetration of underserved markets in the credit card business was as dramatic and preceded the large-scale increases in mortgage credit. Surveys conducted in 1989 and 1992 showed the proportion of white families with outstanding credit card debt rose only slightly—from 42.5 percent in 1989 to 44.1 percent in . . . . . . . . . . . . . But the reduction in inflation… has done more for home ownership opportunities among low- and moderate-income groups than any program administered by the government 1992. In 1995, this proportion was 47.5 percent. But the growth in credit card world is self-interest. Without question, use as a source of finance among non- the most important economic develop- whites was substantial. The proportion ment has been a decline in the of nonwhite families with outstanding underlying rate of inflation and the credit card balances rose from 34.1 consequent decline in medium- and percent in 1989 to 42.9 percent in long-term interest rates. 1992 and to 48.8 percent in 1995. 5 SECOND QUARTER 1997 Let’s do the standard math involved This suggests that a potentially debili- in any home financing decision. In 1990, tating economic burden has been lifted fixed 30-year mortgage rates averaged from a significant share of the popula- 10 percent. Recently, they have been tion, who can now meet economic around 8 percent. The principal and emergencies and time their purchases interest payments on a $100,000 with greater ease. mortgage declined from $878 to $734. . . . . . . . . . . . . . There is a school of thought among some politicians that fighting inflation is bad for low- and moderate-income people. But the reduction in inflation during the 1980s, and the continuation of that policy during the 1990s, has done more for home ownership opportunities among low- and moderateincome groups than any program administered by the government. Our system of long-term fixedinterest rates and the home mortgage interest deduction makes increasing Using a standard set of assumptions inflation highly profitable to those who now? A part of me would like to regarding property tax and insurance already have financed their homes. conclude that this is the result of a payments (PITI) and a PITI-to-income That is why we all grew up being taught permanent change in attitudes in ratio of 28 percent, the annual qualifying that homes are a great inflation hedge. Why has all of this occurred just America. While I certainly believe that income for this mortgage has fallen from If, however, you are simply in the we are a more enlightened country than $48,771 to $42,600. That $6,171 decline market for physical shelter, and not a five or 10 or 20 years ago—that our in qualifying income comes at a very tax shelter or inflation shelter, high collective consciousness has been dense part of the income distribution, inflation —and the resulting higher raised, if you will—I do not believe particularly in the minority population. long-term interest rates— prices you out this is the whole story. And when one considers mortgage of qualifying for a home. Furthermore, if market innovations that have eased your income is fairly moderate, you may on a sense of guilt or charity or a fear traditional underwriting constraints, the not even qualify for the home mortgage of enforcement action to motivate increased opportunity resulting from interest deduction. Thus, a low-inflation behavior. But it will not last. The only lower inflation and lower long-term rates environment is a key to maintaining permanent motivating force in this is even more amplified. home ownership opportunities. Ä In the short term, one can rely 6 R ESOURCE A Different Kind of Club Recognizing that an educated borrower can become a good banking customer and a solid neighbor, nonprofit groups and banks are working together to launch a different kind of club: the home-buying club. These clubs provide in-depth education and resource options for potential borrowers, as well as a realistic look at all the steps involved in buying a home. Clubs sponsored by nonprofit groups may work with members for a year or more, focusing on long-term credit rehabilitation, household budgets and down payment savings plans to help members become bankable. In addition to forming partnerships with nonprofit clubs, some banks have established their own clubs. Banklaunched clubs may offer their members reduced fees on savings and checking accounts and mortgage and closing . . . . . . . . . . . . . . . . . . . . . Kimberly Bradford-Brown, business development coordinator for the NAACP’s Community Development Resource Center in Austin, answers a question from a member of the homebuyer’s club. with 11 members. Along with education, the Austin area and the steps involved in the CDRC emphasizes long-term credit getting a mortgage. NationsBank has rehabilitation to help each club member become bankable. fees. Some clubs even prequalify loan “We saw so many people coming in applicants upon successful completion who had credit issues, and most needed of the program. at least a year to get those cleared No matter how they are structured, up,” Bradford-Brown said. “The only the clubs all have one goal: an educated requirement is a genuine desire to be a borrower with stable credit ready for homeowner. They sign a contract with home ownership. the club to show they will be committed Nonprofit-sponsored clubs “Our No. 1 goal is to educate members to be able to buy homes, so they to the whole one-year process. It’s not a quick fix.” Club members develop individual understand the process, the players budgets and down payment savings involved and where they fit in,” said plans. Members must call Bradford- Kimberly Bradford-Brown, business Brown once a week, attend monthly development coordinator of the NAACP educational workshops and prove they Community Development Resource are making progress with their savings Center (CDRC) in Austin. Bradford-Brown developed a one-year plans. Workshop topics include understanding credit, maintaining household curriculum for the CDRC homebuyers finances, planned borrowing, preparing club, which was formed in August 1996 for home ownership, housing tours of . . . . . . . . . . . . . . . . . . . provided a guest instructor for the course; other guest instructors include real estate agents, city inspectors, appraisers and mortgage brokers. “We’re getting a lot of support from the banking community,” BradfordBrown said. “After the club members have completed the process, the loan officer won’t have to spend time to educate them. An educated borrower is a better customer.” The San Antonio Development Agency (SADA) also helps educate potential borrowers. Nine financial institutions have teamed up with SADA to provide resources for its homebuyers club: Bank of America, Broadway Bank, Bank One, Dimensions Mortgage, Frost National Bank, Guaranty Federal Savings Bank, Mellon Mortgage, Norwest Mortgage and Texas Commerce Bank. 7 FEDERAL RESERVE BANK OF DALLAS To get into SADA’s 10-hour program, SECOND QUARTER 1997 loan closings. As with the NAACP pro- buyer’s Advantage Club offers discounts applicants must provide detailed gram in Austin, SADA makes a commit- on bank and mortgage fees, and savings information on income, credit and ment to work with families no matter how and checking accounts free of service current bills. SADA runs a credit history long it takes. report on each applicant as the first step in building an individual budget/savings plan and to help determine how much families can afford to spend on a home. More than 300 families have graduated from the program since it began in November 1995. Of those, 80 have applied for loans, 25 have closed on loans, and 16 are waiting for construction to start or conclude. Although 74.2 percent of SADA participants earn incomes of 80 percent or below the San Antonio-area median, the program is open to all income levels. Guest speakers include loan officers, builders and real estate agents, who cover such topics as down payment assistance and subsidies, and floor plans of available properties. SADA tracks all participants through to their charges for one year. The bank recognized a potentially lucrative long-term “Our goal is to make sure participants . . . . . . . . . . . . . . . . . . . have access to the information and to a home mortgage for which they can qualify,” said Albert Uriegas, an executive assistant at SADA. “As people become better educated, they can get into home ownership aware of the responsibilities of all parties and not get into serious problems later. When families know what they can afford, they can make the financial decisions that will ensure them quality housing. Families also can explore the assistance programs available to homebuyers.” Bank-sponsored clubs Bank-sponsored clubs often feature a variety of savings, checking and loan services, packaged into incentive plans for members once they complete the program. The Bank of America Home- . . . . . . . . . . . . . . . . . . . market, as well as a better way to quantify and track its marketing efforts. “It’s good business,” said Bill Allin, vice president and Texas area manager with Bank of America Mortgage in Irving. “We’ve been doing a lot of mortgages through the club. We offer the whole package because we want an ongoing relationship. Hopefully, we can go back to them later with other products.” Bank of America’s pilot club, launched in the spring of 1996, grew out of earlier seminars on home buying. Clubs are now active in the Dallas, Fort Worth, Houston, San Antonio and Austin markets. Upon completion of the bank’s buyereducation program, club members may qualify for a fixed-rate home loan with a continues on page 8 From left, CRDC homebuyer’s club members Cynthia Carter, Mary Bennett and Lenora McFadden listen to a presentation by retired real estate agent Mary Lee Comer at a meeting in Austin. DID YOU KNOW...? CRA Information on the Internet Bank CRA examination ratings and a listing of upcoming exams are now available on the Internet. You can access the information at your convenience, via the Web sites listed below. Web sites for CRA ratings Federal Deposit Insurance Corp. www.fdic.gov/banknews/ monthexam.html Federal Reserve System www.bog.frb.fed.us/DCCA/CRA Office of the Comptroller of the Currency www.occ.treas.gov/cra/crasrch.htm Office of Thrift Supervision www.access.gpo.gov/ots/press_rel.html Web sites for CRA examination schedules Federal Deposit Insurance Corp. www.fdic.gov/databank/qbp/excra.html Federal Reserve System www.bog.frb.fed.us/DCCA/CRA Office of the Comptroller of the Currency www.occ.treas.gov/cra/duecra.htm Office of Thrift Supervision (OTS) www.access.gpo.gov/ots/press_rel.html . A Different Kind of Club . continued from page 7 . down payment as low as 5 percent, 2 . percent of which can come from family . gifts, a government agency grant or a . nonprofit grant. That means some mem. bers only need to provide a 3 percent . down payment. . As with the other clubs, credit . rehabilitation is the biggest issue . people face coming into the Bank of . America club, said Jim Richardson, vice . president of community development. . That process can take up to one year or . longer. Club meetings are scheduled for . evenings and Saturdays in community . centers. The setting is casual, and the . bank often provides child care. . “People need to feel comfortable . about discussing their financial situa. tion,” Richardson said. . Loan officers and real estate agents . often attend the meetings, where the . bank presents information on down . payment assistance programs. The . bank makes sure it follows up with . members, to help them gather . information and accurately complete . forms, Allin said. . The bank services offered to club . members become tools to encourage . saving and good credit practices. . A special savings account is offered . with no service charge, to encourage . club members to save for their . down payments. . “We can offer a lot of other services . along with the home loan,” Richardson . said. “We want not only their home mort. gage business but to develop a long. term banking relationship with them.” . Potential for expansion After the NAACP’s first class graduates, Bradford-Brown wants to . . . . . . . . . . . . . . . . work with Austin-area banks, real estate agents and others to generate incentive packages for club members. Homebuyer clubs are in the works at two other NAACP community development centers in the country. The NAACP plans to open more centers in 1997. BradfordBrown hopes to see clubs at all centers eventually. “People can live the American Dream. I tell people if you can dream it, you can live it if the commitment is there,” Bradford-Brown said. In San Antonio, the SADA program is exploring options to offer other area nonprofit groups homebuyer club services, Uriegas said. “There’s a lot of interest in getting into the classes,” Uriegas said. “We’re getting ready to do some expansion in outreach efforts.”Ä Perspectives Federal Reserve Bank of Dallas Community Affairs Office P.O. Box 655906, Dallas, Texas 75265-5906 214-922-5276 Gloria Vasquez Brown Vice President gloria.v.brown@dal.frb.org Nancy C. Vickrey Community Affairs Officer nancy.vickrey@dal.frb.org Ariel D. Cisneros Community Affairs Specialist ariel.cisneros@dal.frb.org Jim V. Foster Community Affairs Specialist jim.foster@dal.frb.org Bobbie K. Salgado Houston Branch, Community Affairs Specialist bobbie.salgado@dal.frb.org Writing: Casey Miller Design: Patti Holland The views expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. Articles may be reprinted on the condition that the source is credited and a copy is provided to the Community Affairs Office. Internet Web site: www.dallasfed.org
@FedFRASER