SALT LAKE CITY - To get an idea of how industrial loan corporations have changed this city, travel five minutes west of the Capitol building to a neighborhood known as Fairpark.
In the early 1990s, boarded-up and condemned houses spotted many of its blocks. A flourishing drug trade and an estimated 20% of the city's gang members called it and nearby Glendale and Popular Grove home. During one six-month period the area had 62 drive-by shootings. With the Union Pacific Railroad corridor running down its eastern flank, Fairpark and its neighbors were, literally and figuratively, Salt Lake City's other side of the tracks.
Today, Fairpark is a different place. Prostitutes who once walked the streets around the local grade school have dwindled in number, and violent crime in the Fairpark, Glendale, and Popular Grove neighborhoods is down 50% since 1996. Fairpark still isn't prosperous - the median household income is $23,600 - but more than 60% of its residents own their homes.
Along with hours of revitalization work by community groups and residents, one of the biggest changes came in the form of dollars - millions in low-interest loans and other investments by groups of companies called industrial loan corporations. "They've been so critical to many of our major developments. If we didn't have the ILCs, we wouldn't have had the growth we've had," said Maria Garciaz, executive director for Salt Lake Neighborhood Housing Services.
ILCs are proliferating in Utah as out-of-state finance and nonfinance companies seek ways to offer banking-type services without the hassle of banking regulation. For example, they are not subject to the Bank Holding Company Act or to Federal Reserve Board examinations, though they have to fulfill the Community Reinvestment Act mandate that banks invest in communities where they take deposits, typically the headquarters and surrounding area. This has resulted in such a bonanza of lending and development in Utah that the ILCs are running out of investment options.
Community groups, particularly in the string of cities like Salt Lake at the foot of the Wasatch Mountains, see the ILC dollars as a boon. Others aren't so sure, arguing that Utah's situation illustrates how theCRA has failed to keep pace with changes in the financial services industry, and that the ILCs should be making community development loans and investments wherever they do business - not just, or mostly, in Utah.
"To us, the shame of what regulators have not done is bring the CRA up-to-date with the banking and financial world, where responsibilities are not just around a branch but where the profits of institutions" are made, said Alan Fisher, executive director of California Reinvestment Committee, a nonprofit that spends much of its time pressuring banks to lend more in underbanked communities.
"We're in some golden years in Utah and I can't imagine they'll go on forever," said Steven Graham, president of Utah Community Reinvestment Corp., a nonprofit established in 1999 to provide long-term financing for affordable rental housing. "Someone will say we can't have all this money in Utah and all this need elsewhere - and at some point the ILCs will be powerful enough to influence the regulation," he said.
ILCS: LARGE BUT LOW-PROFILE
"Industrial loan corporation" conjures smokestacks and steelyards, a legacy of the charter's start in the 1920s as one that allowed companies to make lower-quality, higher-rate loans to specific industries. The charter nearly died out in the mid-1980s after several ILCs failed and their private insurance fund ran out of money. But it reemerged in the mid-1990s as a beacon for nonbanks that wanted national banking powers without having to answer to certain state and federal banking laws.
Today some of the industry's biggest names are included among Utah's ILCs: Units of Merrill Lynch & Co. and Morgan Stanley have charters, applications by units of Goldman Sachs Group Inc. and UBS are pending, and American Express Co., Providian Financial Corp., BMW, and General Electric Co. have set up ILCs.
Companies like the charter because it grants the power to offer FDIC-insured deposits and issue Visa and MasterCard products (which require a depositary institution charter). It also grants the ability to export a uniform interest rate structure. Utah has no limits on the interest rates lenders can charge customers, making the export feature appealing to card companies and other national consumer lenders.
Of the four western states that offer similar charters, Utah has drawn the most applicants. From 1991 to the end of last year, the number of ILC-chartered banks went from 17 to 24 and assets rose more than 70-fold, to $103 billion. "The regulatory environment got companies coming - now there's a real community with an infrastructure and work force," and that network in turn draws new applicants, said George Sutton, chairman of the banking and finance group at Callister Nebeker & McCullough in Salt Lake City and the former commissioner of financial institutions in Utah.
The impact of this growth isn't obvious at first glance. Most ILCs do not have street-level branches, operating out of office suites instead. But of the $136 billion of assets at Utah depositary institutions last June 30, industrial banks held 68%. Three of Utah's five largest depository institutions, as measured by assets, have ILC charters.
CRA: THROWBACK TO THE '70S
In broad strokes, the Community Reinvestment Act says that "if you take deposits from that community, you should lend there," said Timothy Burniston, associate director of compliance policy and examination support at the Federal Deposit Insurance Corp.
In practice the law is much more technical. In lenders' self-identified "local assessment area" - generally their headquarters and where they have branches - they keep track of the volume of low- to moderate-income loans and grants they make. If the banks can show they have done an adequate job of fulfilling that assessment area's needs, they will get a good mark from regulators.
It's a routine that goes on wherever there is a bank or bank branch. But in Utah, since most ILCs have no retail branches or loan production offices, they have created and funded several consortiums and programs that will make the low-income and real estate development loans for them. Even though these national companies generate most of their deposits outside Utah, their first responsibility under the CRA is to address the needs of their local assessment area - typically Salt Lake County.
That local focus has sparked controversy in other places, including South Dakota, home to several national credit card companies. "The concept of a local assessment area becomes increasingly less relevant when you have a very fluid and dynamic loan market," says Kenneth H. Thomas, a lecturer at the University of Pennsylvania's Wharton School. "Whatever good thing the banks have done, they should get credit for it."
GOT MONEY, NEED INVESTMENT
A rule of thumb cited by people who work with the ILCs in Salt Lake City is that a lender should earmark 1% of it assets to CRA compliance. If that were followed in every case, CRA investments in Utah would be in the range of $1 billion - a hefty sum for a state with a population of 2.23 million.
But observers say CRA opportunities there don't amount to $1 billion. "It's probably not that possible for them to deploy that much money," said Steve Grizzell, president of UTFC Financing Solutions, a fund that makes debt investments in small businesses and is mostly backed by ILC money.
Regulators have also noted the predicament. "There are many financial entities, including numerous ILCs within Salt Lake City, all vying for a part of a limited volume of community development investment and service opportunities," the FDIC said in its July 2002 evaluation of GE Capital Financial.
A look at BMW Bank of North America, an ILC unit of the German luxury car company, shows the level of investment that goes on. In 2001, its purchases of housing bonds and mortgage pools came to $8.9 million in investments and represented 1.3% of assets, according to its most recent CRA evaluation.
GE Capital Financial, an ILC set up by General Electric to handle its corporate card business, has donated refrigerators, stoves, and other household appliances to two housing revitalization projects. American Express Centurian Bank was the lead bank investor for a 155-unit multi-income-housing complex slated to open in June. Morgan Stanley has committed $100,000 to a joint venture with Worker's Compensation Fund that lends money to injured laborers to set up their own businesses.
Those are just some of the individual projects. Then there are the special community development programs started by the ILCs because they lacked the infrastructure to make certain loans and existing opportunities, such as buying bonds from the local housing authority, were running dry. In 1999, a group of ILCs got together to discuss taking over the operations of the state-run UTFC; That same year American Express and Zions Bancorp spearheaded the creation of Utah Community Reinvestment. In 2001, eight ILCs and four banks committed a total of $10 million to the UTFC.
Now, some ILCs are considering setting up a venture capital fund at the University of Utah that would be run by students.
"Five or six years ago, CRA programs tended to be a little passive. Now ILCs are developing programs from scratch," said Callister Nebeker's Mr. Sutton. "If you're trying to find a way to meet CRA, and you do a passive investment, there's probably not a $100 million development opportunity ready and waiting."
It's not as if Utah's largest commercial banks are sitting by idly; after all, they too have to satisfy the CRA. Zions, Wells Fargo & Co., KeyCorp, and Bank One Corp. show up in many of the same loan pools as the ILCs. An executive from Zions sits on Salt Lake Housing along with an ILC executive; Bank One supplied the printing for a glossy brochure that describes the board's activities.
But ILCs outnumber the banks. Twelve of the contributors listed in Salt Lake Housing's annual report are ILCs, versus nine banks and thrifts. Last year, 58% of the $40 million loan pool used by Utah Community Reinvestment came from the ILCs. "The fact that the ILCs are here and some of them have a rather significant balance sheet means that the economic support - whether it's grants and donations or investment participation - has moved CRA activity to a higher level," said Bob Myrick, president of Morgan Stanley Bank.
UBS Bank USA, a unit of the Swiss banking giant, applied for an ILC charter in February. It its CRA plan, it said "concern has been expressed that sufficient CRA opportunities may no longer exist in the Bank's assessment area because of the number of financial institutions pursuing CRA activities in that same assessment area."
The growing bank population in Utah and changes to CRA guidelines prompted the FDIC to hold talks with the ILCs four years ago about how they could comply with the CRA as nontraditional lenders. The outcome of these and other discussions seems to be a measure of flexibility inserted into the exams. For instance, community development projects, including national ones, are given more weight than previously.
"We recognize that while the assessment area may be drawn around the county or city, these entities are not just limited to doing business there," said the FDIC's Mr. Burniston. "We'll also look for the work they do outside the area."
Even if the rules change at some point, executives at ILCs say there's a practical barrier to going beyond the local assessment area: the shortage of knowledgeable staff to work in the field on CRA projects. "You really need to understand the community to do CRA investing," says Myra Renwick, the CRA officer for GE Capital Financial. "We don't have the people or expertise to go elsewhere."
