WASHINGTON - Lending in low-income and moderate-income neighborhoods is good business, not only socially but economically, according to the Federal Reserve Bank of Philadelphia.
A report on the experiences of 61 organizations involved in community development lending has found that in many cases, these loans perform as well as, or even better than, comparable loans to higher-in-come customers.
The report comes as lenders of all sizes are under pressure from community groups and regulators to step up their inner-city, low-income, and minority lending. Regulators have begun talking tough about ending discrimination in lending, and have also begun reforming the Community Reinvestment Act. In the future, performance will be measured by the volume of loans made in lenders' communities, they say.
The Fed's guide, "Community Reinvestment Advocates," recounts the experiences of lenders. lender consortiums, and nonprofit intermediaries in low income lending. While many institutions began this kind of lending to improve their CRA ratings, they have found business benefits as well, the report found.
The book's success stories include:
* Bankers Trust New York Co., which has made more than $50 million in loans through its community development group since 1990, and so far has not had any loans in delinquency or default.
* Corestates Bank, Philadelphia, which has originated $70 million in community development real estate loans, and administers another $153 million, with a loss rate "far below industrial norms." In addition, its regional urban lending department has offered a 90% uninsured mortgage product since 1988, with only two foreclosures.
* Fidelity Federal Savings Bank of Florida, in West Palm Beach. which has averaged 20% of loan volume and 30% of total loans in low-income and moderate-income neighborhoods since 1987. In 1992, more than 250 loans worth $14.3 million were originated, with a delinquency rate no greater than the company's total loan portfolio.
* Northern Trust Co., Chicago, which has made 242 loans totaling $37 million through its neighborhood lending program. The bank has had no foreclosures or delinquencies on single-family loans. and only 2% of loans are more than 30 days past due.
Other Sources of Strength
The experiences of consortiums and nonprofit organizations also have been good according to the report. It found that four long-established consortiums - the Community Investment Corp., the Community Preservation Corp., the First Housing Development Corp. of Florida, and the Savings Associations Mortgage Co. - have provided financing of more that $1 billion for the development of 62.000 multifamily loans, with no losses.
In addition, the Enterprise Foundation and the Local Initiatives Support Corp., which together have made loans of $157 million to community development organizations, have had default rates of 1% to 3%. And community loan funds have made loans totaling $120 million with losses of about 1%.
The Philadelphia Fed put its report together in an effort to spread the word about community lending. While interest in this kind of lending has increased in recent years, data about the performance of low-income loans has been scarce, Fed officials said.
"If the successes were known, I'm convinced more people would take a chance at it," said Frederick M. Manning, vice president and community affairs officer at the Philadelphia Fed. "It's needed and overdue, and hopefully will cause some people out there to take a fresh look at it."
Many of the lenders in the report are large firms. The Philadelphia Fed hopes smaller institutions will take the lessons learned by the big banks and apply them more aggressively to their own lending.
When it comes to compliance with CRA, and to doing the things the law is all about, the big banks have certainly got their act together," Mr. Manning said. Many smaller lenders are just beginning to key into the emerging market, he said.
High Cost Cited
Despite these successes, with strong performance, the transaction costs of community development lending can be quite high, cutting into profitability. Several lenders acknowledged the special costs of community development lending.
"We have found that this is good business, but it can be more difficult. more time-consuming, and less profitable than other types of mortgage lending." said Jeffrey Graham, vice president of Bank of Boston, in the report. "Success requires persistence, focus, strong management support. and a positive attitude."
Advised Dede Myers, vice president of Midiantic National Bank in Edison, N.J.: "In order to do this type of lending, a financial institution must set up separate staff trained to market and underwrite the selected products. Because the loans are often smaller and more labor intensive, they usually will be denied or ignored if they compete for time with other deals."
But Mr. Manning of the Philadelphia Fed discounts some complaints of the high cost of community lending.
"Some of the statements around the cost side of it are way overblown," he said.
Keith Rolland, senior community affairs specialist and editor of the report, said a number of lessons about low-income lending emerged from the lenders' reports. They include:
* Many successful lenders work in partnership with the government and obtain credit enhancements, thereby reducing their risk.
* The most active lenders maintain a dialogue with grass roots community organizations.
* Credit counseling and homeownership education have become an integral part of programs for first-time homebuyers.
* These programs can lead to the discovery of new markets. improved relationships with community groups, and an enhanced public image.
Cashing In by
A Federal Reservee study argues that banks can make money when they engage in community development lending. Among the major findings:
* Many banks report that loans to low-income and moderate-income borrowers are performing as well as, or better than, comparable loans to others.
* Community loan funds have made loans totaling $120 million with losses of only 1%.
* The volume of mortgage lending by banks to low-income and moderate-income borrowers seems to be at a historical high.