Volume 11; No. 3; December 1999
Micropolitan Community Reinvestment Trusts
By Kevin OBrien, President, Sovereign Capital, Inc.
Financial Institutions face unique challenges in complying with the
CRA in smaller micropolitan communities where there are few investment
opportunities with acceptable portfolio risk. Opportunities that can be
found tend to be characterized by high levels of distressed infrastructure.
Small municipal governments face their own challenges in financing community
facilities and making physical improvements. The costs of debt rating
and issuance of debt are frequently prohibitive because of relatively
small-sized bond issues in micropolitan areas.
This article offers a potential solution for both financial institutions
and small community governments: special asset securitization trusts.
These trusts, while still in a conceptual phase, could operate as revolving
debt pools for small cities.1 Small
city governments, special districts, schools, hospitals and other taxing
jurisdictions could collectively issue debt obligations and realize substantial
savings in debt rating fees, underwriting costs, and interest expenses,
since such costs would be shared among pool participants. Collectively,
these municipalities could reduce their interest costs since diversification
would improve their credit profiles and since quality of life, indicators,
which are generally high for small cities, could be considered as rating
Financial institutions could choose either to sponsor or invest in these
trusts. Sponsors would create the trusts and could originate bridge loans,
secured by tax anticipation notes, which would initially fund the trusts.
Municipalities would, of course, place their yet-to-be-subscribed obligations
into the trusts.
Investors, including financial institutions, would then purchase community
reinvestment certificates issued by the trusts, much as they would purchase
securitized packages of credit card receivables or automobile loans. This
same process could apply for the sale of securitized municipal tax liens,
which are projected to grow at $5 billion per year.
Besides sponsoring trust obligations or investing in certificates, financial
institution representatives could choose to serve on inter-bank tender
panels which would periodically review certificates issued by the trusts
or review offering memoranda describing specific issues.
In addition to favorable customer and public perception, financial institutions
could benefit from CRA investment test consideration since products designed
to finance community and economic development initiatives sponsored by
local governments qualify. Also, investment interest income from subscription
of community reinvestment certificates and reduced portfolio volatility
through diversification of credit risk would be advantages. Sponsoring
financial institutions would also have the capability to earn financial
advisory and facility fees. Finally, sponsoring banks could create bridge
funds to provide small city issuers with interim financing before obligations
are securitized, generating an additional source of fee revenue. Investing
institutions could hold these obligations for their own accounts or could
re-price them for retail distribution as individual investor account products.
Through participation in this program, financial institutions could directly
and profitably facilitate community development projects within targeted
lending markets, creating foundations for future profitability from population
and business growth through development of local and regional credit markets.
The trusts could also improve access to capital for economically disadvantaged
communities and ensure availability of financial resources for small communities
Community Reinvestment Trust Operations
Structure (PDF - 75KB)