Anne Arvia, president and CEO of Chicago-based ShoreBank, focuses on making loans in inner city neighborhoods to help revitalize low-income areas. And now she wants to help in the rebuilding efforts in the Gulf area after hurricanes Katrina and Rita. She's not alone.
Banks from across the country that want to help the rebuilding efforts in the Gulf area will have an easier time, thanks to recent regulatory changes.
Bank regulators issued guidance last month to clarify new rules proposed last September overseeing community-redevelopment spending by small banks. The rules are designed to boost redevelopment efforts in disaster areas-it names hurricanes Katrina and Rita specifically-and to give more latitude in complying with Community Reinvestment Act for banks with between $250 million and $1 billion in assets.
Rob Rowe, regulatory counsel of Independent Community Bankers of America, says his organization has heard from many of its members who want to help the rebuilding efforts in the Gulf area. Many of them are already part of participation loans and are looking to do more. Rowe said that many are investing in one of the redevelopment-oriented mutual funds to ensure that their investments are CRA-compliant.
Arvia says she has one concern-that the new rules could redirect funds away from other areas that also need CRA help-but overall she is very much in favor. Banks need to strike a balance between the needs of their hometowns and disaster areas, she says, especially when the need in areas like the Gulf region is so drastic. Estimates from the Insurance Information Institute put the property damage at $38 billion. Moreover, she says anything that acts as a catalyst for this type of revitalization financing is positive. "Any kind of shared vision between public and private efforts is a good development," she said.
An effort like the National Community Investment Fund is another way for banks to get involved with development efforts. The fund invests in the equity and debt of development-oriented banks around the country. In some cases, it deposits money in small banks that then can use the money to finance local loans.
It is still too early for any banks outside the Gulf region to have taken advantage of the new latitude offered by the guidance and make CRA loans in the Gulf area. But sources contacted for this article were adamant that this effort is sorely needed in the Gulf area and will help rebuilding efforts.
The recent guidance better defines what constitutes a disaster area and also gives a specific time frame for a qualifying investment, says Barbara VanScoy, managing director of CRAFund Advisors, a mutual fund geared to banks as investors.
The areas considered under the new rules will be only those designated a federal disaster, according to the guidance. State- disaster designation alone will not be enough, although that is usually a prerequisite for federal assistance, the guidance said. And the time frame will be 36 months following the date of the designation, according to the guidance. But it added that in some cases where there is "demonstrable community need," that time frame may be extended. In fact, it said that the regulating agencies already plan to substantially extend the time period in the Gulf Coast area because of the dire need after hurricanes Katrina and Rita.
VanScoy's fund is dedicated to community and economic development and acts as a conduit for banks seeking to put investments toward that goal. VanScoy said that when a bank buys into her fund, her team will invest in whatever region the bank wishes. It maintains relationships with housing authorities all over the country and often will invest in the bonds that finance low-income housing, she says. It's not a completely altruistic mission, though, as it strives to earn a good return for its investors, she says. In fact, her goal is to best the Lehman Brothers Aggregate Bond Index, a widely used benchmark in the fixed-income world. Since its inception in August 1999, the CRA Fund has returned an annual rate of 5.75 percent, she says.
The Office of the Comptroller of the Currency, the Federal Reserve and the FDIC collaborated on the recent rules.
Most sources said they are not worried that the new rules will lead to a situation where banks fulfill their CRA requirements in far-flung areas and ignore the needs of their own markets.
John Taylor, president and CEO of the National Community Reinvestment Coalition, for one, says that the new rules give banks one more option, but they still will be required to serve their home markets with CRA loans and services. "If they're not reinvesting in their areas, it will create a whole host of other [development] problems," he says. The NCRC is an association that facilitates the flow of private capital into underserved areas.
The government guidance also clarifies just what constitutes a community- redevelopment effort, and it does not necessarily need to be in the low-income spectrum. It concludes that housing for middle- and upper-income people qualifies if the housing "directly helps to stabilize the community by attracting new, or retaining existing, businesses or residents and, in the case of a designated disaster area, is related to disaster recovery." In the case of disaster recovery, the government will "consider all activities related to disaster recovery that revitalize or stabilize a designated disaster area, but will give greater weight to those activities that are most responsive to community needs, including the needs of low- or moderate- income individuals or neighborhoods."
The one caveat is that the language of the rules is vague on some points, which means that the final determinations on CRA compliance will not be made until after the loans and services are offered and bank examiners are evaluating the books, sources say. ICBA's Rowe says that since the rules are not written in black and white terms, there is going to be some uncertainty for several years before an industry precedent can establish what really qualifies for CRA investments. "There is always uncertainty when you are trying to second guess bank examiners," he said. "You usually have to wait two to three years to see how examiners react to know for sure."
