Sharon Canavan, Community Development Expert, and Vonda Eanes, District Community Affairs Officer, OCC
This Community Developments newsletter highlights how banks are working with nonprofit organizations and public agencies to return foreclosed properties to productive use. These partnerships are proving critical to efforts to stabilize communities that are struggling in the wake of the recession.
Some of the strategies these partnerships are using can position a financial institution for positive consideration under the Community Reinvestment Act (CRA). Activities that meet CRA requirements, including the geographic requirements of benefiting the bank’s assessment area or a broader statewide or regional area that includes the bank’s assessment area, will be favorably considered during a CRA examination.
The CRA, enacted by Congress in 1977, requires regulated financial institutions to meet the credit needs of borrowers in the local communities in which they are chartered--including low- and moderate-income neighborhoods--consistent with the safe and sound operation of the institution. The OCC and other federal financial supervisory agencies consider a bank’s CRA compliance record when reviewing applications for new bank branches, relocations of a main office or branch, mergers, and acquisitions.
Banks may receive favorable CRA consideration by engaging in community development activities. The CRA regulation defines community development as affordable housing (including multifamily rental housing) for low- or moderate-income individuals, community services targeted to low- or moderate-income individuals, activities that promote economic development by financing businesses or farms that meet the size eligibility standards of the Small Business Administration’s Development Company or Small Business Investment Company programs (13 CFR 121.301) or have gross annual revenues of $1 million or less, or activities that revitalize or stabilize low- or moderate-income geographies, designated disaster areas, or distressed or underserved nonmetropolitan middle-income geographies designated by the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and the OCC, based on specific factors detailed in the regulation (12 CFR 25).
Some examples include providing:
- An investment or grant to a nonprofit organization supporting community revitalization activities in low- and moderate-income areas.
- Financing for affordable housing rehabilitation and construction, serving low- and moderate-income persons.
- Financing for activities that revitalize or stabilize a low- and moderate-income community.
- Technical assistance that helps community development organizations serving low- and moderate-income communities build capacity and acquire and manage foreclosed properties.
As highlighted in this newsletter, banks are involved in various community stabilization strategies that may qualify for favorable CRA consideration in a number of ways.
Property Donations and Discounted Sales
Wells Fargo helps rebuild distressed neighborhoods by transferring other real estate owned (OREO) to its philanthropic arm, the Wells Fargo Housing Foundation. The Foundation looks for opportunities to donate, and accepts requests from community groups for donations of, OREO that can be rehabilitated for low- and moderate-income housing.
Property donated or sold at a discount to organizations whose primary purpose is consistent with the CRA definition of community development may be considered qualified investments in a CRA examination. Donations may be in the form of cash or in-kind donations, such as OREO sold at a discounted price or that is donated outright.
The Wells Fargo article explains how a bank’s community development corporation can use an OREO Acquisition/Rehabilitation Equity Equivalent Investment (EQ2) to provide low-cost, flexible loan capital to nonprofit organizations to purchase and rehabilitate bank-owned properties for resale to qualified low- and moderate-income borrowers.
Low Cost and Creative Financing
The Bridge to Success Contract for Deed Program helps aspiring homeowners who are unable to qualify for conventional mortgages. This pilot program provides affordable financing for acquisition and rehabilitation costs through contract for deed agreements. The program is financed by low-cost loans from a bank that established a mission-related deposit initiative to attract below-market interest deposits for community development lending.
Self-Help uses a similar strategy to help aspiring homeowners with a lease-purchase product. Self-Help connects families with OREO properties in target cities through local nonprofit organizations and sells the resulting mortgages to Fannie Mae. Self-Help seeks financial institution partners to originate and service these loans.
Banks that provide loans to financial intermediaries that rehabilitate and resell foreclosed properties as affordable housing for low- and moderate-income individuals may receive CRA consideration. Loans to financial intermediaries, such as community development financial institutions recognized by the U.S. Department of the Treasury, community development corporations, community loan funds, or pools that lend or facilitate lending to promote community development through community stabilization strategies, may be treated as community development loans and receive CRA consideration.
Banks may also receive CRA consideration for providing technical services that will help community development organizations serving low- and moderate-income communities build their capacity to acquire and manage foreclosed properties.
In many cities, well-established community development organizations have significant experience managing property acquisition and rehabilitation. But in other communities, nonprofit community development groups may be less experienced dealing with high rates of foreclosures. Banks can support the efforts of CRA-qualified nonprofit organizations by providing technical assistance such as management training, financial consulting, or marketing assistance. For example, bank employees might help a CRA-qualified nonprofit organization develop guidelines and standards for a property acquisition and rehabilitation program.
The OCC’s District Community Affairs Officers can provide technical assistance to national banks seeking additional information about how their community stabilization efforts might receive positive CRA consideration. Visit the “This Just In ... ” section of this issue or go to OCC Web site’s list of District Community Affairs Officers.