There was a perception in the industry soon after 1989's Financial InstitUtions Reform, Recovery, and Enforcement Act became law that a "CRA loan" (an expression often spoken in an acerbic tone) could only be a money-losing proposition, no matter how you sliced it.
Since then our industry has become more enlightened. It has realized that many layers of business exist within the realm of community lending.
The tone has changed. Behold! Nonprofit housing agencies can make money! People will make their house payments even if they had several 30-day-lates on their revolving accounts! Borrowers do keep their money at home for some very legitimate culturally based reasons!
Difficult to Quantify
Yet the perplexing issue of accurately quantifying community lending results looms large for most bankers.
Of course we can look at the size of the spread on any given loan, or monitor the sales volume of community lending products to the secondary market agencies.
But what about the person who attended a homebuyer workshop at your institution nine months ago, took the lessons to heart, and is now coming back for a "regular" loan?
Or the borrowers who initially walked through your door in pursuit of an affordable home loan product and subsequently discovered that they could qualify for a "mainstream" loan that you are not tracking from a CRA perspective?
How do we capture this business so that we can accurately report the true contribution of community lending to our institutions' bottom line?
The issue looms even larger when one considers the near impossibility of capturing the dollar value of ancillary business generated by marketing CRA products.
Consider the relationships established with real estate professionals in the name of affordable housing - relationships that ultimately result in loan officers' also being referred significant amounts of "non-CRA" loans.
Consider also the penetration into previously uncultivated market segments because of your institution's consistent efforts to establish a presence in them through weekend community-based neighborhood events or by expanding your advertising and marketing effort to address a particular bilingual audience.
Realistic Goal
And then there is the difficulty of quantifying the benefits of general market exposure generated by press releases announcing homebuyer workshops, or through your participation in a local loan pool - exposure that would otherwise be gained only by spending hard-earned marketing dollars.
Many lenders cannot accurately track affordable home loan products or do not understand how important it is do to SO.
It is probably impossible to completely capture the bottomline benefits of a comprehensive community lending program. But a realistic goal would be to document the results without making a major dent in the time available to fulfill other aspects of your job description.
Your community lending effort may never receive credit from your bank's controller for the $300,000 loan that your loan officer brought in because of the relationship he established with John Doe Real Estate Co. while promoting low-down-payment "CRA loans."
Nevertheless, the effort should get credit for the homebuyers who were attracted to your institution because you participate in the MortgageCredit Certificate (MCC) program, or because you lend in cooperation with a local housing agency's down payment assistance program, or because a loan officer ran a booth at a community outreach event.
Laborious Process
To arrive at this level of reporting can be a laborious process, especially if the institution is large or the loan operations arc decentralized.
* Special product codes must be established for each community lending product your institution offers or program in which it participates.
* Loan officers and processors must be trained and retrained, to ensure that such loans are being accurately coded on the system.
* Redundant reporting mechanisms must be established, checked, and cross-checked at least until you have grown confident that information and product codes are being accurately input by loan production staff.
* Outreach efforts to nonprofit and government housing agencies that result in nontraditional loan business must be documented and reported.
* "Double entries" must be made on contribution margin reports, so that your community lending department is given proper credit for its contribution to product development and marketing, while credit is also given to the originating loan officer and office.
It is a big job. But the bottomline results of establishing, auditing, and monitoring a tracking system for affordable home loan products and services will astonish many.
Just over a year ago, my bank established a community development department and introduced an array of affordable home loan products.
Various tracking procedures were implemented. There now exists a high level of confidence in the accuracy of the data being captured
By April, the department had risen to the top quartile among our 22 loan offices in terms of its year-to-date contribution margin percentage. In April alone it ranked second.
These results are based solely on actual production, and do not include revenues from ancillary business and relationships.
Smart Move
The moral of this story?
Before you spend hours on end developing new products and thousands of dollars on marketing material to broaden your share of community lending business, before you beat yourself up in anticipation of the regulators coming in and doing the same - take the time to make sure you are accurately capturing what you are already doing!
It is highly unlikely that any of your more creative and expensive endeavors will have so large an impact on your numbers.
