WASHINGTON - Banks looking to make safer rural loans - and get credit toward Community Reinvestment Act goals to boot - can turn to a federal loan guarantee program.
The Department of Agriculture runs the popular program, which spurs homeownership by extending guarantees on loans to poor and working-class rural residents. Last year, $725 million worth of those loans were supported by the guarantees. This year the plan is to support $1.04 billion in such loans.
The nation's 20,000 banks and bank branches outside metropolitan areas may find it particularly useful. The loan guarantees are administered by the USDA's Rural Housing and Community Development Service, formerly known as the Farmers Home Administration.
"We look at it as a great way to serve a wider range of rural housing needs," said Maureen A. Kennedy, administrator of the service. "The kinds of projects that we are talking about would all qualify for the Community Reinvestment Act"
The service has two main programs that push credit into rural communities.
The first is its section 502 plan, which provides 90% guarantees for home loans. The second is its "community facilities loan program," which last year supported roughly $30 million in loans for rural hospitals, jails, street-paving, and other public facilities with a government guarantee on 80% of the loan.
Would-be homebuyers who earn 80% to 115% of their community's median income are eligible for section 502 loans. The USDA guarantees 90% of the loan amount, and the bank takes the risk on the other 10%. Lenders may make loans for up to the full value of the house.
"There are plenty of people with low to moderate income that don't have a $10,000 down payment to buy a home," said former community banker Jan Shadburn, who is now acting Florida director for the USDA housing service. He said the guarantees give banks a "comfort zone" on loans they might not ordinarily make.
"In any state, this is a tremendous asset for lenders to be able to participate in their community and minimize their risk at the same time," said Mr. Shadburn, formerly an executive vice president at Marianna, Fla.- based Citizens Bank.
Some bankers might be leery of turning to Washington for help making loans in their own backyards. But the American Bankers Association praised the USDA program.
"They have done a tremendous job of making it work for bankers," said John Blanchfield, the ABA's associate director for agriculture and small business banking. "It has been remarkably free of bureaucracy."
"We've got to be taking our cue from the private sector," said the USDA's Ms. Kennedy. "We can't say, 'Look, here are our rules - follow them or else forget it.' We need to be saying, 'What do you need from us?'"
In fact, the rural housing service will be meeting with banks, investment banks, and others over the next two months to collect their suggestions on how to improve service.
Nearly 1,000 participating banks get market returns on safe loans through the program and score points with their regulators under the Community Reinvestment Act. The average rural housing service home loan is for $61,000, according to the USDA.
For their loans to qualify for the USDA guarantees, banks must register with the agency and agree to follow conventional lending practices on qualifying loans. That process can take less than a month.
The USDA housing service has 7,000 staffers in county offices across the country. Banks wishing to participate start by contacting the state office of the service to find the nearest local office.
"We have the expertise in holding the banks' hands," Mr. Shadburn said. Sometimes real estate agents do the legwork in finding loan customers. "Generally what we do is set it up through a realtor doing the packaging" of moderate income loans, Mr. Shadburn said.
Three hundred Florida lenders used the mortgage guarantee program to make $45 million in loans last year, he said. Banks can hold them in portfolio or sell them into an active secondary market.
In addition to the guaranteed loan programs, the USDA also runs a small pilot program in some parts of the country that provides added leverage to its rural housing subsidies.
In Florida, Iowa, Minnesota, Tennessee, Ohio, and Wyoming, banks can lend 50% of the total amount, while the USDA lends the other 50%. Although there is no Federal guarantee on the bank's portion of the loan, the USDA takes a subordinate stake in the loan to lower the bank's risks.
The Rural Housing and Community Development Service also provides direct loans to low-income rural households and communities - $1.8 billion in such loans last year. It also runs other programs that do not directly involve banks.