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Partners
In Community and Economic Development
Federal Reserve Bank of Atlanta
Volume 4, Number 1
Fed Chairman Speaks Out on CRA
I
Federal Reserve Board Chairman
A lan Greenspan addr esse d
par ti cipants of a conference
spo nsored by The Na ti o nal
Community Reinvestment Coalition
on February 8, I 994 concerning
CRA and lending discrimination.
His prepared statement is excerpted
here.
n dealing with the Community Reinvestment
Act, the Home Mortgage Disclosure Act, discrimination in
lending and other consumer
issues, the National Community Reinvestment Coalition
plays a vita l role in many of
the most pressing concerns
facing financ ial institutions
and the ir communities . Consequently , I particularly appreciate the opportunity to
discuss a few of the many
issues surrounding the provision of credit to low- and moderate-income people .
I have little doubt there are
many in this audience who
have profoundly differing
views from those of us at the
Federal Reserve on the way
CRA should be interpreted
and implemented . To be
sure, I do not think we disagree on the central objective of CRA
to expand
profit-making lending to all
elements of the community-including those that
have been overlooked in the
past.
I do believe, however, that
we
have
signif icant
differences in certain of our
Analysis
See GREENSPAN, page ./
New CRA Proposal Raises Many Issues
By Courtney Dufries
T
he Community Reinvestment Act was
passed by Congress and
signed by President Jimmy
Carter on October 12, 1977.
In short, the law says that financial institutions have an
affirmative obligation to help
meet the convenience and
needs of the commun ities
they serve , including low- and
moderate - income areas ,
https://fraser.stlouisfed.org
SPRIN G 1994
Federal Reserve Bank of St. Louis
consistent with safe and
sound banking practices.
A proposal recently published for pub lic comment
would dramatically change
the regulations implementing
the law The public comment
period expired March 24 , and
the regulators are reviewing
the comments in the hope
that the ch anges better implement the CRA
See Cl?A.
page 6
INSIDE THIS ISSUE
■
■
Neighborhood Reinvestment
Corporation announces an
innovative secondary
market for purchase/rehab
loans ..... .. . .. . .. . . . . . .... .. . ... . 2
Community Development
Center formed in Hattiesburg,
MS to promote job creation
by lending to small and
minority businesses . ... . .. ... . . . ... . 5
■
Seven local banks and a
development authority in
Brunswick, GA form
partnership for small business
development that provides more
than just loans . . . . . . . . . . . . . . . . . . . 10
FEDERAL RESERVE BANK OF ATLANTA
2
Innovations From the
Secondary Market
NHSA to preapprove nonprofits' home purchase/rehab loans;
lenders book presold loans
he secondary market
is critical to successful
home purchase and home
rehabilitation loan programs
because financial institutions
are reluctant to
book long-term
fixed rate loans and
many lenders lack
the staff and expertise to effectively
control risks associated with home purchase/rehabilitation
loans. In response
to these problems,
Neighborhood Reinvestment Corporation (NRC) has
announced a new
program designed to create
10,000 new low- to moderate-income homeowners in
183 co mmunities over the
next five years. With this program , participating lenders
can fund and immediately
sell these loans to Neighborhood Housing Services of
America, Inc. (NHSA) .
T
New Orleam
NHS Board
members attending a co11fere11ce at the
New Or/e{lm
branch of the
Atlanta Reserve Bank.
Pictured are
Exemtive Director l{lure11
Anderson,
President
Richard
Ainsworth (011
right), 1111dformer Board
member Boh
leed1· (011 left).
1
Local nonprofits who are
members of NRC's NeighborWorks affordable housing
delivery network , typically
Neighborhood Housing Services (NHS) organizations, will
prescreen and educate potential borrowers , help complete their loan applications,
and obtain prior approval
from NHSA for their ultimate
sale after funding . Participating lenders will receive the
preapproved loan applica-
Partners in Community
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Federal Reserve Bank of St. Louis
tions and can fund and sell
the loan on the same day .
NeighborWorks organizations in 20 cities were se-
lected to participate in the
first year of the program, including the cities of Chattanooga, TN , New Orleans,
LA, and Savannah , GA The
program was recently expanded to include Birmingham , AL, and Shreveport,
LA
As Jonathan Jones, NRC
Southern District field service
officer, says, "The key is to
provide opportunities for
stronger partnerships between lending institutions
and local programs. By setting goals for increasing
home ownership opportunities, we allow local nonprofits
and lenders to really focus on
the problem."
NRC requires the local
nonprofit to agree to regu lar
training and technical assis-
and Economic Development
tan ce programs on topics
such as homebuyer development, loan production and
underwriting, and media relations. In addition, the NRC
provides a one-time
$15,000 grant to be
used at the nonprofit's discretion for
staff development,
loan assistance, or
other uses that furth er the program
goals.
According
to
Richard Ainsworth ,
community affairs
officer at Whitney
National Bank, New
Orleans, "One great feature
of the program is that money
to rehabilitate homes is provided by NHSA The NHS
then provides construction
oversight, and the bank gets
a prequalified , presold loan
for a rehabilitated property. "
By eliminating the rehabilitation loan risk, local lenders
are more inclined to participate in the program.
In addition to this program,
many NeighborWorks organizations can provide
homebuyer education programs , prescreen applicants,
offer downpayment or other
loan assistance programs ,
offer construction or rehabilitation loan expertise and
funding , and serve as a liaison for lenders to low- and
moderate-income communities.
3
N
EIGHBORHOOD HOUSING SERVICES (NHS) is the
name used by many local nonprofit organizations dedicated to neighborhood revitalization . Locally controlled ,
they frequently work in only one or two neighborhoods,
although some work in larger areas. NHS is often funded
with fee income from loan originations, fees from home
construction or rehabilitation work, and by grants from financial institutions, insurance companies, governments and
others. Most, but not all NHS programs are affiliated with
Neighborhood Reinvestment Corporation (NRC) through
the NeighborWorks Network. Most NHS programs operate
revolving loan funds for revitalization efforts.
N
EIGHBORWORKS NETWORK is a registered trademark used to designate nonprofit organizations affiliated with NRC. Many neighborhood-based nonprofits
choose to join this network because it provides access to
extensive training programs, access to a secondary market
for loans they may originate, and some limited funding for
special needs or programs. Affiliated organizations must
meet minimum standards established by NRC to remain in
the network, including , but not limited to, required financial
reporting systems and annual audits by NRC field service
officers. The NeighborWorks Network is the largest neighborhood-based nonprofit network in the United States. Two
other similar networks would include the Local Initiative
Support Corporation (LISC) and the Enterprise Foundation .
N
EIGHBORHOOD REINVESTMENT CORPORATION
(NRC) was chartered by Congress in 1978 as a public,
nonprofit, tax-exempt organization that receives direct Congressional appropriations and is charged with promoting
local neighborhood-based revitalization efforts. The NRC
board of directors is comprised of a member of the Board
of Governors of the Federal Reserve System, the chairpersons of the Federal Home Loan Bank Board and the Federal
Deposit Insurance Corporation, the secretary of Housing
and Urban Development, the Comptroller of the Currency,
and the Adm inistrator of the National Credit Union Administration . Governor Lawrence B. Lindsey of the Federal
Reserve System is chairman of the board of NRC. NRC
has 9 regional offices.
N
EIGHBORHOOD HOUSING SERVICES OF AMERICA, INC. (NHSA) is a national secondary market
established in 1974 to purchase loans made by local NHS
organizations. In addition to income generated from service
fees and other operations, NHSA receives most of its admin istrative and capitalization support from NRC. A member of the NeighborWorks Network, NHSA has purchased
over $100 million in loans from 102 local revolving loan
funds as of September 1993. NHSA typically packages the
loans in a mortgage-backed security which is then sold to
institutional investors who desire socially-responsible investments.
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SPRIN G 1994
Federal Reserve Bank of St. Louis
SIXTH DISTRICT NRC
REGIONAL OFFICES
NRC Southern District
Office
Thomas Ro cky Wa de
District Director
404-331-7428
(Georgia , Florida , Alabama ,
Mississippi, North Carolina , and
South Carolina)
NRC Great Lakes District
Gloria Orteg a
District Director
513-684-377 4
(Tennessee, Kentucky, Ohio,
Indiana , and Michigan)
NRC South Central District
Ro n Johnston
District Director
512-229-4100
(Louisian a, A rkansas,
Oklahoma , and Texas)
NEIGHBORWORKS
NETWORK
Birmingham NHS, Inc.
205-93 9-04 70
Clearwater NHS , Inc .
813-442-4 155
NHS of Fort Pierce
407-465-2544
Neighborhood Housing and
Development
Corporation of Greater
Gainesville
904-334-3 114
Springfield NHS of
Jacksonville, Inc.
904-355-1248
Miami-Dade NHS, Inc.
305-8 36-2162
St. Petersburg NHS, Inc.
813-821 -6897
NHS of Tampa , Inc.
813-221-5516
NHS of LaGrange, Inc.
706-883-2055/2058
NHS of Savannah, Inc.
912-238-0647
NHS of Lafayette, Inc .
31 8-269- 1353
New Orleans NHS, Inc.
504-822-3852
NHS of Shreveport, Inc.
318-632-5500/550 1
Chattanooga Neighborhood
Enterprise, Inc.
615-265-4114
Knoxville Neighborhood
Housing and Commercial
Services, Inc.
615-637-082 5
FEDERAL RESERVE BANK OF ATLA N TA
4
Greenspan: Utilize Existing Networks
SOUNDBIT ES
Conti1111edfro111 page I
approaches. These are
disagreements main ly of
process and effect By nature
community groups may be
less incl ined to trust market
forces th an we do. You may
view our caution with regard
to the CRA reform proposal
as hostility , while we see it as
pr udent decision making .
You may tend to see issues
app ropriately from your
vantage point of community
development, while we are
required to be looking at the
same questions in a
somewhat broader economic
context What you may view
as ultima tel y critical short
term gains, we may often see
as counter-productive in the
long run to our common goal.
I grant we at the Fed may be
wrong on some of this, but so
may a number of you . The
appropriate approach is
debate in a democracy ,
before Congress and in open
forum . I hope that my
remarks today wil l contribute
to that process.
Let me first dwell on the
Community Reinvestment
Act As an economist, I suspect I approach CRA a bit differently than many of you .
We economists tend to th in k
that what makes good market
sense makes good long term
social sense as well. CRA
can be good business, and
can meet that market test
CRA has helped financial
institutions to discover new
markets that may have been
underserved before . That
has been its great strength .
to do so. Activities developed by banks to meet credit
needs in low- and moderateincome neighborhoods
should be wel l-planned and
thoughtfully im pleme nte d
within their overall business
plan . Banks should not try to
throw money at a problem or
"just write the check"-that's
not using the market to anyone's advantage. The latter
type of activity will not be sustainable over the long haul.
The Mercedes-Benz
Plant, to be built on 966 acres
in Van ce, Alaba ma, is expected to generate $7 .3 billion
in payroll and tax benefits to
state and local governments
over 20 years according to an
economic impact analysis prepared by Troy State University. The plant is expected to
employ 1,500 people and will
produce 60 ,000 passenger
vehicles a year beginning in
January 1997. Construction
on the 1.2 million square foot
building will begin in the spring
of 1994.
This is surely evident to
most of you , but I think it
bears repeating , for CRA
must meet the test of the market if it is to provide the longterm benefits of revitalization
that we all desire. It's worth
remind ing all of us-community groups , policy makers
and even bankers-of this
fact from time to time, since
it's sometimes tempting to
emphasize short term benefits at the expense of long
term commitments.
Congregation s fo r Afford able Housing in Atlanta has
established a housing hotline
te lephone service in partnersh ip with the Atlanta Jou rnal/Constitution newspaper to
inform people of the availability of affordable hou sing in
metro Atlanta . The hotline
number is (404) 222-2739 .
Nowhere have the benefits
of
sound
community
development
lending
practices been more evident
to me than on a recent
community tour which I took
in southeast Washington ,
D.C . There I witnessed
low - income multifamily
housing and retail projects
which have been financed by
a local institution with a
professional, experienced
community development
lending group. This bank has
forged
productive
partnerships with local
non-profit and for-profit
entrepreneurial developers.
We at the Federal Reserve
have stressed this market aspect of CRA and will continue
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Partners in Community
Federal Reserve Bank of St. Louis
and Economic Development
See GREENSPAN. page 8
First American National
Bank in Nashville, Tennessee
is offering a Disc CheckbookPlus software program to its
small business customers to
assist them with their accounting . The program was developed by Disc Inc. , Owings
Mills , MD, and will help customers reconcile their bank
accounts and import the data
into a spreadsheet format for
further analysis.
First-time homebuyers
who purchase a new energyefficient home in Georgia may
be eligible for downpayment
and closing cost assistance .
The new Georgia Energy Incentive Partnership Program
is being offered by Georgia
Power Company, Atlanta Gas
Light, and Fann ie Mae. For
more information , call : The
Home Builders Association of
Georgia (1-800-248-2453) ,
Georgia Power Co . (1-800524-2421 ), or Atlanta Gas
Light (1-800-564-6040) .
5
Taking Care of Business in
Hattiesburg, Mississippi
Nonprofit CDC provides loans to eager entrepreneurs
S
outheast Mississippi
Community Investment Corporation (SEMCIC),
in Hattiesburg recently an nounced the formation of a
new Community Development Center (CDC). The
center is designed to create
jobs by lending money to help
develop new businesses or
expand existing businesses.
Utilizing government funds
and bank financing , the CDC
now has over $3 .9 million
available to lend to qualified
applicants in Forrest and Lamar counties . But you better
hurry . Within 60 days of the
formal announcement on October 1, over 150 loan applications had already been
requested.
SEMCIC is a subsidiary of
the Area Development Partnership (ADP), an organization that also included the
Chamber of Commerce .
SEMCIC is responsible for
providing techn ical assistance and administering the
established loan program.
All seven local banks in
Hattiesburg have committed
$25 ,000 each to fund the
CDC , and each bank ' s
pre sident is a SEMCIC board
member.
SEMCIC 's
Director, Ms . Joanna
Matheny comments , " I' m
really
proud
of
our
bankers--they are really
coming through with amazing
amounts of time and staff
support They are totally
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SPRING 1994
Federal Reserve Bank of St. Louis
dedicated to making this
CDC work for the good of the
comm unity ."
Although
forma l relationships with
organizations other than
financial institutions are
lacking, SEMCIC recognizes
the potential to expand and
develop affiliations in various
areas throughout the
community .
In addition to the funding
by local banks, SEMCIC was
granted
$800 ,000
in
Comm unity Dev elop me nt
Block Grants from the State
of Mississippi and the Forrest
County Board of Supervisors .
Also , $2 .5 million in the
state's Minority Revolving
Loan Fund (M RL) have been
approved for use by the CDC .
These funds , administered
through the M iss issippi
Business
Finance
Corporation , can be used to
finance up to 25% of a loan
request . The rem a ining
financing will be derived from
bank funds (45%), and
SEMCIC funds (25%). The
state program requires at
least 5% equity to qualify for
a loan .
The Mississippi Business
Finance Corporation has also
granted SEMCIC $500 ,000
from their Small Bus iness
Assistance Progra m. Ms.
Matheny reported that, "The
funds wil l be leveraged as
much as possible, usi ng MRL
money and others as
appropriate ."
Expectations for the
program are high and it has
received national attention .
SEMCIC was the only bank
CDC chosen from a field of
approximately 300 non-profit
community development
organizations to receive one
of 10 technical assistance
grants from the federal
Department of Housing and
Urban Development.
Hattiesburg , MS
is
centrally located between
Jackson , Meridian , Mobile ,
Biloxi-Gulfport , and New
Orleans It extends into both
Forrest and Lamar counties ,
and has been named by The
Rating Guide to Life in
America 's Small Cities as
one of the top 10 small cities
in the South .
ADP President David Rumbarger and SEMCIC Director
Joanna Matheny discuss the new program with a potential
applicam (se ated).
FEDERAL RESERVE BANK OF ATLANTA
6
CRA: Sweeping Changes to Regulations
READING FILE
Continued from page I
More Performance
Based Criteria
activities anyway to comply
with CRA.
Pr e sident Clinton requested more objective, performance-based assessment
standards that minimize the
compliance burden while improving performance . The
proposal succeeds in addressing many of these concerns . The proposal also
tries to address the industry
criticism that existing standards require excessive
amounts of paperwork. That
burden is reduced for smaller
financial institutions, many of
which rely on community development lending as their
primary source of business.
Significantly st ronger enforcement powers improve
on the existing regulations.
Stronger enforcement
powers for poor performance
are comparable to the sanctions associated with safety
and soundness concerns. In
addition , the public can participate in the examination
process due to notification at
least 30 days before the examination begins. And although the proposal is not
intentionally designed to provide a "safe harbor" for banks
with favorable ratings, examination frequencies would
change based on the ratings.
The better the rating the less
frequent the examinations,
and vice versa.
For most retail banks, the
proposal would eliminate the
current 12 assessment factors and replace them with
three tests covering lending ,
service, and investment activities. The proposed regulations are numbers-driven,
looking primarily at loans actually booked , investments
and grants actually funded,
and the number and location
of branches that are easily
accessible to low- and moderate-income communities .
Additional data collection of
approved and denied loans is
required of institutions having more than $250 million in
assets. Different evaluation
standards are proposed for
smaller institutions.
No longer wou ld banks
document their outreach and
marketing efforts. No longer
would regulators routinely require documentation of credit
needs assessments or of directors' participation in CRA
activities . The proposal assumes that financial institutions would do these
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Partners in Community
Federal Reserve Bank of St. Louis
■
Closing the Gap: A Guide to
Equal Opportunity Lending, 27
pps ., Federal Reserve Bank of
Boston. For copies, call (617)
973-3459
■
Small Steps Toward Big
Dreams: Enterprise Development Programs for the Disadvantaged, Charles Stewart
Mott Foundation , 17 pps. For
free copies call (313) 7661766.
■
Banking in a Changing World,
speech by Susan M. Phillips,
Governor, Federal Reserve
Board , June 1993.
■
Detecting and Eliminating
Possible Discrimination in Financial Institutions, speech by
John LaWare , Governor, Federal Reserve Board , March
1993.
■
Tools for Lenders: A Guide to
Successful Community Reinvestment. The Woodstock lnstit ute has prepared this
publication to help guide financial institutions as they assess
their CRA compliance (1990).
The manual is available for
$50 for the first copy, $25 for
additional copies. For copies ,
ca ll (312) 427-8070.
■
A Path to Community Development: The Community Reinvestment Act, Lending
Discrimination, and The Role
of Community Development
Banks is the sixth public policy
brief published by The Jerome
Levy Economics Institute for
Bard College . For copies, call
(914) 758-7412 .
■
Sound Loans for Communities: An Analysis of the Performance of Community
Reinve stment Loans, The
Woodstock Institute. For copies , contact Malcolm Bush or
Kathryn Tholin at (312) 4278070.
■
The 1994 Metropolitan Atlanta
Affordable Housing Directory
is available for $15 .00 . Payment should be ma iled to The
Atlanta Affordable Home Associ ation , 173 1 Commerce
Drive , N.W ., Suite 109, Atlanta , GA 303 18 or call (404)
351-6666 .
New Examination
Procedures
Four examination options
are available for institutions,
depending on their size and
type. These options include
the lending, service, and investment tests for retail institutions; an investment test for
special-purpose or wholesale
institutions; a streamlined examination for smaller institutions; or a pre-approved
strategic plan.
Because of distinct orientations , special-purpose and
wholesale banks will be
evaluated differently than retail banks. The lending test
will serve as the basis for rating retail banks; the rating can
be adjusted up or down
based on the results of the
servi ce test, or up based on
the investment test. However , special-purpose or
wholesa le banks' ratings will
be based primarily on the investment test. Any financial
institution that fails to pass
and Economic Development
See CRA . page 7
Copies of mate rials produced by
the Federa l Reserve System can be
obtained by writing or calling the Community Affa irs section at (404) 5897307 .
7
CRA: Community Involvement Encouraged
Continued from page 6
the established discrimination criteria will receive a
needs to improve or substantial noncompliance rating.
The other two examination
options are the CRA plan or a
small bank streamlined examination . A CRA plan can
not exceed two years and
must have measurable goals
against which performance
can be evaluated. If an institution fails to meet the "preponderance
of
the
measurable goals", it will be
evaluated under the lending ,
service, and investment
tests.
Small banks and thrifts
(generally less than $250 million in assets) can choose to
undergo a streamlined examination process. Under
the small lender's test, the institution is presumed to have
a satisfactory rating if it has a
reasonable loan to deposit ratio, makes most of its loans
locally, has a good loan mix
(including a variety of loans
and a fair distribution across
income levels), has no legitimate, bona-fide complaints
from community members ,
has no discrimination noted ,
and has a reasonable distribution of loans if required to
report under the Home Mortgage Disclosure Act (HMDA).
A reasonable loan to deposit ratio is currently assumed to be 60 percent. As
of June 30, 1993, 51 .6 percent of the nation 's insured
commercial banks with assets under $250 million had
loan to deposit ratios of less
than 60 percent.
Public Comments Sought
Public comment on the
regulations was not only invited but strongly encouraged . The proposal asked
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SPRING 1994
Federal Reserve Bank of St. Louis
for comments on 11 specific
items or issues. Of course
many more issues have been
identified since
the proposal
was published,
only a handful
of which are
discussed
here.
profitable and frequently unsustainable. Some lenders
and advocates worry that this
could have
the effect of
reducing the
total amount
of funds available from fin an c i a I
institutions to
address other
community
development
lending
needs . In addition , improperly underwritten loans
normally resu lt in higher past
due rates and defaults, which
is unfair to depositors, stockholders , and (low-income)
borrowers.
"ls the
proposal better
than the
existing
regulations?"
Due to the
complexity and
importance of
the issues, the
public comment per iod
was extended an additional
30 days. Now begins the arduous task of analyzing the
comments and either incorporating changes to the proposa I, developing a new
proposal, or possibly even
modifying the existing reguI at ion if the proposed
changes prove unworkable.
Market Share Test
One of the most significant
issues identified is utilizing a
market share, determined by
reporting ins titutions , to
evaluate performance under
the lending test. The bank's
market share of loans in lowand moderate-income areas
is compared with its share in
other parts of its service area .
Because finance companies,
small banks, and other lenders do not report their loans,
the market share is only an
estimate and could be misleading . As a result, examiner
judgement
will
sometimes be required to adjust the in itial ratings .
Larger institutions could
choose to aggressively seek
market share in low-income
communities by underpricing
loan products or by engaging
in unsound loan underwriting Below market rate lending is almost always less
Increased Data Collection
Another significant issue
being widely discussed is the
data collection requirements.
Lenders with more than $250
million in assets (or subsid iaries of holding companies
with more than $250 million
in bank or thrift assets) may
be required to report data on
mortgages, small business
loans, and consumer loans.
The data would include information
on
the
borrower's/business ' location ,
the number and amount of
loans made or purchased ,
and the number and disposition of applications received .
Unlike the Home Mortgage
Disclosure Act (HMDA) , no
data on the race , income , or
gender of the applicant would
be required .
The reporting requirement
excludes data on auto loans,
credit cards , and open-end
credit. Therefore , if an institution makes home equity
lines of credit available in
See CRA . page I I
FEDERAL RESERVE BANK OF ATLANTA
8
Greenspan: Quantification Could Do More Harm Than Good
Continued from page 4
The result has been an
impressive array of projects
which provide housing and
retail services to large
segments of a previously
underserved low- and
moderate-income community
in Washington.
The res ult for
the bank has
been two-fold .
It has attained
a high deg ree
of visibility for
these projects
and they have
realized
a
profitable
portfolio. Yes,
some of this
was accomplished with the
aid of special government
programs to fill gaps. But on
the who le , the role of
government was rather
inconsequential.
han ds the decisions about the
best use of credit to meet the
needs of localities. Certainly
this is done by the Congress
from time to time-for example, through the tax code and
credit subsidies. But this is
not, and should
not be , the role
of banking supervision. Despite
its
problems, CRA
has had a
unique strength
in that it has not
been a bureaucratic , Wash ington driven,
program that
substitutes "inside the beltway" decision making by nonelected officials for the give
and ta ke of local community
con tro l. Yet it does seem
clear that some greater direction from the regulators is
needed, and the question is
how that guidance should be
provided .
"We should not
entertain false
hopes of curing
the ambiguity
problem. "
As you know, the four regulatory agencies were asked
by the President to rethink
CRA by placing more emphasis on performance, rather
than process and documentation . We are in full accord
with this objective. The public
comment period ends on
March 24 , and if you have not
already done so, I encourage
you to submit comments to
the regulators. These public
comments weigh heavily in
agency decision making .
I would like to make some
poi nts which I think need to be
considered when the agencies adopt a final rule . First,
although it's clear that actual
performance , not procedures , should be the major
emphasis in CRA, the agencies must not cross the line
into cred it allocation. By this
I mean taking into their own
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Partners in Community
Federal Reserve Bank of St. Louis
This has been one of the
most difficult issues th at we
have tackled in this revision
process-trying to maintain
some flexib il ity , yet further
quantifying what is required
for good performance.
Second , quantifying CRA
may be viewed as an improvement in some quarters
in that it wou ld add some certainty for bankers on their rati ng , and better allow
community groups to assess
performance. It would also
make our exam iners' lives
much easier by removing the
need for them to make judgments on " how much is
enough." In the public hearings which were held on CRA
reform , many bankers re-
and Economic Development
qu ested that we "ju st tell
them what they need to do."
Many community groups
echoed this theme . And it's
easy to understand the desire for a clearer road map.
However, complete quantification cou ld do more harm
than good by removing incentives for creativity in the
im plementation of projects.
By allowing some judgment
to remain , it increases the
chances that banks will look
more closely at the specific
needs of their communities,
as they are influenced by local groups, and develop innov ative solutions for
addressing th ose needs. A
laundry list of allowable activities may preclude certain
disti nctive projects. It may
cause banks to concentrate
all their resources on the
more common projects
which are known to get socalled "CRA credit". It wou ld
be most unfortunate if unique
and well thought out projects
remain unfu nded because
they aren't on some list that
we in Washington have devised .
Third , let me mention a
positive aspect of the reexamination of CRA-a more
direct recognition that CRA is
not just about housing . Initiall y when CRA was enacted the emphasis was on
housing for several reasons.
One, the statute was passed
as part of the Housing and
Community Development
Act of 1977. Second , the
major community organizations which lobbied successfully for the passage of CRA
See GREENSPAN, page 9
9
Greenspan: CRA Is Not Just About Housing
Continued f rom page 8
were mainly housing advocacy and development
groups. Third , with the existence of HMDA data , housing
was the only area for which
the public had quantifiable
data on an institution's performance . However, the importance of small business
financing and development to
low- and moderate-income
communities and to our economy as a whole, cannot be
minimized . I believe the proposed CRA reforms will assure that this important area
receives proper consideration.
We have tough work ahead
of us. Although there seems
to be common agreement that
reform of CRA is desirable,
there are difficult decisions to
be made. Although databased , the rating system being
proposed
will
still-properly in my viewdepend on considerable examiner judgment. We should
therefore not entertain false
hopes of curing the ambiguity
problem that engendered so
many of the complaints that
prompted the review process.
The core question is whether
the new complicated evaluation system will better advance the cause of CRA for all
concerned.
Closely related to changes
in CRA are the various proposals for funding community
development financial institutions. Without taking a stance
on any specific piece of legislation , as a general principle I
think it is very important to utilize existing fin ancial intermediarie s and institutions as
much as possible . In gener<'l l,
in my view, we should support
the capacity building efforts of
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SPRIN GJ994
Federal Reserve Bank of St. Louis
these existing organizations
rather than trying to create a
network of new institutions
Let me turn briefly to a matter of serious concern to us
all. That, of course, is the
specter of racial discrimination in the mortgage granting
process raised by the HMDA
data, our own research and
enforcement activity , and
findings of the other agencies. I know of few issues
that need such prompt and
decisive action-on behalf of
both the regulators and the
industry-as do the questions that have arisen about
the fairness of the mortgage
market.
We simply cannot as a nation tolerate unfair and illegal
activity that puts some of our
citizens at a disadvantage as
they try to participate in the
credit markets. We all know
that the raw HMDA numbers
are not a reliable gauge of
whether discrimination is at
work or to what degree. But
the general story they tell
cannot be encouraging to
anyone, and is a strong signal that work needs to be
done. The cumulative evidence seems clear to me.
We have a problem whose
magnitude may be unknown,
but whose presence is undeniable.
To be sure, much discrimination , perhaps most, in today ' s
society
is
subconscious, the result of
habit and culture . But
whether it is deliberate or not,
the consequence is the
same. Free market capitalistic systems rooted in individu _I freedom cannot and
should not abide such unjust
behavior. To the extent
that individual contributions to the market place
are judged , and rewarded on any basis
other than economic values, the system suffers,
and the nation's standard of living is impaired .
We may never reach
perfection in this regard ,
but we should never
cease to persevere.
"
We
cannot
tolerate
unfair
and
illegal
lending
activity
"
But the solution to these
problems will depend on a
very significant commitment
by the industry itself. We
have been encouraged by efforts of individual institutions
to review loan processing
procedures , reexamine
credit granting criteria for unintended unfair consequences , institute special
train ing for loan officers, and
establish second review programs. All of these efforts
deserve aggressive support,
and I would urge each and
every institution to undertake
a self examination .
In clos ing, let me say that
the existence of the National
Community Reinvestment
Coalition--conceived to
largely represent the views of
grass roots organizationsis a welcome addition to the
Washington scene . In bringing the views of its constituent organiza ti ons to the
attention of the Federal Reserve and others, it is playing
a most crucial role in the formation of our nation's policy
on the critical iss ues of economic development. Despite our differences, I very
much appreciate having the
opportunity to address you .
FEDERAL RESERVE BANK OF ATLANTA
10
Coastal Georgia Addresses Small
Business Development Needs
By Hank Helton
I
n Glynn County, Georgia, local area financial
institutions working with an
area development authority
have created a program that
provides existing and potential small businesses with
more than just loans.
Announced in August
1993, the Enter-Prize Program is a partnership between seven local financial
institutions, the Coastal Area
District Development Authority (CADDA), the University
of Georgia Small Business
Development
Center
(SBDC) in Brunswick, and
the Consumer Counseling
Credit Service (CCCS) in Savannah, Georgia.
The program informs potential and existing business
owners of business development resources, provides
counselling and training , and
provides qualified applicants
with start-up or expansion
loans. To date, 4 loans totalling $101,000 have been
made; approximately 40 applications have been submitted .
According to Rod Lueth,
President of Frederica Bank
and Trust, "The Enter-Prize
Program facilitates the process of going from an idea to
reality. We have a lot of different resources here for
business development. The
clients just have to know how
to tap into them and that's
where we come in. "
Under the Enter-Prize
Loan Program, the financial
institutions receive the applications, analyze the pro
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Partners in Community
Federal Reserve Bank of St. Louis
Pearl Brown opened Karmen 's
Hot Bar in Brunswick, GA with a
loan and ass istan ce fr om th e
Enter-Prize Program.
posal , make the credit decision, and ensure proper loan
documentation , but provide
only half of the loan amount.
The remainder of the loan is
funded by CAD DA, utilizing its
revolving loan fund . Initially,
CADDA limited its commitment to $100,000 for the program. Any increases in this
amount based on demand will
have to be approved by the
CADDA Board of Directors.
Personal guarantees are
required of the borrowers .
The banks and CADDA are
secured by a first lien on the
project assets by sharing collateral on a pro-rata basis.
Loan amounts range from
$5,000 to $50,000. The loans
can be used to acquire land,
buildings, machinery, equipment, and inventory. The
funds can also be used for
working capital, leasehold improvements, or building renovations. Interest rates are
Prime plus 2 percent with repayment terms ranging from 5
to 20 years. The borrower is
required to have an equity injection of at least 10 percent.
and Economic Development
Borrowers must be able to
demonstrate management
experience in the type of
business they are expanding
or starting . The borrower
must also agree to accept ongoing assistance with management issues, preparation
of financial statements, and
other matters pertaining to
the day-to-day operations of
the business.
Ed Pinckney , Jr., Vice
President of Trust Company
Bank of Southeast Georgia ,
said, "The biggest problems
we have are getting financially qualified applicants and
applicants with adequate
business plans. The community was concerned that they
could not obtain business
loans. We sat down and put
a mechanism in place so the
applicants could have a process to follow to get these
loans."
If a loan application is rejected because of bad or insufficient credit history, the
applicant is referred to the
CCCS for free budgeting and
money management advice.
Applicants who need assistance with developing or fine
tuning their business plan ,
completing financial statements, or establishing record-keeping systems are
referred to the SBDC .
In addition, the banks are
establishing a network of legal, insurance, accounting ,
and other professionals to assist borrowers . Once the
credit problems are resolved ,
an adequate business plan is
See EN TER-PRIZE, page 11
11
ENTER-PRJZE
Continued f rom page 10
established, and any other
problems addressed, the borrower then reapplies for the
loan .
"This is more of a cooperative effort than a competitive
effort. Communication is the
key . This program has not
only helped break down barriers between the community
and the financial institutions,
but also barriers with in the fin an c i a I community ," Mr.
Lueth stated .
The financing component
of the program is a partnership between Barnett Bank of
Southeast Georgia, Coastal
Bank of Georgia, First Bank of
Brunswick, First Federal Savings , First Georgia Bank ,
Trust Company Bank of
Southeast Georgia, Frederica
Bank and Trust, and the development authority .
CADDA was created in
1976 by the Coastal Area
Planning and Development
Commission to administer a
$5 million Department of
Commerce grant. It serves
the 8-county coastal Georg ia
region . The authority , now
self-supporting , administers
the CADDA Revolving Loan
Fund (RLF) which was the first
and now the largest rural revolving loan fund in the United
States with $8 .3 million in outstanding loans. In addition ,
CADDA is an SBA Certified
Development Corporation
and is involved in numerous
federal and state financing
programs .
For more information call ,
the Coastal Area District Development Authority in Brunswick ,
Georgia ,
( 912 )
261 -2 500 .
SPRIN G 1994
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Federal Reserve Bank of St. Louis
CRA
A N A L ysI s
Continuedfrompage 7
-
wealthy neighborhoods ,
these loans are not reported .
But if the same institution
makes home improvement
loans available in moderateincome neighborhoods, they
are reported . Some advocates complain that only
closed-end credit may be offered in low- and moderateincome areas in order to
boost the lender's reported
market share.
Some lenders have complained that if an institution
identifies small dollar consumer loans and car loans as
the most significant credit
need in a low-income area ,
the proposed CRA reporting
requirement would fail to capture the information or provide the bank with CRA
"cred it". Of course, a lender
could rely on an examiner's
subjective decision that an
upgrade in the rating is appropriate , but one of the goals of
the new regulations is to reduce subjectivity .
High Reporting Costs
The new reporting requirement increases the cost of
lending , both to the 3,400 institutions who have to file the
loan reports and to the regulators who compile them . Although very difficult to gauge ,
the business reporting system alone is estimated to cost
the industry roughly $21 million a year.
Nobody knows the cost
that regulators will incur to
generate the business and
consumer loa n reports . It
currently costs about $4 million a year to process HMDA
reports . The obvious question : Are the added costs
worth it? A lot depends on
who has to pay . Will these
costs be absorbed by the in-
dustry or passed on to the
consumers?
Other Issues To Consider
Many would argue that in
all fairness , institutions
should be able to evaluate
their CRA performance on an
ongoing basis . However, under the lending test, market
share can not be accurately
determined until all reporting
data has been processed by
the agencies, resulting in an
after-the-fact review .
Another side-effect results
from the calculations required under the investment
test. The calculation adds
the total investments and
grants provided for community development projects ,
community development corporations, equ ity funds , etc.
and divides that amount by
total risk-based capital. Institutions that are poorly capital ized w i ll need fewer
investments or grants to fare
favorably under the investment test. Th is may be appropriate . After all , if a bank
is on rocky ground , its resources are likely more efficient Iy and effectively
employed through channels
other than generous grants.
However, if a bank is well
capitalized , which is desirable from a safety and soundness viewpoint, it may be
more difficult to pass the investment test . Problems
could arise if retail institutions
may perceive that the investment test is too difficult to
pass, and focus instead only
on the lending test. As a result, some low-income housing developments that
require high levels of equity to
See C'RA . page 12
FEDERAL RESERVE BANK OF ATLANTA
12
CRA-Continuedfrom page I I
Calendar
April
Federal Reserve Bank of Kansas
City and the New Mexico Bankers
Association , April 5, Clovis, NM , Devel opment Finance Worksh op. Conta ct (816) 881-2890. This works hop
will be re peated Ap ril 6 in Roswell ,
NM , April 7 in Hobbs, NM , April 13 in
Las Veg a s , NM , A pr i l 14 i n
Espanol a, MN , April 20 in Gallup ,
NM , and April 21 in Farmington, NM .
Contact (816) 881 -2890.
Information
provided 011
upcoming
events of
other organizations should
be viewed as
strictly informational and
not as an endorsement of
their activities.
The Institute for Professiona l an d
Executive Developmen t, Inc., April
5-6 , Housing Ta x Credits 1994
Workshop, Washington, D.C. Conta ct 202-33 1-9230.
National Association of Development Organ izations , April 17- 19 ,
NADO's Wa shington Confe rence ,
W ash in gton , D.C . Conta ct (2 02 )
624-7806 .
Nation al Council For Urban Econom ic Development, April 17-20 , Annual Conference, Philade lphia , PA.
Contact (202) 223-4735.
Th e National Coa litio n fo r th e
Homeless and the Minnesota Coa lition fo r the Homeless , April 21-23,
Homelessness Conference, M i nneapolis, MN . Contact (61 2) 8707073.
May
American Ban kers Association ,
May 18-20, 1994 Community Development Lending Conference, Baltimore, MD . Contact (202) 663-5274.
maintain low monthly rents ,
may actually be structured
with more debt for CRA purposes and thus drive up the
rents. Also, could institutions
who believe it is too difficult to
pass the investment test reduce their level of charitable
donations or investments in
CDCs with no consequence?
Many of the terms in the
proposed regu lation are not
defi ned . What does "good
loan mix," "bona-fide co mplaint ," "significantly exceeds ," "very few ," "vast
majority," and "read ily accessible" mean? Many people
are concerned that hundreds
of interpretative issues may
arise .
Finally , some people have
complained that the proposal
does not fully cons ider loan
demand . So me markets
have li mited loan demand .
Low demand res ults in lower
loan to deposit ratios and as
a result, a higher percentage
of these small institutions
would no t qua lify fo r a
strea mlined CRA examination. And suppose an upperincome area experiences a
building boom. If a construction lender meets that dem and and a nearb y
low-income area does not
experience comparable demand , the lender could fare
poorly under the CRA
Partners
Nobody has said that this
proposed regu lation is perfect. The fact is, it has many
favorable features but also
raises many issues and co ncerns. Is it better than the
existing regulations? The
jury is still out
Contributing to Partners
We encourage you to submit articles that we can consider
for publication in Partners. We also welco me the opportun ity
to learn of other so urces that we might co ntact fo r articles.
We are particularly inte rested in unp ublished material on
co mmu nity development lending.
VICE PRESIDENT
Ron Zimmerman
EDITOR
Cynth ia Goodwin
ASSOC IA TE EDITOR
Courtney Dufries
Free subscnptIon and add1t1onal copies are available upon request to
Community Affairs, Federal Reserve Bank of At lanta, 104 Manetta St , NW ,
Atlanta. Georgia 30303-2713 or call 404/589-7307 FAX 404/589-7302 The
views expresse d are not n ece ssarily thos e o f th e Fed eral Reserv e Bank
o f Atla n ta o r t h e Feder al Res erve Sy stem. Material may be reprinted or
abstracted provided that Partners 1s credited and provided w ith a copy of the
publ1cat1on
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Partners in Co mmunity
Federal Reserve Bank of St. Louis
From th is examiner's viewpoint, regulators will continue
to encounter problems implementing thi s law. Suppose
for example, a small retai l institution establishes a CRA
Plan but fa ils to meet the preponderance of the measurable goa ls . Ex aminers
would then attempt to evaluate performance utilizing a
streamlined CRA examinati on . But if the institution fails
to qualify fo r the streamlined
examination, the exam iner
looks to the lend ing , investment, and service test. The
exa miner must be proficient
in evaluating the bank under
three different scenarios .
And because small banks
are not required to report
loan act iv ity (other tha n
HMDA reports), evaluation
under the lending test becomes much more challeng ing . Most people agree that
regulators should spend considerable time and money to
ensure that well-trained examiners are available to conduct these examinations.
and Eco11omic Development
Also , we invite you to co ntribute articles or ideas for our
special features such as Cityscape , Opinion, Update, College Corner, and Reading File . For gu idance on article
preparation , just write or cal l us . The majority of Partners
readers are lenders, examiners , nonprofit developers, commun ity and eco nomic development practition ers and advocates, and government agencies and many others with a
direct interest in the fie ld. By contributing to Partners, you
and you r organizati on and our readers wil l benefit from your
expert ise .
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