Getting Your Money's Worth

Magazine cover with picture of machinery that reads "Everybody's Business: A People's Guide to Economic Development," a Southerners for Economic Justice and Institute for Southern Studies report

This article originally appeared in Southern Exposure Vol. 14 No. 5/6, "Everybody's Business." Find more from that issue here.

In 1985, a Fort Lauderdale-based bank provided a line of credit to a community development corporation to build 35 single-family homes for low- and moderate-income buyers. The next year, a North Carolina bank donated $50,000 to a national community development foundation and, in conjunction with the foundation, promised loans to minority businesses at three percent below prime rate. A bank in Atlanta is now spearheading a drive to create a new city-wide enterprise to support rehabilitation and construction of housing in low-income neighborhoods. Each of these efforts is the direct result of how economic development advocates have responded to dramatic changes in the banking industry. 

In June 1985, the U.S. Supreme Court issued a landmark ruling permitting regional interstate banking. For months, if not years, major Southeastern banks had been strengthening their balance sheets, scouting potential merger partners and plotting market strategies in anticipation of interstate banking within the region. Within days of the Supreme Court decision, First Atlanta merged with Wachovia Corporation of North Carolina. In the next 15 months, a dozen major mergers and acquisitions occurred among large regional banks in the Southeast. "Super-regional" banks such as NCNB and First Union of Charlotte, First Wachovia of Winston-Salem, and Citizens and Southern and SunTrust of Atlanta are now among the most profitable banks in the nation. 

Changes in the regulation of banks and thrift institutions have enormous consequences for local economic development efforts. These changes — coupled with national and international economic upheavals, demand for greater returns on savings accounts, and technological innovations — have resulted in competition between fewer and larger financial institutions. The evolving structure of today's banks shifts the location of credit-making decisions, deemphasizes commitments to local economic goals, and encourages the "strip-mining" of local deposits. 

The critical issue for community economic development practitioners in this financial environment is the continued availability of credit for distressed communities. Credit for low-income residents, small businesses, nonprofit developers, and government programs requiring bank participation is of particular concern. 

The Community Reinvestment Act of 1977 (CRA) has been surprisingly effective in addressing community economic development concerns and the negative effects of bank consolidation. The CRA requires banks to meet the credit needs of all parts of their community. Along with a companion measure (the Home Mortgage Disclosure Act), it effectively bars lenders from "redlining" or refusing loans and other services to entire areas because of the race or economic class of their populations. According to the Wall Street Journal, since the act's passage more than $3.7 billion has been committed in 117 cities for home mortgage, small business, and other loans to predominantly low-income borrowers. 


How CRA Works 

A bank's CRA record is available for public scrutiny and comment. This record is also reviewed by federal regulators before a bank merger is approved. During the application period for approval of the acquisition or merger, the application may be "challenged" or "protested" by community coalitions, organizations, individuals, or (especially in the case of the Southeast) legal service attorneys who intervene on behalf of low-income clients. 

Following an initial flurry of CRA protests and challenges, primarily in large Northern cities, many observers predicted that the CRA would be repealed or simply ignored by regulators as they grappled with new concerns such as bank failures, deposit insurance crises, and the financial stability of the thrift industry. The predictions proved wrong, and CRA protests jumped from three in 1984 to 18 in 1985. Emulating landmark achievements in Chicago and Boston, legal services organizations (especially in Florida, North Carolina, South Carolina, Georgia, and Kentucky) and community coalitions have challenged the applications of large banks seeking to cross state lines. 

Generally, research on a bank's CRA performance is conducted by a legal services attorney or a community group. This research entails examining the community's credit needs (home mortgages, home improvement loans, small business loans, credit for government development programs, etc.) and the bank's response through extension of credit and participation in special community development programs. In many cases, researchers will discover that lenders make few, if any, home mortgage loans in black and low-income neighborhoods. 

Armed with statistical data, a protest or challenge is filed with the appropriate federal bank regulatory agency which can reject a bank's application for a merger, acquisition, or other activity if they are convinced that the bank is not meeting a community's credit needs. Rather than rejecting an application, however, all parties involved usually attempt to reconcile their differences through negotiation. 

As a result of CRA protests, the Southeast has seen 15 "reinvestment lending agreements." These agreements focus on local credit needs, such as loans for mortgages, home improvement, and small — especially minority — businesses. Agreements also outline specific commitments to community development organizations, including investments, flexible underwriting criteria, and contributions of human and financial resources. While none of these agreements has been in effect long enough to assess their success in generating capital for credit-poor neighborhoods, two distinct strategies have been identified. 


Two Agreement Models 

Two general forms of lending agreements have been analyzed by M.I.T. Department of Urban Studies and Planning graduate students Eric Brown and Beth Marcus. Each form stems from a particular organizational base and relationship with the financial institution. The first involves community-based organizations in a relatively adversarial relationship with the financial institution. Typically this has happened in urban areas where there are community organizations with sufficient capacity to design feasible development projects. The resulting agreement is characterized by a comprehensive delineation of future lending obligations, including specific dollar commitments and loan types (housing, small business, minority enterprise, etc.) 

It authorizes non-traditional forms of equity, income, and collateral and sets time limitations for processing loan applications. To ensure continuous community input, oversight committees are established with regularly scheduled meetings of community representatives and lenders. Finally, the agreement assigns individual lending officers with responsibility for community reinvestment and liaison duties. 

The second form of agreement has been used in less organized areas. These agreements tend to be statewide, and have generally been negotiated by legal services programs in a non-adversarial atmosphere. The lender typically pledges to extend credit to worthy applicants regardless of income level or location. Although earlier agreements of this type did not specify dollar amounts, a recent lending agreement negotiated by Florida legal services attorneys with the Barnett Bank included a $50 million commitment. The financial institution usually agrees to conduct a needs assessment within the local community and to establish a position responsible for community affairs and investment. This type of agreement stresses the development of relationships as well as institutional change. 

There are four possible explanations for the emergence of these two unique forms of lending agreement: different problems are being addressed; similar problems are being interpreted differently; organizational bases and community histories are different; and expectations of results differ among communities. 

A powerful coalition of community-based organizations with ample evidence that its constituents have been systematically denied credit is likely to take an approach quite different from that of a group of public-interest lawyers exploring the potential for economic development in a relatively unorganized community. A community where financial institutions have been unresponsive to local requests for credit will not have the same objectives and expectations as the community only recently discovering its economic development potential. 

These diverse situations clearly suggest that different approaches may be advisable; both can produce credit for their communities. One type will produce by specifically obligating the lender to the achievement of goals and the other by providing a favorable climate for granting local loans. Several more years and considerable investigation will be required to decide which type of agreement will provide greater benefit. 


First Results 

Impressive results in Florida, however, recently led Federal Reserve consumer affairs chief Griffin L. Garwood to call CRA lending agreements in that trend-setting state a model for other communities. In the past two years, legal services attorneys have reached agreements with three regional banks acquiring Florida banks and one statewide bank holding company. Similar negotiations are underway with two more large banks seeking approval for additional acquisitions. 

As a result of these agreements, the banks have contracted with minority firms for services, conducted extensive studies of credit needs in low-income communities, intensified marketing and outreach activities, and reviewed underwriting criteria for loans. Lending criteria have become more flexible, mortgage loans have increased, community development projects are receiving investments, and the banks are participating in governmental development finance programs. 

In one such program, bank-owned lending corporations are being developed in a number of Florida cities by the Black Business Investment Board, a $5 million state finance agency. In conjunction with a national foundation, other banks are attempting to form a statewide financial intermediary and technical resource center to serve community development corporations (CDCs). In Miami Beach, a group of banks is working with a CDC to form a lending consortium for apartment and hotel rehabilitation. 

In addition, CDC housing projects with over 400 low- and moderate-income units are being directly financed, with flexible rates and terms, by banks throughout the state. A recent legal services study estimates that over $100 million has been invested in Florida's low- and moderate-income areas by banks that have signed lending agreements. 

Some banks have spurned the negotiation/mediation model. Hibernia Corporation, a New Orleans bank holding company, found its application to purchase a small Louisiana bank delayed for almost a year because it refused to negotiate with ACORN, a grassroots citizens' organization. At a private meeting with Federal Reserve Bank officials, the bank said it was already meeting "the convenience and needs of the New Orleans community" and therefore would not meet with ACORN representatives. ACORN's research showed that although New Orleans is 60 percent black, Hibernia loaned seven times more money for home purchases in white neighborhoods than for homes in black neighborhoods. 

After costly delays of its acquisition plan and a public hearing by the Federal Reserve, the bank finally negotiated. The Hibernia application, approved in July 1986, contains a detailed statement of credit commitments to low-income residents and in effect is a lending agreement with the Federal Reserve Board. ACORN reports it has negotiated CRA agreements with banks in St. Louis, Phoenix, Philadelphia, Washington, Baton Rouge, and Denver. 


Lessons for Your Community 

Through a series of steps, local communities can create the foundations for economic development partnerships with financial institutions — even without filing a CRA protest. Here's what can be done, with advice and assistance from groups listed in the resource section: 

• Prepare a credit-needs statement in the form of a community strategic development plan. In this plan, document the need for housing, small business, and community development credit. File the plan with all federally chartered and insured financial institutions and with their regulators. The plan should outline the developmental growth and prospects of the community based on information derived from Home Mortgage Disclosure Act data, census data, Housing Assistance Plan reports, surveys of housing conditions, and surveys of residents and businesses. Critical local issues, such as housing deterioration and lack of equity capital for small businesses, should be outlined. A statement of goals and objectives, along with a list of resources and a strategy for meeting these goals, should conclude the plan. 

• Conduct meetings with senior management of each local institution and discuss your findings, areas for improvement, and specific programs and projects that need lender commitments. 

• At the time of mergers and acquisitions (especially by out-of-state institutions), correspond with and visit the institution to discuss concern for the potential impact of the merger on local credit needs. Bankers tend to be more receptive when an important merger or acquisition requires regulatory approval. Closely examine the CRA record of an out-of-state acquiring institution; identify an exemplary CRA record (possibly from another state) that can be a model for your community. 

• Undertake an outreach and marketing effort, including workshops on public and alternative financial resources and written materials to help lenders select worthwhile projects and programs. In one example, the Massachusetts Urban Reinvestment Advisory Group (MURAG) has conducted monthly "banking forums" since 1982, bringing together bankers, local government officials, and community development leaders to discuss common issues and to "network." 

• Stay abreast of changes in the local and national capital markets and bank environment. Many states, Kentucky for one, have a national "trigger" for interstate banking which will allow large money center banks to acquire local institutions. In Texas, previously reluctant to allow any interstate banking, a bill will soon pass to allow such activity. 

• Carefully consider the circumstances and objectives of your organization's constituents before attempting to secure an agreement with a financial institution. While it is relatively easy to initiate action by lodging a CRA protest, the process of negotiating and finalizing an agreement is complex and will have broad ramifications for years to come. Seek the assistance of experienced reinvestment organizations such as the National Training and Information Center of Chicago, the Center for Community Change in Washington, the Massachusetts Urban Reinvestment Advisory Group in Boston, and the National Economic Development Law Center in Berkeley (see resource section). 

The success of community organizations and legal service attorneys must be tempered with the realization that bank trade groups and lobbyists could mount renewed efforts to repeal CRA. The turmoil in the banking industry will likely continue for several years. Businesses and developers who can cultivate contacts with a variety of lender sources will always have access to capital. Now is the time for community development practitioners to establish the same favorable financial position by increasing their awareness of financial markets, their understanding of regulatory mechanisms like CRA, and their preparation of specific and well-informed strategies and development plans.