Community Investments
Volume 10; No. 4; Fall 1998
Consortia & the CRA
By Fred Mendez, Community Affairs Advisor, Federal Reserve Bank
of San Francisco
Multi-bank community development organizations (“consortia”) represent
the industry’s best effort to formalize community development lending
as an equal partner in the world of traditional banking. By assuming the
role of sub-contractor to their bank investors, consortia can provide
the community development expertise and capacity that small- and mid-sized
financial institutions cannot often afford. At the same time, these intermediaries
can provide large financial institutions with an effective way to reach
underserved populations through products and services that may initially
be unprofitable if performed internally.
The role of consortia within the financial industry is still a topic
for discussion in many banking circles, and regulatory agencies have no
role in determining the mechanisms in which banks meet the credit needs
of their communities. However, one role that the regulatory agencies do
play is in setting the foundation for bank participation in newly formed
consortia by providing regulatory guidance. The Federal Reserve Bank of
San Francisco is currently providing such guidance to two-dozen financial
institutions in the State of Utah that are undertaking the task of creating
a statewide consortium. The grid presented on the following page is derived
from a presentation delivered to these financial institutions in an effort
to explain the CRA implications of consortia lending.
Setting the foundation for this grid are two over-arching issues concerning
assessment area and the innovation/complexity of consortia products. The
regulation clearly states that community development loans, services,
and qualified investments are considered under CRA if they support a community
development organization or activity that services an area which includes
a financial institution’s assessment area. The assessment area need not
receive an immediate or direct benefit as long as the purpose, mandate,
or function of the activity serves the geographies and/or individuals
inside the assessment area or an area that is larger, but includes the
assessment area. Keep in mind, however, that an examiner will consider
community development activities that have a direct benefit to an institution’s
assessment area as being more responsive to the credit needs of that area
than those activities whose benefit is uncertain or diffused throughout
a larger area.
Another factor to take into consideration is the level of innovation
and complexity. This is determined by a financial institution’s efforts
to meet community development needs not being met in the normal course
of business by the local private market. Financing an organization such
as a consortium that provides innovative and complex products and services
is all well and good, and will likely result in the typical “garden variety”
CRA consideration. But, active partnership with a consortium in the development,
management, and distribution of such products and services will result
in innovative and complex consideration under the CRA . . .the stuff of
which Outstanding ratings are made.
Understanding the role of consortia, what they can and cannot do, and
how to use multi-bank initiatives to provide the greatest impact to those
most in need requires a partnership of resources and expertise. While
the financial industry continues to evolve, the role of consortia must
change with the industry in order to continue the mission of meeting the
changing needs and expectations of bank investors. The four federal banking
regulatory agencies are committed to assisting the industry in the development
and evolution of multi-bank community develoment initiatives. And, while
the CRA is challenging at times, it provides plenty of flexibility to
try new things through intermediaries like consortia.
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Large
Financial Institutions
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Small
Financial Institutions
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Wholesale or Limited
Financial Institutions
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Lending Test: Loans made to a consortium are considered
community development loans. Loans made through a consortium either
through participation or purchase are also considered community development
loans. The loans made by a consortium as a result of a financial institution’s
loans or investments will allow that financial institution to receive
continuing consideration for community development lending activity
as long as documentation supports this continued activity. For CRA
reporting purposes, multi-family affordable housing loans are considered
both a home mortgage and a community development loan. |
The focus of the streamlined CRA examination procedures
for small financial institutions is on lending and lending-related
activities. Loans made to a consortium are considered community
development loans, as are loans made through a consortium either
through participation or purchase. The loans made by a consortium
as a result of a small financial institution’s loans or investments
will allow that financial institution to receive continuing consideration
for community development lending activity as long as documentation
supports this continued activity. Participation in a consortium
can also be an adjustment factor for a low loan-to-deposit ratio
and allows for a bigger “bang for the buck” by providing access
to innovative financing that would not be available if the institution
did not participate in the organization.
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Community Development Lending: Similar to large financial
institutions, loans made by wholesale and limited purpose financial
institutions to a community development consortium are considered
community development loans, as are loans through a consortium either
through participation or purchase. The loans made by a consortium
as a result of a financial institution’s loans or investments will
allow that financial institution to receive continuing consideration
for community development lending activity as long as documentation
supports this continued activity. For CRA reporting purposes, multi-family
affordable housing loans are considered both a home mortgage and a
community development loan. |
I
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Investment Test: Any lawful investment
in a consortium, be it for creation, capitalization, or the purchase
of securitized loans, is considered a qualified investment. In the
cases where the consortium generates both community development loans
and community development investments, the split credit rule may apply,
allowing both lending and investment test consideration for the same
tranaction. (See Community Investments, Winter and Spring 1997) |
The most recent Interagency Questions
& Answers document on CRA clarifies that lending-related investments,
such as an investment to capitalize or create a consortium, will be
evaluated by examiners when evaluating small financial institutions
for a satisfactory CRA rating under the streamlined examination procdure.
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Community Development Investment: Any
lawful investment in a consortium, be it for creation, capitalization,
or the purchase of securitized loans, is considered a qualified investment.
In the cases where the consortium generates both community development
loans and community development investments, the split credit rule
may apply, allowing both lending and investment test consideration
for the same transaction. (See Community Investments, Spring 1996,
and Spring 1997) |
S
E
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V
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C
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Service Test: Participation by financial institution
representatives in the provision of financial services-related activities
to consortia is considered a community development service. This includes,
but is not limited to: participation on the task force to create a
consortium, participation on the organization’s board of directors,
and participation on the organization’s loan committee. |
The provision of community development
services to the consortium will help a small financial institution
if they choose to be evaluated for an Outstanding CRA rating. |
Community Development Service: Formal participation
by financial institution representatives in the provision of financial
services-related activities to consortia is considered a community
development service. This includes, but is not limited to: participation
on the task force to create a consortium, participation on the organization’s
board of directors, and participation on the organization’s loan committee.
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About the Author
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Fred Mendez is a community investment
advisor for the Federal Reserve Bank of San Francisco, which he
joined in 1993. In this role, he educates representatives of the
financial and community development industries on the CRA, community
and economic development, the secondary market, fair lending,
and bank reform issues.
Fred came to the Federal Reserve from the investment
banking industry and holds two degrees in Economics.
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