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rtners
FEDERAL
RESERVE
BANK of
ATLANTA
IN COMMUNITY AND ECONOMIC DEVELOPMENT
VOL. 1 NO. 2
PERSPECTIVE
The role low income plays in
those persistent mortgage
loan disparities
By Ron Zimmerman
Meeting the challenge
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
By Courtney Dufries
S
ubstandard housing is a
problem everywhere ,
and Tampa, Florida, is no exception. But what makes Tampa
different is that it recognized its
problems and has been successful with a large-scale effort to
provide affordable housing and
revitalize neighborhoods.
A partnership of local
government, financial institutions, and nonprofit organizations resulted in the Tampa
"Challenge Fund." The Challenge Fund was formed in 1987
with the goals of preserving
valuable housing stock, stabilizing neighborhoods, increasing
the tax base, promoting public
and private partnerships, and
providing safe, decent, affordable homes, especially for firsttime homebuyers.
See TAMPA, page 3
M
ore than a decade after
the Community Reinvestment Act was passed, the
debate over alleged, widespread
discrimination in home
mortgage lending by our
nation's financial institutions is
still not settled. In recent years,
numerous studies using Home
Mortgage Disclosure Act
(HMDA) data and lien transfer
records have clearly documented disparate patterns of
geographic loan distribution
that statistically correlate to the
racial makeup of census tracts
throughout the country. Few
people today would argue that
the patterns do not exist, but
opinions vary on the underlying
reasons for these disparities.
Based on the statistical
evidence, most people tend to
focus on racial discrimination as
the primary cause of the lending
patterns. Less recognized and
understood is the impact that
differences in income and
wealth play in creating the disparate mortgage loan results.
The Atlanta Metropolitan
Statistical Area (MSA) census
data provide a good example.
However, Atlanta is not unique
in these income patterns.
Similar income differences exist
in most, if not all, major cities.
HUD defines as low- to
moderate-income those census
tracts having median incomes of
80 percent or less of the MSA
median income. In the low- to
moderate-income group in Atlanta, over 52 percent of the
See DISPARITIES, page 2
HIGHLIGHTS
■
Farmers Home
Administration creates
affordable housing
■
■
program for rural
areas ..... ,........ P11ge 3
Low incomes hinder
ability to purchase a
home for many
Atlantans·-·--· Page 5
OPINION: Satisfying
your examiner &
satisfying your
community are not
always the
same .............. Page7
FEDERAL RESERVE BANK OF ATLANTA
2
Distribution of Atlanta's Census Tracts by Race*
VICE PlESIDENT &. CA()
Ronald Zimmerman
EDITOR
Cynthia Goodwin
ASSOCIATE EDITOR
Census Tracts
Courtney Duf:ries
COPYEDITOR
INCOME DISTRIBUTIONS
71 % to 80% Median
61% to 70% Median
51 % to 60'fo Median
41% to 50% Median
31 % to 40% Median
30% of Median and less
BLACK TRACTS
Number
Percentage
9
10
13
17
17
15
11.11%
12.35%
16.05%
20.99%
20.99%
18.52%
WIDTE TRACTS
Number
Percentage
23
11
5
5
0
0
52.27%
25.00%
11.36%
11.36%
0.00%
0.00%
* Assumes that a tract is at least 51 % black or 51 % white based on the 1980 census.
DISPARITIES: A shortage of income
Continued from page 1
predominately white census
tracts (defined for comparison as
those tracts having a white
population of 51 percent or
more) have income between 70
and 80 percent of the MSA
median income as opposed to
only 11. 1 percent of the
predominately black tracts (51
percent or more black population). Although only 11.4 percent of the white tracts have
median incomes of less than 51
percent of the MSA median income, the median incomes of
60.5 percent of the black tracts
"... focusing on illegal credit
discrimination as the sole cause of the
disparate mortgage loan distribution
patterns is unwise in that this narrow
view obscures other factors that
significantly influence the distribution
of home mortgage loans... "
fall below this level. Finally,
although no white tract's median
income falls below 40 percent of
the MSA median income, 39.5
percent of the black tracts fall
below this threshold. Based on
the 1991 Atlanta MSA median
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PARTNERS
AND
Federal Reserve
Bank ofIN
St.COMMUNITY
Louis
income of $44,100, 40 percent
would equal an annual income
of only $17,640.
Thus, it is apparent that
based on income alone, there is
a tremendous difference in
home mortgage borrowing
capacity between the races.
The negative effect of consumer
debt, even the same dollar
amount of debt, on the lower
income applicants, within
which group blacks are disproportionately represented,
exacerbates the differences in
borrowing capacity of the races.
Monthly, non-housing, debt
payment burdens as low as $200
can mathematically disqualify
lower income applicants for the
loans needed to finance even
very low cost housing. (See
chart on page 6.)
Unfortunately, this situation
tends to get worse from year to
year because as the MSA
median income rises, the HUD
income range used to define the
low- and moderate-income
level encompasses people with
increasingly higher incomes.
Because more whites have incomes at or above the top of the
income range, the group least
affected by diminishing borrowing capacity because of debt
and, therefore, the group most
capable of qualifying to finance
a home, will tend to have an
ECONOMIC DEVELOPMENT
Neva Corbin
Free subsctiption and additional copies are available upon
request to Community Affairs,
Federal Reserve Bank ofAtlanta.
104Marietta St., N.W., Atlanta,
Georgia 30303-2713, or call
404/589-7307; FAX 404/589-
7302. Change of addr&s notices
and subscription cancellations
should be sent directly to the
Community Affairs section.
Please include the current mailing label as well as any new information. The views expressed are not necessarily
those of the Federal Reserve
Bank of Atlanta or the Federal
Reserve System. Material may
be reprinted or abstractel;l
provided Partners in Community
and Economic Development is
credited. l>lcase provide this
Bank's Community Affairs sec-
tion with a copy of any publica~
tion in which material is
reprinted.
increasingly disproportionate
number of whites.
Moreover, the dollar rise in
income of the lower income
people in the low- to moderateincome group will naturally trail
the dollar rise in income of those
at the top of the range even if the
percentage increase is the same.
For example, if one starts with
income disparities of say
$30,000 and $10,000 (a three to
one difference amounting to
$20,000), a 5 percent income
increase for each will result in
an even wider disparity of
$31,500 and $10,500 or a difference of $21,000. Assuming
that the 5 percent annual increase continues, the next year
the income figures would move
to $33,075 and $11,025, now a
difference of $22,050. Therefore, whites, who are more likely to be near the top of the income range, experience an increasingly disproportionate rise
in borrowing capacity comSee DISPARITIES, page 6
3
Farmers Home Administration unveils new loan program
By State Director Tom Harris
F
armers Home Administration (FmHA) implemented a new program to
help rural residents become successful homeowners on May 17,
1991.
In addition to its direct housing loan program, FmHA is now
authorized to guarantee commercial loans to purchase
single-family housing.
Under the new program ,
FmHA guarantees up to 90 percent of the principal loan advanced by qualified lenders.
Lenders that are HUD approved,
Fannie Mae approved, or Freddie Mac approved can par-
uc1pate. Also, state housing
agencies, the Farm Credit System, and lenders already participating in other FmHA
guaranteed programs are
eligible.
FmHA is authorized to
guarantee up to $100 million in
loans for single-family housing
during the current fiscal year.
The maximum loan amount is
$67,500 in most areas but can
reach as high as $124,875 in
certain high-cost areas as established by HUD. Interest rates
are set by the lender but cannot
exceed the standard VA rate or
Fannie Mae rate, whichever is
higher.
See FARMERS, page 9
TAMPA: Challenge Fund expands to phase II
Continued from page 1
Improvement is
clearly evident in these
before and
after photos
of one of
Tampa's
typical
rehab units.
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Federal Reserve Bank of St. Louis
This partnership is even more
impressive when compared to
rehabilitation efforts in 1985,
when government money was
not effectively leveraged and the
city's housing program
rehabilitated only 37 homes. But
in 1990, after only three years of
full operations, the public and
private partnership has
rehabilitated 989 housing units
in one year alone. And through
the efforts of city-sponsored
housing programs, especially the
Challenge Fund, the community
plans to rehabilitate and construct over 5,000 housing units in
the next five years while continuing to leverage approximately
$2.59 of private funds for every
dollar of federal funds.
The primary funding source
of this effort is the Challenge
Fund, which provides low-cost
home purchase and home
rehabilitation
loans
to
households earning between 60
and 150 percent of the area
median income. Having proved
itself in the initial program, the
city announced "Challenge
Fund II" in August 1990, and 18
financial institutions have committed $28 million to the new
program.
Under the initial Challenge
Fund, most homeowners earned
between $15,000 and $25,000 a
year. Over $13 million in loans
were provided by 12 local
financial institutions to
homeowners at interest rates of
2 percent below market rates
and for terms up to 20 years.
Investors received 15-year
loans at 1 1/2 percent below
market. Financial institutions
agreed to rate concessions and
flexible underwriting because
the city provided a five-year
guaranty on every loan and
provided all loan origination
work. The guaranty program
requires the city to buy back any
loan delinquent 90 days or
more.
According to Archie West,
Urban Planner at the Community Redevelopment Agency, the city-sponsored nonprofit
organization that administers
the Challenge Fund, "participation by the banks in addressing
substandard housing has been
outstanding."
The program's strongest feature is that it "brings together all
the elements necessary in a
forum where the city, banks,
nonprofit organizations, and individuals can do those things
needed to revitalize a neighborhood."
Besides bringing diverse
parties together, the city
provides pre-purchase counseling, screens applicants, completes the loan documentation,
and funds "soft second"
mortgages to rehabilitate homes
for qualified applicants whose
income is less than 80 percent of
the median income.
See TAMPA, page 4
FEDERAL RESERVE BANK OF ATLANIA
4
TAMPA: Meeting the challenge
Continued from page 3
"These
are not normal
everyday
loans but we
recognize
the need/or
loans like
this."
-Connie
Downs
The "soft-second" mortgages
provide interest-free loans that,
combined with bank financing,
make home rehabilitation loans
affordable for low-income
families. The second mortgages
are repaid when the ownership of
the home changes.
"This Challenge Fund works
because the city government
brings something to the table
other than CRA and high expectations," says Chris Steigerwaldt, vice president of SunBank of Tampa Bay, a Challenge
Fund lender. "The Community
Redevelopment Agency chooses
people carefully and follows
through with loan administration."
Prescreening applicants is a
difficult task. The Challenge
Fund recently implemented a
13-week pre-purchase counseling program that covers everything from credit counseling to
decorating and landscaping.
"Sometimes it's a matter of
downsizing expectations of what
people can afford," says Harriet
Stone, director of Housing
Management Services at Tampa
United Methodist Center, a nonprofit organization hired by the
city to help screen applicants and
provide counseling.
In addition, the Challenge
Fund offers flexible underwriting criteria. Down payments
range from 5 percent of the purchase price to only $500. When
looking at problems on credit
reports, "we try to determine if it
was something the applicant
created and defaulted on, or if it
was a joint problem such as a
divorce, a medical problem, or a
job loss," says Ms. Stone. "We
would rather see no credit than
bad credit".
Besides having a steady
source of income ("consistent
employment"), underwriting requirements limit total monthly
housing expenses to 30 percent
of monthly income and total
monthly debt payments to 40
SOUNDBITES
NIMBY syndrome Impedes
affordable housing
percent of monthly income.
Loan to value ratios cannot exceed 90 percent.
The Challenge Fund's success is a shared success. The
city government has effectively
leveraged its funds to achieve a
large-scale housing program
that works to meet social,
economic, and political goals.
Nonprofit organizations and
community groups achieve
greater success in addressing
their neighborhood concerns
and providing affordable homes
for the working poor. Local
financial institutions benefit
from a stronger deposit base,
sound loans, and improved
neighborhood and business
communities.
lthough these mortgage
loans cannot currently
be sold in the secondary market
because of their below-market
interest rates, local financial institutions have agreed to hold
them in their own portfolios for
the 20-year terms.
According to Connie Downs,
Community Affairs Officer at
Barnett Bank of Tampa Bay,
"These are not normal everyday
loans but we recognize the need
for loans like this. Because the
credit risks are controlled and
the costs are reasonable, we are
willing to accept some of the
other [interest rate] risks. It is
not always easy to satisfy our
commitment to the community,
but this is a prime example of
how to do it" .
Although the Challenge
Fund is the most visible of the
city's efforts, the city-sponsored
Community Redevelopment
Agency's home rehabilitation
efforts have included many different programs.
Community Development
Block Grants (CDBG) are used
to provide very low- and low-income homeowners with non-
A
See TAMPA, page 11
https://fraser.stlouisfed.org
PARTNERS
AND ECONOMIC DEVELOPMENT
Federal Reserve
Bank ofIN
St.COMMUNITY
Louis
n July 8, 1991, the federal
Advisory Commission
on Regulatory Barriers to Affordable Housing issued its report at
a White House ceremony. The
report cited tacit opposition to the
construction of low-cost housing
in established neighborhoodsthe "not in my back yard"
syndrome--as the key motive behind these regulatory barriers,
which can add as much as 20 to 35
percent to the price of a house in
some areas. The commission
urged the reform of complicated
and time-consuming processes for
obtaining building permits, expensive subdivision ordinances,
zoning rules, rent control, and environmental protection laws.
Copies of the report can be obtained for $10 from HUD User,
P.O . Box 6091, Rockville,
Maryland 20850,JD# HUD580fJ.
O
STABILIZING NEIGHBORHOODS: Neighborhood
Housing Services began a new
chapter in Birmingham, Alabama
in June 1991. The organization
will be working in seven low- and
moderate-income areas of the
city. Former Federal Reserve
Board Governor Martha Seger
was the keynote speaker at a
luncheon for the organization on
July 11th sponsored by SouthTrust Bank, N.A. and AmSouth
Bank, N.A. in Birmingham.
BUILDING AFFORDABLE
HOUSING: The Churches Conference on Shelter and Housing
announces the publication of a
new resource book for congregations and community-based organizations considering a housing
initiative. Entitled Making Room
at the Inn: Congregational Investment in Affordable Housing,
is a resource book intended to
prepare nonprofits with little orno
housing experience to work effectively with development partners
and financial resources. Contact
CCSH at (202) 232-6748. Prices
vary from $10 to $17.50 plus
postage, depending on type of entity.
5
Affordable housing looking for a market
By William R. Smith
The business community is
trying to deal with a shortage of
affordable housing in Atlanta.
But can it address the real problem-a shortage of income?
hen it comes to building affordable housing,
good intentions aren't enough.
Just ask Ronald Hogan, president of Georgia-Pacific Corp.
Two years ago, the wood
products and paper company
committed $2 million to help
revitalize Vine City, a run-down
neighborhood near the site of the
Georgia Dome in downtown Atlanta. Hogan explains, "We're
in the building materials business, so we decided this was a
good way to direct some of our
attention."
So far, the company has built
20 houses in Vine City and has
plans to assemble 200, as part of
what it calls Project Hope. The
one-story houses cost between
$41,000 and $50,000. In
March, after a year on the
market, only three of the houses
were owner occupied; 15 were
vacant.
"It's been a complete bust,"
says John Wieland, the state's
largest homebuilder who
donated his services to construct
some of the Vine City houses.
"You can't just go into a poor
neighborhood and build houses,
then congratulate yourself on
what a great job you've done."
Hogan denies the effort has
been for naught. "We've
learned a lot from Project
Hope," he says, but concedes it
"hasn't met expectations."
Project Hope's problems illustrate the complexity of one of
Atlanta's most severe problems:
the shortage of affordable housing. Its most visible symptom is
the homeless, whose numbers
W
William
R. Smith is
a staff
writer/or
Georew
'Iul1JL This
article was
reprinted
with permission from
Volume 6,
Number9
(Mayl991) ..
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
"The heart of the
problem is not a
shortage of
housing," says John
Leak, a vice
president with
Central Atlanta
ganizations and neighborhood
groups. Called the Atlanta
Neighborhood Development
Partnership, it is chaired by
Hogan.
The partnership may help to
bring focus to what has been a
fragmented effort Dozens of
churches and civic organizations try to address the issue of
affordable housing, but they
rarely work together. Until the
Atlanta Journal-Constitution's
Progress, the
downtown business
group. "ft's a
shortage of income."
have swelled to an estimated
10,000 in the metropolitan area.
What is often overlooked,
however, is the vast number of
families in Atlanta who can't afford decent housing. Half of
every household in the city-a
total of about 200,000 people-earns $15,000 a year or less.
"The heart of the problem is
not a shortage of housing," says
John Leak, a vice president with
Central Atlanta Progress, the
downtown business group. "It's
a shortage of income."
In the past, the public sector
was responsible for affordable
housing. But during the 1980s,
Washington cut its commitment
to low-income housing, and the
U.S . Department of Housing
and Urban Development was
plagued by scandal. Things are
no better on the local level. The
Atlanta Housing Authority has
14,700 units, but 11 % of them
are uninhabitable. The waiting
period for two- and threebedroom units is three to six
months.
The Atlanta Chamber of
Commerce recently started an
effort to address the shortage of
affordable housing. It's being
conducted through a coalition of
corporations, non-profit or-
Pulitzer Prize-winning series on
discriminatory lending practices
in 1988, the business community virtually ignored the
issue.
The chamber's effort is
projected to raise as much as$10
million for various programs
and build as many as 10,000
housing units. "This will help
get everybody to pull in the
same direction," says Dan
Sweat, president of the CF
Foundation. "It will probably
be the most aggressive and ambitious organization to address
affordable housing in the city's
history."
Research Atlanta, a nonprofit group that studies community issues, recently published a report on affordable housing, and in many ways its conclusions contradict the approach
espoused by the chamber. The
report says there has been too
much emphasis on trying to help
poor people to buy homes and
not enough on building and
rehabilitating rental units. In
some neighborhoods, such as
Vine City and Summerhill, the
default rate for mortgages exceeds 30%. Sandra Stone, executive director of Research Atlanta, says it's a mistake to encourage people with unstable incomes to take out a mortgage.
Research Atlanta says that
13% of all rental units in Atlanta
are either overcrowded or have
structural problems, such as inSee HOUSING, page 9
FEDERAL RESERVE BANK OF ATLANIA
6
BORROWING CAPACITY
EFFECT OF
1991 MSA
MEDIAN INCOMES
FINANCING
EFFECT OF
$2.0CWMTH
$300,'MTH
IN CONSUMER
IN CONSUMER-
DEBT
PAYMENTS
DEBT
PAYMENTS
ANNUAL
INCOME
MONTHLY
INCOME
$35,280
30,870
26,460
$2,940.00
2,572.50
2,205.00
$102,309
89,520
77,732
$102,309
89,520
73,799
$94,255
22,050
17,640
13,230
1,837.50
1,470.00
1,102.50
63,943
51,154
38,366
57,356
40,914
24,471
44,928
28,485
12,043
POTENTIAL
-Moderate Ceiling80% OF MEDIAN
70% OF MEDIAN
60% OF MEDIAN
77,813
61,370
-Low-Income Ceiling50% OF MEDIAN
40% OF MEDIAN
30% OF MEDIAN
Taxes and Insurance
Adjustment
If Monthly Pymts
for Taxes and Ins .
are:
$ 50
$ 60
$ 70
$ 80
$ 90
$100
$110
$120
Subtract This Arnt
From Ccmputed
Loan Arnounta:
$ 6,214.09
$ 7,456.91
$ 8,699.73
$ 9,942.55
$11,185.37
$12,428.19
$13,671.01
$14,913.82
The financing potential assumes 28% of inccme ill used to pay principal and interest expenses, 9% interest ill ch11ged, and a 30-year loan ill obtained. Effect of consumer debts
assumes 28% of inccme ill pcrmiued for monthly hoW1ing expenses, 36% ill permitted for all monthly expenses, 9% interest ill charged, and a 30-year loan ill obtained.
_______________________________
.........................................
The chart does not account for taxes and Insurance expenses. To obtain an accurate financing potential both before and after adjusting for consumer debts, use the Taxes
and Insurance Adjustment CharL
DISPARITIES: The role played by low income
Continued from page 2
Although
only 11.4
percent of
the white
tracts have
median incomes of
less than 51
percent of
theMSA
median income, the
median incomes of
60.5 percent
of the black
tracts fall
below this
level.
pared to blacks, who are more
likely to be toward the bottom
end of the income range.
Recognizing the difficulties
that low-income applicants
have qualifying for conventional loans, many community organizations have called for pricing and underwriting concessions to help eliminate the loan
disparities. However, any concession to all low- and
moderate-income applicants
tends to result in a greater
benefit to low- and moderateincome whites than to low- and
moderate-income blacks. For
example, the national median
income in 1989 for whites was
about $2,500 per month and for
blacks about $1,500 per month.
If, for instance, the underwriting guidelines were changed to
pennit use of an additional 2
percent of monthly income for
housing expenses, whites at the
median would see a $50 per
month rise in borrowing
capacity while blacks at the
median would see an increase of
only $30 due to the difference in
incomes.
It is also becoming increasingly apparent that even making
extremely low cost financing
and other favorable terms and
assistance available will not
necessarily create a market in
neighborhoods that have suffered a severe decline, particularly where crime is a problem. (See "Affordable Housing
Looking for a Market" on page 5
of this issue of Partners for one
local example.) Given the extremely poor condition of some
of these areas, homebuyers often
have to take a tremendous leap of
faith to believe that an area can
and ultimately will be revitalized
and become a safe, decent place
to live as well as a viable financial investment. Thus, it is understandable that qualified applicants may be reluctant to
chance the largest investment
they may make during their
lifetime on a questionable area.
Nothing in this article is intended to suggest that the
regulators should diminish their
efforts to uncover unlawful
credit discrimination.
However, it does seem that focusing
on illegal credit discrimination
as the sole cause of the disparate
mortgage loan distribution patterns is unwise in that this narrow
view obscures other factors that
significantly influence the distribution of home mortgage
loans, and these other factors
https://fraser.stlouisfed.org
PARTNERS
COMMUNITY
AND ECONOMIC DEVELOPMENT
Federal Reserve
BankIN
of St.
Louis
may explain why the loan patterns occur. Given the large differences in income and wealth
between the races, it will likely
be very difficult to totally
eliminate the mortgage loan disparities. Along with ferreting
out any unfair lending practices,
appropriate attention should
also be given to (1) examining
the myriad factors that affect the
cost of housing, (2) looking into
whether the limited amount of
available government and
philanthropical subsidies are
reaching the truly needy, and,
(3) for lenders, the secondary
market participants, and
mortgage loan insurers, analyzing pricing and underwriting
policies and practices to determine if the various risk
parameters are being too tightly
defined and whether the existing
guidelines are being interpreted
correctly and administered as intended. Unless these important
aspects of the problem are addressed, it seems unlikely that
the disparities can be reduced
significantly.
7
0
PIN
ION
Satisfying your examiner & satisfying your
community are not always the same
By Allen Fishbein
ow that public disclosure of individual
bank CRA ratings and evaluations has begun, it is little
wonder that many institutions
are bracing themselves for their
next compliance examination.
The new community reinvestment disclosure requirements
mandated by the FIRREA are
likely to bring increased public
scrutiny, changing the stakes
considerably for banks assigned
poor or even mediocre ratings
by the examiners.
These new changes to CRA
have increased the temptation
for banks to emphasize quickfix methods for achieving
regulatory compliance, even if
these efforts are not directly
aimed at addressing CRA's underlying purpose-to promote
increased lending to underserved local communities.
Those banks that continue to
view CRA purely as a compliance issue, however, will
learn very quickly that satisfying the examiner and satisfying
the local community are not
necessarily the same thing.
N
Allen
Fishbein is
General
Counsel of
the Center
for Community
Change and
directs its
Neighbor-
hood
Revitalization Project.
CCC isa national technical assistance and advocacy organization,
supporting
low-income
and minority
communitybased organizations.
This excerpt
is reprinted
with permissum. The
full article
appeared in
the October
1990 issue of
ABABank
Comoliance.
The Changing CRA
Environment
Community groups and the
regulators often have had substantially different expectations
regarding CRA enforcement.
To fully understand these differences, it is necessary to
review the act's history since its
inception in 1977.
CRA was adopted as a result
of grassroots activism by local
community groups. It was
designed to address the concerns
of these local citizens' groups
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
and others who believed that
redlining and other discriminatory mortgage lending
practices by the banking industry were contributing to the
decay of many older urban
neighborhoods. CRA was
aimed as much at modifying the
behavior, nonns, and attitudes
of banks as it was at changing
the stance of the federal banking regulatory agencies, which
it seemed had not used their supervisory authority to deter
lending discrimination.
Community groups learned
how to use the limited leverage
CRA provides, by challenging
requests forregulatory approval
of bank expansions. The increasing involvement by community groups in the application process reflected the growing frustration by local communities with the level of agency enforcement Even though
they were labeled "extortionists" and "blackmailers" by
some segments of the banking
industry, local groups began to
view the CRA challenge
process as increasingly central
to making the law work.
Few applications were
denied as a result of CRA challenges. Nonetheless, those
challenges provided local
groups with the leverage they
needed to engage banks directly
in serious negotiations about
the ways in which they can better meet local credit needs.
Most challenges resulted in settlement arrangements between
banks and community groups.
It is estimated that more than
$7 .5 billion in reinvestment
commitments from banks and
S&Ls have stemmed from these
CRA negotiations.
The regulators steadfastly
refuse to issue precise standards
on how many loans institutions
are required to make. However,
it appears that more precise
guidelines are likely to emerge
over time as a result of the agency determinations of CRA performance on a case-by-case
basis.
Since the regulators are unwilling to tell banks how much
CRA-related lending is sufficient to achieve a satisfactory or
outstanding rating, some institutions are pinning their
hopes for a good grade by emphasizing the" softer" aspects of
CRA compliance. Thus, internal documentation systems,
loan geocoding, expanding
CRA statements, and the like
seem to be receiving more attention these days than do
strategies for improving actual
lending performance to underserved segments of the communities.
It is a little early to forecast
how the regulators will treat the
"process" aspects of CRA as
compared to actual lending performance. However, regardless
of what the regulators ultimately decide to do, banks will continue to be evaluated by their
communities, based on the extent to which they are providing
credit to underserved areas
rather than on the thickness of
the paper they use for their CRA
statements.
Winning Community
Approval
Despite what you may hear
from some quarters, there is no
fail-safe means for ensuring that
your record is challenge-proof.
However, banks that have established strong ties with all
segments of their local comSee OPINION, page 10
FEDERAL RESERVE BANK OF ATLANIA
8
Atlanta CDBG Expenditures
Public funding: CDBG
Percent of Total Allocation
By Cynthia Goodwin
any localities use funds from the Community Development Block Grant (CDBG)
program to finance their investments in
public/private partnerships. The CDBG program
was begun in 1974 and is the federal government's
main vehicle for supporting local renewal efforts.
CDBG replaced eight former categorical grant and
loan programs under which communities competed
nationally for funds in specific project categories.
Funding for fiscal year 1991 was $3.2 billion.
Entitlement and non-entitlement communities
receive funds. "Entitlement areas" are (1)
metropolitan central cities of MSAs or other cities
within MSAs with populations of at least 50,000 and
(2) urban counties within MSAs that are authorized
to undertake community development and housing
activities and that meet certain population requirements. These areas receive annual grants. To
receive its allocation of funds, a community must
submit a statement of objectives describing funding
plans, submit a five-year Comprehensive Housing
Affordability Strategies (CHAS), and must certify
that its program complies with federal labor, environmental, civil rights, and contracting laws.
The 50 states and Puerto Rico are eligible to apply
to distribute funds to non-entitlement units of
government, generally under 50,000 in population,
that are not metropolitan cities or part of an urban
county. From each year's CDBG appropriation except the Secretary's Discretionary Fund [and the
UDAG program for entitlement cities] 70 percent is
allocated to metropolitan cities and urban counties,
and 30 percent is allocated to non-entitlement areas.
Entitlement grants are determined by a statutory
formula that uses several objective measures of community need including poverty, population, housing
overcrowding, age of housing, and growth lag.
Funds to non-entitlement areas are allocated among
the states by a formula, and either the state or HUD
distributes the funds to the different units of general
local government.
Entitlement grantees received about $2.02 billion
in fiscal 1990, spread among 741 metropolitan cities
and 125 urban counties. In 1988 (the most recent
year for which this information has been reported),
metro cities spent 35 percent of their funds on housing rehabilitation; 21 percent on public works; 12
percent on economic development; 14 percent on
administration and planning; 9 percent on public
services; and 8 percent on acquisition, clearance, and
relocation. Non-entitlement areas received $845
million in fiscal 1990. About $808.9 million went
to states, and $36.3 million went to small cities in the
M
See PUBLIC, page 12
https://fraser.stlouisfed.org
AND
PARTNERS
Federal Reserve
Bank ofIN
St.COMMUNITY
Louis
1989
1990
$10.8 million
iZLl Administration
D
< Year
< Allocation
1991
$9.2 million
$1 0.4 million
Housing
-
Economic Development
Source: Community Development Planning
Tampa CDBG Expenditures
Percent of Total Allocation
1989
$4.2 million
IZ]
Economic Development
-
1991
$4.3 million
1990
$4.5 million
Administration
< Year
< Allocation
D
Housing
Source: Community Redevelopment Agency
Birmingham CDBG Expenditures
Percent of Total Allocetlon
60
50
40
30
20
10
0
_.IL._~~~~LJ~~~~~=~~:__,,
1989
1990
$7 .7 million
$7.8 million
-
Economic Development
IZLl
1991
$8.4 million
Administration
< Year
< Allocation
D
Housing
Source: Community Development Department
Percentages do not total 100% due to category exclusions.
ECONOMIC DEVELOPMENT
9
FARMERS: New program to increase rural homeownership
Continued from page 3
Loans can be made to applicants whose income does not
exceed 100 percent of the
median income for the county
where the home is located. Applicants with income less than
80 percent of the median income
can qualify for a subsidy to
reduce the amount of payment
they actually pay. The subsidy
is paid directly to the lender.
To qualify to participate in
the Guaranteed Loan Program,
lenders must submit to the
FmHA State Office in their area
the following:
1. Evidence of approval by
HUD, Fannie Mae, or Freddie
Mac and lender ID
2. The name, address, and
phone number of the designated
contact person for guaranteed
loans.
3. A list of principal officers
and their major duties.
4. Copies of all the fonns that
will be used to process guaran"If
there's a
family
living in the
inner city
wilh good
credit and
decent income
they're
probably
going to
want to
move out to
a more comfortable
place... There
has to be an
effort to improve the entire neigh-
borhood so
people will
want to stay
there."
-John
Wieland
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
FmHA State Office Contacts
Douglas Canup
Austin Cromier
Stanley Shows
G. Benson Lasater
Jim Martin
Jerry Cude
James Rathbone
Don Pierce
Ambrose McGuire
Denver Parks
Dale Holmes
Ernest Schuette
Gary Frisch
Thurman Burnette
Mary Painter
Francis W etherhold
Wesley Harris
M.J.Pena
Dorothy Seitz
Deborah Davis
Athens.GA
Alexandria, LA
Jackson, MS
Nashville, TN
Phoenix.AZ
Little Rock, AR
Woodland, CA
Lakewood, CO
Des Moines, IA
Lexington, KY
Bangor.ME
East Lansing, MI
Columbia, MO
Raleigh.NC
Columbus, OH
Harrisburg, PA
Columbia, SC
Temple, TX
Richmond, VA
Wenatchee, WA
teed loans including application
forms, closing forms, and
security instruments.
(404) 546-2169
(318) 4 73-7630
(601) 965-4325
(615) 736-7382
(602) 640-5086
(501) 324-6273
(916) 666-3382
(303) 326-2851
(515) 284-4666
(606) 233-2731
(207) 947-3837
(517) 337-6608
(314) 875-5245
(919) 790-2731
(614) 469-5165
(717) 782-4567
(803) 765-5879
(817) 774-1305
(804) 771-2615
(509) 662-4298
5. A brief synopsis of internal
loan underwriting criteria.
GEORGIA: Shortage of income
Continued from page 5
adequate insulation or broken
plumbing. There are 3,000
apartment units that are boarded
up and vacant.
Few neighborhoods have
deteriorated more drastically
than Vine City, which has a rich
history. Mayor Maynard Jackson and City Council President
Marvin Arrington grew up
there. Alonzo Herndon, who
founded Atlanta Life Insurance
Co., built a mansion in the
neighborhood near Atlanta
University Center. Coretta
Scott King lives in Vine City.
Two years ago, as part of the
deal to develop the Georgia
Dome, the Atlanta City Council
got the state and Fulton County
to set aside $10 million to revitalize the neighborhood, which
has a population of about 5,000.
Georgia-Pacific announced
Project Hope later that year, in a
separate effort.
Some 700 people-mostly
residents of public housing in the
vicinity-have applied for
mortgages to buy Project Hope
houses. But few have qualified,
and people are getting tired of
waiting. "It's taken an eternity to
process the loans," says the Rev.
W .L. Cottrell, president of the
Vine City Housing Ministry, a
coalition of neighborhood churches that markets the houses and
counsels prospective buyers.
Cottrell says some applicants
have waited more than a year
without being approved or
rejected for a loan.
John Wieland is discouraged,
in part because of conditions in
the neighborhood, where across
the street from a row of freshly
rehabilitated houses a boardedup shack is occupied by crack
dealers. "If there's a family
living in the inner city with good
credit and decent income,
they're probably going to want
to move out to a more comfortable place," Wieland says.
"There has to be an effort to improve the entire neighborhood so
people will want to stay there.
That means you figure out ahead
of time who's going to move into
the houses, then work with them
years in advance and help them
to save money and pay their bills
on time so they can qualify for a
mortgage."
Hogan acknowledges the
problems. "This is a complicated issue," he says. "There's
got to be more to it than putting
together bricks and mortar."
FEDERAL RESERVE BANK OF ATLANfA
10
OPINION: Satisfying your examiner & satisfying your community
are not always the same
Continued from page 7
munities and have demonstrated
a sustained record of working to
address the needs of underserved areas have little to fear
from a CRA challenge.
Banks can demonstrate this
commitment to helping to meet
community credit needs through
outreach to their local communities. This means going
beyond a bank's usual "circle of
friends," particularly emphasizing those parts of the community
in which the bank is not active.
In addition, banks should
resist the mistake of thinking of
CRA as an urban issue only.
There are significant pockets of
disinvestment in many rural
areas that must be addressed. It
is not enough for community
bankers simply to say, "We
would not be in business if we
were not serving our community."
Winning community approval depends on top management staying in touch with the
bank's community, not only by
going outside the bank, but also
by setting the tone for how the
institution's personnel relate to
all members of the community
who come into the bank.
Working With Your
Community
In his now classic book
Democracy in America, Alexis
de Tocqueville, the young
French aristocrat who came to
our nation in the 1830s, extolled
the "can do" spirit of Americans
in forming private, voluntary
mutual assistance associations
as an important means for tackling local problems. Fortunately, this tradition is continuing. It
is alive and well in local communities throughout this
country. The private, not-forprofit sector is a dynamic and
growing part of most communities. This is the sector
banks must relate to much better
https://fraser.stlouisfed.org
PARTNERS IN COMMUNITY AND
Federal Reserve Bank of St. Louis
if their CRA efforts are to succeed.
Being neither governmental
entities nor commercial
enterprises, the organizations
that comprise the nonprofit sector often deliver essential social
services to the residents of lowand moderate-income areas.
These community-based organizations provide everything
from health services, to child
care, to employment training.
The directors and staffs of these
organizations can be quite
knowledgeable about the needs
and conditions of the areas in
which they are located.
At their best, communitybased organizations can serve as
a banker's "eyes" and "ears" in
the areas in which they are located. They are often vast
repositories of information
about local needs and potential
business opportunities for
banks. Many are becoming experienced housing and commercial developers.
Too many banks, however,
confuse communication and
outreach with information dissemination. Since community
meetings are typically held o
weekday evenings or the
weekends, senior managers
often delegate personnel with
very little seniority to attend
them. Moreover, the representatives attending community
meetings may know very little
about the bank's lending activities. As junior personnel,
they are reluctant to speak on the
bank's behalf. As a result, they
limit their activities to passing
out brochures and making sure
the bank's name is listed on the
attendance sheet that is circulated. The new CRA climate
means that bank personnel will
be attending more community
meetings, but unless these representatives are in a position to
carry on an active dialogue with
ECONOMIC DEVELOPMENT
local residents, any new initiatives will not be worth the effort.
Conclusion
Public disclosure of CRA
ratings and evaluations will provide the public with a great deal
more information about banks'
community lending records
than was previously available.
Community groups, consumer
organizations, public agencies,
and others all will be using this
new information base to determine how well banks are serving local credit needs and as a
basis for suggesting ways in
which banks can improve their
performance.
Further, given past history, it
is unlikely that local groups will
be content to rely exclusively on
the ratings assigned by the
See FISHBE1N, page 12
11
TAMPA: Meeting the challenge
Continued from page 4
For more
information
about this
program
contact Mr.
Fernando
Noriega, Jr.,
Division
Manager,
City of
Tampa Community
RedevelopmentAgency,3109th
Avenue,
Tampa,FL
33605, or
the CommunilyAffairs section
of the
Federal
Reserve
Bank of Atlanta.
amortizing loans to upgrade
their homes to a standard condition. This money is repaid when
the home is sold or when ownership changes.
The same program has been
expanded by using a Lump Sum
Drawdown Agreement allowed
under U.S. Housing and Urban
Development regulations .
Under this agreement, the full
year's CDBG allotment of lowinterest loans for housing
rehabilitation money can be
drawn at one time, thus earning
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
·
interest at a local bank while
funds are disbursed as needed.
Two other programs provide
purchase and rehabilitation
loans to low-income persons.
The Resurrection of Affordable Housing Program (RAHP)
works with nonprofit organiz:ations to identify condemned
homes that are then purchased,
rehabilitated, and sold to low-income persons through a package
of subsidized financing.
The Mayor's Own-A-Home
program, is directed at selected
READiNG
families living in public housing.
Several other smaller housing programs that provide loans
and grants include (1) Urban
Homestead Program, (2) Adult
Congregate Living Facilities,
(3) Elderly Grants, (4)
Hillsborough County Housing
Finance Authority Bond Program, and (5) Sewer Grants.
FILE
D
Business Opportunities Casebook is an effort to assist rural communities in their economic development efforts.
For a copy contact U.S. Small Business Administration, Rural Development, Business Development Division,
999 18th Street, Suite 701, Denver, Colorado 80202.
D
The Secondary Market and Community Lending Through Lenders' Eyes, prepared for Freddie Mac, this report
addresses public concern that lenders have been underserving the credit needs of certain communities (1991).
Call Angie Grantman (703) 903-2363 .
D
A Guide to Business Credit for Women, Minorities, and Small Businesses explains the credit application process,
types of loans, and relevant regulations. Board of Governors .
D
Community Affairs Officers at Federal Reserve Banks outlines the Community Affairs Officer's role, duties, and
responsibilities, particularly those responsibilities related to the Community Reinvestment Act Federal Reserve
Bank of Richmond.
D
Home Mortgages: Understanding the Process and Your Rights details where and how to shop for a mortgage
and explains the credit analysis process. Board of Governors.
D
How to Establish and Use Credit discusses how to qualify for credit and use it wisely. Federal Reserve Bank
of Philadelphia.
D
ls My Bank Meeting Its Community Reinvestment Obligations? explains the requirements of the CRA and the
examination process. Federal Reserve Bank of Atlanta.
D
Lessons Learned from the Atlanta Mortgage Consortium by Ronald Zimmerman analyzes that organization's
loan portfolio after one year in operation. Federal Reserve Bank of Atlanta.
D
Mid-Atlantic Conference on the Community Reinvestment Act and Community Development Corporations is an
enlightening transcript of a conference on the subject. Federal Reserve Bank of Richmond.
D
Public/Private Partnership Model for Home Mortgage Lending by Ronald Zimmerman is a Lotus-based,
interactive computer model that enables the user to specify program underwriting criteria to determine a
borrower's or a program's potential. Federal Reserve Bank of Atlanta.
D
Satisfying Your Examiner & Satisfying Your Community AreNotAlways the Same is an article by Allen Fishbein,
general counsel for the Center for Community Change. 1990
Copies of most of these materials can be obtained by writing or calling the Community Affairs section at
the Federal Reserve Bank of Atlanta at (404) 589-7307.
FEDERAL RESERVE BANK OF ATLANTA
12
PUBLIC
CALENDAR
Continued from page 8
FISHBEIN
Continued from page 10
I
Please
notify
Partners if
your organization
would like to
publicize an
upcoming
conference.
The editor
also welcomes infor-
matwn
about community and
economic
development
efforts in
your community.
September
Federal Home Loan Bank
of Atlanta, September 26-27,
Atlanta, GA, Banking on Communities: Building Blocks/or
Success. Contact Renee'
Bayne (404) 888-8436.
National Association of
Housing and Redevelopment
Officials, September 29 - October 2, Atlanta, GA, 1991 National Conference and Exhibition, Contact Registrar (202)
429-2960.
October
Institute for Community
Economics, October 1-3,
Washington, D.C., Preserving
Affordable Housing: An Introduction to Community Land
Trusts. Contact Carrie Nobel
(413) 746-8660.
Federal Reserve Bank of
San Francisco, October 17-18,
1991, Phoenix, AZ.Desert
Bloom. Contact Kelly Walsh
(415) 974-3314.
PARTNERS
Community Affairs
Department of Supervision and Regulation
Federal Reserve Bank of Atlanta
104 Marietta St., N.W.
Atlanta, Georgia 30303-2713
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
two states-New York and
Hawaii-where HUD still administers the program. 53 percent of the 1989 funding to states
and small cities was used for
public works. Housing received
26 percent; economic development, 17 percent; administration
and planning, 3 percent; and
public services, I percent.
All projects and activities
must principally benefit lowand moderate-income persons,
aid in the prevention or elimination of slums or blight, or meet
other urgent community needs.
Communities must furnish
residents with information about
the amount of CD funds that will
be available in the coming program year; hold at least one
public hearing; and publish the
contents of the proposed statement of objectives.
regulators. Communities will
be using the information
provided by the new disclosure
reports to perform their own
"audits" of the community reinvestment performance rather
than the glossiness of an
institution's CRA statement. If
banks ever need a reason to get
out and meet with their communities, they certainly seem to
have one now.
Old You Know?
or approximately 30,000
people who have completed
the Fannie Mae/GEMICO
Community Home Buyers
Program, only 800 have ob•
tained mortgage loans under
this initiative.
@FedFRASER