Tuesday, January 29, 2013

Community Financing

The typical source of capital for community development is usually Community Development Block Grants (CDBG), Low Income Housing Tax Credits, tax increment financing, and other specific and limited support. However, increasing, these resources have become inadequate. The reason being government programs cannot handle the size and liquidity of the private capital market. Further, government funding for housing and community is becoming increasingly had to get. While public funding continues to play a part, albeit limited part, in urban redevelopment, private funding needs to be increased. Strangely, many low-income minority communities that face a shortage in capital are ones with rich and undervalued resources. As they say in real estate, it's all about location. Since these resources are often surrounded by blight, they are overlooked and undervalued by financial institutions and developers. These assets often include historic sites, vintage housing stock, proximity to transit lines, religious institutions, traditional commercial thoroughfares, proximity to major employers, cultural or recreational facilities, restaurants, shops, educational institutions, and other city landmarks. If developed properly, these assets can generate enormous value for the residents and extraordinary investment opportunities. Can you say intelligent citizen participation in urban renewal? In recent years, Wall Street (yes I know, the devil's banker) has developed a variety of innovative investment strategies that can be used to rehabilitate distressed communities. Complex financial modeling with sophisticated technology provide the structure and mechanisms that allow wide flexibility in the creation of financial products aimed at meeting a variety of investment needs. Let us step back and examine how we get the money and what are the finance issues before presenting solutions. The key issues are financial institutions are ill-fitted to met the financial needs of low-income household needs. Also, there is a general, well-founded, mistrust or misunderstanding of the way banks work. There are about three categories of individual participation in financial institutions: banked (actively use banks); cross-over, meaning at least one bank account and use alternative financial services (AFS); the third category is cash only (7.7%). An AFS can be defined as check cashing outlets, payday lenders, pawnshops, rent-to-own stores, and refund anticipation services. In a Pew Study of low-income census tracts in Los Angeles, the study found that the banked tend to be older on average then unbanked, both are foreign born but have been residing in the United Staes for about twenty years, both are employed in non-technical professions, similar family size, and two-thirds of banked have completed high school while half of the unbanked never finished. The findings revealed that having a bank account correlated with higher rates of savings while the savings of the unbanked are usually in remittance. One-third of the banked used AFS and most of the unbanked have never had a bank account. In 1975 The Home Mortgage Disclosure Act (HMDA) was passed. This required banks and other lenders to report information about loan application and their resolution. Files are distributed annually and made available to the public. This process is overseen by the Federal Reserve Bank and HMDA data must present the number of applications and denials. The HMDA has passed through three phases. The first phase occurred between 1975 and 1989: Anti-Redlining. The act did not prohibit relining and allowed people to sue or penalize lenders. Lender had to disclose the location of mortgage and, although, data showed a lack of lending, there was no action taken against the banks. The second phase took place between 1989 and 2002. The third phase took place from 2002 to 2010: the growth of the subprime. This period period was characterized as time of subprime lending or "reverse redlining." In 2002, the HMDA was amended to require lenders to collect interest on their loans. In 2005, a study showed that African-American and Latinos were twice as a likely than Caucasians to obtain subprime loans. In 2010, Anti-predatory lending amendments were enacted which required the following information to be made public: all loan data, type of loan, property type, purpose of the loan, occupancy, loan amount, if initiated as "pre-approved," action taken and date, property location; race, ethnicity, and gender of lendee, income, and if denied up to three reasons why. In 1977 The Community Reinvestment Act (CRA) was passed. This legislation written by then-Senator William Proxmire was a follow up to HMDA. It required banks to maintain records where loans were issued and make this information available. When banks asked regulatory agencies for permission to merge with another financial institution, community representatives had the right to testify about a bank's communal responsibility. Based on the testimony, the regulator could deny a merger or anything else. It also established three test fo banks with $1 billion in assets: the Lending Test which evaluated records of meeting credit needs through direct lending. The Investment Test which evaluated the number and responsiveness of investment including Low Income Housing Tax Credits and equity investments in small business. Finally, the Service Test which measured the availability and effectiveness of bank branches, basic banking services such as low-cost deposit accounts and community development. Banks with with assets between $250 million and $1 billion only had to meet the lending and community development test. Less than $250 million in assets had a more streamlined lending test. Financial institutions were rated substantial or noncompliant. What the CRA does not cover are mortgage lenders, insurance companies, payday lenders, or check-cashing companies. This makes it possible for these institutions to take advantage of their clients. Community Development Financing Institutions (CDFI)go back as far as the nineteenth century with minority owned banks. Credit unions were first established in the 1930s. The first CDFIs came in the form of business loan from the Department of Housing and Urban Development. There are also micro lenders such as the Grameen Bank and Self-Help Credit. In 1994 the CDFI Fund was established which made government funds available to individual CDFIs. In 1995, the CRA was revised to recognize Community Development Financial Union(?) loans and investment. The purpose of CDFIs is the development of loan funds, banks, credit unions, venture capital funds and other financial mechanisms. There are also different type of CDFI lending: personal loans made by credit unions, small business loans, equity or venture loans, and affordable housing. Credit unions are often mutual self-help institutions that toffer individual accounts and direct financial services. Community CDFI and Affordable Housing CDFI- single family lending that go directly to the homeowner and accompanied with homebuyer education. Does not engage in sub-prime loans only traditional lending. They fought against predatory lending. Some of the larger institutions engage in multi-family lending, small business loans. Usually they work with national intermediaries that provide local initiative support corporations. CDFIs are a response to the failure of conventional institutions. They allow for local control of capital. CDFIs are intermediaries between low-income communities and conventional market lenders. However, do CDFIs compete with banks or are they partners or some form of hybrid? There is no straight answer, regardless, a CDFI cannot meet all the community credit needs. What is the measure of a Community Development program? Jobs. How do we mesure CDFI jobs? The answer is complicated because is no national standard for what counts as a job. Is it a new job, permanent, temporary, part time, or full time? Was someone retrained. What is the anatomy of a CRA agreement. When a bank comes up for evaluation and merger hearings, community groups will go the bank for negotiations. The agreements have a three to ten year life span and cover a range of products, services, and lending. The goals for CRA agreements are: single family lending, small business investment, multi-family lending, community investment, accessible product lines, financial services, philanthropy, minority vendor/contract, retail branch access, and employee diversity. One example of an agreement is Wells Fargo. Wells Fargo agreed to a ten year, $45 billion pledge during their acquisition of First Interstate bank. Twenty-five billion dollars were pledged towards small business loans and $2 billion was pledge towards low-income customer service. Wells also increased bank access and the number of bilingual representations. Philanthropy was part of Washington Mutual's CRA agreement in 1999.

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