Alternative Business Financing Focus of July 13 Economic Perspectives

Carlos Weil will discuss the alternative financing his company provides for small businesses on the July 13 edition of Economic Perspectives.  Weil is CEO of Capital Solutions Bancorp, a financial services company with operations in North America, South America, Europe and Asia.  TO LISTEN TO THIS INTERVIEW CLICK HERE: Carlos Weil Interview

Carlos Weil

Founded in 1996 by Weil and Paul Simko, Capital Solutions is an independent offshoot of a 43-year-old South American financial services firm. Capital Solutions focuses on providing flexible and affordable working capital to small and mid-size business that are looking to grow. The financial products provided by Capiatl Solutions include:

• Accounts Receivable Financing
• Purchase Order Financing
• Purchase Order Guaranty
• Financing to Purchase Businesses

The firm was established to offer reasonably-priced financing options for businesses that are frustrated by traditional banks that do not recognize their borrower’s ability to grow.

Treasury Official Updates Congressional Oversight Panel on the Nation’s Financial System

On June 24 Herbert Allison, Jr., the U.S. Department of the Treasury’s Assistant Secretary for Financial Stability, updated the Congressional Oversight Panel on the department’s efforts to repair the nations financial system. The Congressional Oversight Panel was established by Congress to review the current state of financial markets and the regulatory system

Chair Warren, Representative Hensarling, Senator Sununu and members Neiman and Silvers, Last October, Congress established the Troubled Assets Relief Program (TARP), and gave Treasury the necessary tools to help break a downward spiral in our financial system that was causing tremendous  harm, not only to financial firms of all sizes, but also to ordinary families and businesses across the country.

Herbert Allison

Our mandate is two-fold: Stabilize the system while protecting the financial interests of the taxpayer.

Although our work is far from finished, Treasury has accomplished a great deal in a short amount of time. It has:

• Invested nearly $200 billion in 633 financial institutions through the Capital Purchase Program.
• Helped to re-start securitization markets, which are vital in enabling consumers and businesses to borrow.
• Helped begin the difficult, but necessary process of re-making our nation’s auto industry, which is at the heart of our industrial base.
• Helped tens of thousands Americans stay in their homes by securing modifications of their at-risk loans to lower their monthly mortgage payments and making their mortgages more affordable.

To manage these complex efforts, Treasury has built the Office of Financial Stability from the ground up. Last October, the OFS staff was zero. As of Monday, it numbered 166.

There are tentative signs that the financial system is beginning to stabilize, and that our efforts made an important contribution. Key indicators of credit market risk, while still elevated, have dropped substantially.

More than 30 firms have repaid $70 billion in CPP investments. In addition, the taxpayer has received an estimated $5.2 billion in dividend payments from CPP investments.

There are also some signs that the economy is beginning to mend. Consumer confidence rose to its highest level in eight months in May. Housing starts rose at an annual rate of 17% in May, and house purchases have begun to pick up in some parts of the country.

But our financial system and our economy remain vulnerable, with unemployment still rising, house prices falling and pressure on commercial real estate continuing to build.

This is why we must remain vigilant. We must press ahead with our financial stabilization and our economic recovery efforts.

At the same time that Congress established the TARP, it established the Congressional Oversight Panel, an independent group drawn from both major political parties, Congress, the states and public interest groups to ensure that in every step we take, we keep firmly in mind the best interests of the American people.  I applaud the Panel for its work to date, and look forward to a continued strong relationship.

Let me briefly describe my own background and offer a few thoughts that will guide me in my new assignment.  I believe that my views on finance, management and governance, which have not always been stylish, square with what the crisis has taught us is necessary for a financial system that’s both stable and innovative.

I began my career as an officer in the U.S. Navy, spending four years on active duty, including one year in Vietnam. After business school, I joined Merrill Lynch and spent 28 years there, leaving as president in 1999.

I learned from my experiences at Merrill that the long-term success of financial institutions depends on sound corporate governance, including independent checks and balances, tight control over risk, and executive compensation geared to long-term performance on behalf of clients, as well as shareholders. I believe that I contributed to strengthening Merrill’s governance practices in the 1990s.

Since leaving the firm a decade ago, I’ve led two other major financial institutions through transitions necessary for their long-term success.

In 2002, I became chairman and C.E.O. of TIAA-CREF, a leading provider of retirement and asset management services. We adapted the company to changing markets, created independent risk management and doubled the company’s capital so we could withstand a harsh investment climate. As a result, TIAA-CREF is now one of very few financial companies that carry triple-A ratings. And during my tenure, TIAA-CREF became the first company in the Fortune 100 to allow its stakeholders an advisory role on executive compensation. Last September, I was named C.E.O. of the Federal National Mortgage Association as that company was placed into government conservatorship.

The work of OFS, which I now head, is essential to President Obama’s and Secretary Geithner’s plans for recovery.

Our economy declined sharply last year, in substantial measure, because credit stopped flowing. Without access to credit, small businesses cannot buy the new equipment, raw materials and inventory that they need to expand. Larger businesses cannot make the continuous adjustments required to function in a changing global marketplace.

In overseeing the office, I will keep in mind that ending the financial crisis isn’t chiefly about helping banks. It’s about alleviating the real hardships that Americans face every day. I will strive to be a prudent investor on behalf of the American people; to protect the taxpayers who’ve entrusted us with so much of their money.

In pursuing the goal of being a prudent investor for the public, my top priorities will be the following:

First, I will carefully review the controls over taxpayers’ money, giving special attention to compliance with laws and directives, managing risks and internal audits. I will work closely with your panel and all other oversight bodies.

Second, I will strive to maximize the effectiveness of financial stability programs, restoring soundness to financial institutions and liquidity to our markets.

Finally, I will emphasize transparency and interaction with Congress so that the American people will know what we’re doing with their money; why we’re doing it, and how it’s helping the financial system, the economy and their lives.

Thank you. I look forward to your questions.

As Assistant Secretary for Financial Stability, Allison is responsible for developing and coordinating Treasury’s policies on legislative and regulatory issues affecting financial stability, including overseeing the Troubled Assets Relief Program (TARP).

Consumer Alert: What’s really behind that tempting CD rate?

The following consumer alert was provided by the Federal Deposit Insurance Corporation (FDIC).

The FDIC has received inquiries and complaints about certain companies advertising above-market interest rates for FDIC-insured Certificates of Deposit (CDs). Some of these ads display the FDIC logo or state “FDIC Insured.” Many of these companies are not FDIC-insured banks. Rather, they are insurance or financial service companies that sell non-insured financial products. The small print in the ads may state that the company is not an FDIC-insured financial institution.

The advertised CDs generally offer above-market interest rates for only a short term, require a minimum amount, and insist that the customer visit a company office. The advertisement’s goal is to attract consumers for the company’s non-deposit products or services. If a customer asks to purchase the advertised CD, the company will direct the customer to a computer terminal in the company’s office to purchase a CD from an FDIC-insured financial institution that accepts Internet deposits. The CD will be offered at a rate lower than advertised. The company typically writes a separate check to the financial institution for the difference between the bank’s rate and the advertised rate for the term of the CD. Both checks are mailed to the bank, and the bank then issues the CD for the increased amount, but at the bank’s lower interest rate.

Things to consider:

• Consumers should carefully consider whether non-insured products are appropriate for their personal financial situation.
• Consumers should understand the terms of any CD they purchase.
• Consumers can research deposit interest rates at Web sites, such as http://www.bankrate.com.
• Consumers can verify whether identified financial institutions are FDIC-insured at http://www2.fdic.gov/idasp/main_bankfind.asp.
• Consumers can find information about FDIC deposit insurance coverage at http://www.fdic.gov/deposit/deposits/index.html.

Banking Regulator Calls for More Consumer Protections on Reverse Mortgages

From the media department of the Office of the Comptroller of the Currency (OCC).  The OCC is responsible for chartering, regulating, and supervising all national banks and the federal branches and agencies of foreign banks.

Comptroller of the Currency John C. Dugan warned in a speech at the American Bankers Association Regulatory Compliance Conference on June 8th that reverse mortgages pose significant compliance risks and said regulators should get out in front of this issue, before real problems develop, so that these loans are made “in a way that is prudent for both lenders and borrowers.”

John Dugan

 “While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages – and that should set off alarm bells,” Comptroller Dugan said.  The experience with subprime mortgages “clearly demonstrates the link between compliance and safety and soundness.”

The Comptroller said the regulatory agencies should ensure that interagency guidance being worked on is sufficiently robust to ensure that consumers are adequately protected, and he said the OCC would examine national banks to ensure compliance with the guidance as well as relevant existing regulations.  But he said it may turn out that guidance alone is not enough to address the consumer protection issues surrounding this new product.

“In these circumstances, more definitive regulatory standards may need to be adopted, and the OCC is prepared to do that – even if the standards we advocate initially apply only to reverse mortgage lending by national banks,” he said in a speech to a regulatory compliance conference sponsored by the American Bankers Association.

Reverse mortgages provide a source of income or line of credit to elderly homeowners by allowing them to tap the equity in their home without having to sell or move out of the home.  The underwriting on these loans is nontraditional since no repayment is required until the homeowner dies, permanently moves out of the home, or fails to maintain the property or pay property taxes.  If the home is sold to repay the loan, the borrower is not responsible for any loan amount above the value of the home.  Any remaining equity above the amount due belongs to the borrower or the borrower’s heirs.

While some lenders offer their own proprietary products, 90 percent of all reverse mortgages are insured by the Department of Housing and Urban Development’s Federal Housing Administration, and known as “home equity conversion mortgages,” or “HECMs.”

Mr. Dugan said the ability of consumers to access their home equity through immediate and large lump sum payments can pose substantial risks.  For example, lenders may simultaneously and aggressively market investment, insurance, or annuity products or, worse, attempt to condition loan approval on the purchase of such products.  Likewise, with access to large lump sums upon closing, elderly borrowers can be particularly vulnerable to coercive sales of annuity and long term care insurance products that are expensive and may not be appropriate to their needs.

“Another risk is that reverse mortgage borrowers, because they have no immediate repayment obligations, may overlook substantial fees that are attached to the loan,” Mr. Dugan said.  “And consumers who spend their loan proceeds quickly or unwisely may end up short of the funds they need for home maintenance or property taxes, with disastrous consequences:  the failure to make those payments can result in foreclosure.”

The Comptroller also expressed concern about misleading marketing claims, especially if the product’s incentives and fees put more of a premium on making the loan than on ensuring it is appropriate for the borrower.

“Even when consumers are not subject to misleading or deceptive marketing, they still may have a hard time understanding the complex nature and costs associated with reverse mortgages,” he said.  “If a consumer doesn’t fully understand how much the loan will cost, how much can be borrowed, or all the circumstances under which the loan can become due, then the risk increases for a transaction that is not appropriate to the consumer’s needs.”

The OCC already has regulations in place to deal with deceptive marketing, the Comptroller said, and the OCC “will use this authority to require immediate correction of any potentially misleading marketing claims by a bank in connection with reverse mortgage products.”

The OCC will also use existing authority to ensure that national banks do not condition the availability of a reverse mortgage on the borrower’s purchase of certain nonbanking products, such as an annuity or life insurance.

Mr. Dugan said one area that deserves particular attention is whether to impose additional requirements with respect to escrows of taxes and insurance.  Nonpayment of taxes or insurance can trigger foreclosure.  However, the new Federal Reserve Board escrow requirements for “higher-priced” mortgages do not apply to reverse mortgages, and HUD does not require escrows to be established in connection with HECMs.

“Given the predominance of the HECM product in reverse mortgage lending, I think it would be a major step forward for HUD to issue guidelines or requirements addressing the escrow issue for HECMs, and I would like to begin a dialogue with them on the issue,” he said.  “Once they set the standards for escrows, we would ensure that they are followed by national banks for HECM products, and would ensure – by regulation, if necessary – that comparable standards apply in connection with proprietary reverse mortgages offered by national banks.”

In closing, Comptroller Dugan said that while much attention still needs to be focused on dealing with the economic downturn, regulators can’t afford to ignore consumer issues.  “We need to be on constant alert to emerging risks and vigilant in our regulatory compliance responsibilities,” he said.

Community Development Financial Institution Fund Director Speech at National Summit on Entrepreneurship

CDFI Fund Director Donna J. Gambrell gave the following keynote address at the Association for Enterprise Opportunity’s National Summit on Entrepreneurship in Washington, DC on May 18, 2009

Introduction

Thank you for that kind introduction, Connie.  It is an honor to be here today.  Since I was appointed as Director of the Community Development Financial Institutions (CDFI) Fund 18 months ago, I have had the opportunity to address many such gatherings, but this is my first appearance at a national conference sponsored by the Association for Enterprise Opportunity (AEO).  I thank you for the invitation.

Donna Gambrell

The CDFI Fund’s purpose is to promote economic revitalization and community development through investment in and assistance to community development financial institutions – or CDFIs.  We have the critical mission of expanding the capacity of these institutions to provide credit, capital, and financial services to underserved populations and economically distressed communities in the United States.

In Washington, we have seen some significant changes over the last six months, with the election of President Obama and the installation of his new Administration.  AEO has seen change as well, with the appointment of Connie Evans as your new President and CEO.  Connie brings more than 20 years of microenterprise experience to the position, is one of your earliest members, and was appointed by former President Clinton to serve on the very first Advisory Board of the CDFI Fund.

At a time when the microenterprise industry and the CDFI industry as a whole are in a position to play a very real and important part in America’s economic recovery, it is encouraging to know that you have a strong leader at your helm.  Connie, thank you for taking on such an important responsibility.  I look forward to closely working with you and AEO.

This year’s theme of Microenterprise: Restructuring Business as We Know It, resonates with me personally and could not be more timely or appropriate given the financial crisis that our country currently faces.

Since the recession began over a year ago, more than 5 million people have lost their jobs.  In order to revitalize the economic base of this great nation, one of the areas we must focus our attention on is supporting the very institutions that have always been able to create jobs – small businesses, including micro-businesses.

The CDFI Fund’s mission is very similar to that of the microfinance industry.  We both support the entrepreneurial spirit that has always been at the heart of economic prosperity in America.  We both aim to better low-income communities through investment, and I can’t think of a more important time in recent memory to renew ourselves to that shared goal.

To that end, I not only encourage you to utilize our programs, but more importantly, for us to work together and discuss ways the CDFI Fund can better help the microenterprise industry.  Let us commit ourselves today to work on this together, because there is no better time than right now.

State of the CDFI Industry

The new Administration views the CDFI Fund with a renewed sense of responsibility. Let me share a few examples how.

The President has included the CDFI Fund in his strategy to address the current economic crisis.  To that end, the Administration has assisted our mission through several important means.

First, one need look no further than the administration’s newly released 2010 budget to see for themselves.  Entitled A New Era of Responsibility – Renewing America’s Promise, the budget more than doubles the CDFI Fund’s current operating budget of $107 million this year to $243.6 million for 2010 (an increase of 127 percent).  This funding will go a long way in our efforts to assist the microfinance industry, and we appreciate the Administration’s understanding and respect for our mission and for the work that we do.

The budget requests also calls for $113.6 million for the CDFI Program, which represents a 90 percent increase.  It also requests $80 million for the Capital Magnet Fund, a newly authorized program to increase capital investment for the development, preservation, rehabilitation, or the purchase of affordable housing for low-, very low-, and extremely low-income families.

It is also the first Administration budget to specifically include funding ($10 million) for the CDFI Fund’s Native Initiatives, which assist Native Communities (Native American, Alaskan Native and Native Hawaiian communities) to overcome certain barriers to financial services;

This funding will go a long way in helping those communities historically underserved by more traditional financial institutions.  The CDFI Fund is committed to making the FY 2009 and FY 2010 awards as expeditiously as possible.  This is a commitment I first made last year, and since then, the results speak louder than my words.

Just six weeks ago, the CDFI Fund announced 27 awards under the FY 2009 round of the CDFI Program’s Technical Assistance-Only program.  Due to new business process efficiencies that have recently been implemented, these awards were made five months earlier than the same award announcement in FY 2008.

Since the announcement on March 26, 21 of the awards have been fully disbursed for more than $1.8 million.  This is an astonishing 77 percent of the total TA awards of $2.3 million.  Clearly, we are on the right track and the staff at the CDFI Fund is hard at work.

The CDFI Fund also received resources through the American Recovery and Reinvestment Act of 2009 (the Recovery Act).  It provides us with an additional $3 billion of New Markets Tax Credit allocation authority, which will be awarded equally between fiscal year 2008 and fiscal year 2009.

In addition to the CDFI Fund’s annual appropriation for fiscal year 2009, the Recovery Act also appropriates an additional $100 million.  $90 million of this total will be applied to the CDFI Program, $8 million will be used to fund Native Initiatives, and the final $2 million will be used to cover administrative expenses.

The CDFI Fund is moving expeditiously to award and disburse these Recovery Act resources.  Later this month, we will announce $1.5 billion in allocation authority through our New Markets Tax Credit Program.  In June, we will have announced the entire $98 million of Financial Assistance awards made available through the CDFI Program and Native American CDFI Assistance (NACA) Program.

In addition, the CDFI Fund has recently opened supplemental rounds for our grant programs in response to the growing demand and additional funding made available.  I would encourage all certified CDFIs to take advantage of this while there is still time left for you to apply.

This is certainly a new day for the CDFI industry.  Let us not waste this opportunity.  Let us work together to demonstrate to all the vital role we play in providing responsible and affordable financial options for the low-income communities and residents we serve.

Data on Microenterprise Development

I would now like to focus on the area of microenterprise development and highlight some of our data which demonstrate just how active CDFIs are in the microenterprise field.  Of all business loans made by CDFIs, over two-thirds (68.1 percent) are micro-loans, and nearly all of these micro-loans are fixed-interest loans (94.6 percent) and are fully amortized (91.1 percent).

• The average size of micro-loans is $12,463, and the median is $10,000.
• The average term is 54 months, and the median is 42 months.

These loans have supported businesses owned by both minorities and by women in both urban and rural areas, those who have had trouble acquiring them through more traditional lenders.  Approximately 55 percent of these loans go to minority-owned or controlled businesses.  Additionally, almost 43.7 percent of these loans go to women-owned or controlled businesses. I can also report that nearly half of these (44.4 percent) are to low-income controlled or owned businesses.

As a result of our increased funding, we are now in a much better position to support CDFIs that are committed to supporting microfinance in our nation’s low-income communities.  Together through these efforts, we will create job lending and better practices, which are needed now more than ever as we deal with the financial crisis.

Case Studies

An example of a CDFI using a CDFI Program award to support more microenterprise development is the New Mexico Community Development Loan Fund, a private, tax-exempt organization.  Its mission is to provide loans, training and business consulting to non-profit organizations and entrepreneurs within all areas of the Navajo Nation, throughout the United States.

Since 1989, the Loan Fund has provided services to support the efforts of low-income communities, in order to help them achieve their dreams of financial self-reliance.  It has successfully assisted hundreds of small business owners and non-profit organizations over the past 20 years.

The businesses it partners with have a vested interest in community development.  A prime example is Small World Day Care, which was created in response to the needs of low-income workers who needed a facility to look after their children during working hours.  The center was opened in 1998, but within four years it had proven itself to be so popular that organizers realized more space was required.  The Loan Fund took up their cause and helped them purchase a new building.  Today, Small World cares for more than 40 children.

A relatively new microenterprise development organization supported by the CDFI Fund is the African Development Center (ADC).  Created in Minneapolis in 2005, the ADC is a certified CDFI that provides training to African immigrant and refugee businesses, those that may not be applicable for more traditional sources of financing.

ADC is often seen as an industry of one, as there are very few organizations that provide the same service.  Since their creation, ADC has lent more than $2 million to more than 130 businesses.  Over the next three years, it predicts an annual growth rate of 15 percent.

Minnesota boasts a higher than normal immigration rate from African nations.  According to the most recent U.S. Census statistics (2000), 13 percent of the state’s foreign born residents come from Africa, and this number is expected to increase dramatically by 2010.  Minnesota offers immigrants an established African population, a strong economy, a good quality of life, educational opportunities, and unskilled jobs that don’t require fluency or literacy in English.  These factors more than any other have helped make it an ideal refuge for many who have known nothing but war and poverty for most of their lives.

Certification

These are just two examples of the many microenterprise development projects that the CDFI Fund has supported.  They illustrate our commitment to you and your communities, so I want to once again encourage all of you here today to utilize our award programs.

To those of you today who have already been a certified CDFI, as our funding increases, we want to support your work even more and we encourage you to make the most of it.  The CDFI Fund is committed to your success, and we welcome the opportunity to work with you to achieve that.

To those of you who have not sought certification, now is the perfect time to do so, as the new Administration has thrown its support behind the CDFI Fund.  The Recovery Act and the 2010 budget have greatly aided our ability to serve you.

Conclusion

It’s an exciting time for the CDFI Fund.  With a renewed sense of purpose comes a greater ability and responsibility to serve community development organizations and the microenterprise industry.  We have earned political capital, and it is up to all of us to see that it’s spent wisely.  I appreciate AEO and all of its members, without whom we would not have the same impact in improving the lives and economic conditions within America’s neediest communities.  We will do great things together.

Thank you for inviting me here today.  We look forward to fostering new relationships and bringing your economic success stories to fruition.

SBA Launches New Loan Program for Struggling Businesses

Provided by the SBA Press Office

Small businesses suffering financial hardship as a result of the slow economy may be eligible to receive temporary relief to keep their doors open and get their cash flow back on track through to a new loan program announced by SBA Administrator Karen G. Mills.

Karen Mills

Beginning on June 15, SBA will start guaranteeing America’s Recovery Capital (ARC) loans.  ARC loans are deferred-payment loans of up to $35,000 available to established, viable, for-profit small businesses that need short-term help to make their principal and interest payments on existing qualifying debt.  ARC loans are interest-free to the borrower, 100 percent guaranteed by the SBA, and have no SBA fees associated with them.

“These ARC loans can provide the critical capital and support many small businesses need to make it through these tough economic times,” said Administrator Mills.  “Together with other provisions of the Recovery Act, ARC loans will free up capital and put more money in the hands of small business owners when they need it the most. This will help viable small businesses continue to grow and thrive and create new jobs in communities across the country.”

As part of the Recovery Act, the ARC program was created as a no-interest, deferred payment loan to help small businesses that have a history of good performance, but as a result of the tough economy, are struggling to make debt payments.

ARC loans will be disbursed within a period of up to six months and will provide funds to be used for payments of principal and interest for existing, qualifying small business debt including mortgages, term and revolving lines of credit, capital leases, credit card obligations and notes payable to vendors, suppliers and utilities.  Repayment will not begin until 12 months after the final disbursement.  Borrowers don’t have to pay interest on ARC loans.  After the 12-moth deferral period, borrowers will pay back the loan principal over a period of five years.

ARC loans will be made by commercial lenders, not SBA directly.  For more information on ARC loans, visit www.sba.gov.

The Bank Regulator’s View of the Mortgage Crisis and the Community Reinvestment Act

Barry Wides, Deputy Comptroller for Community Affairs for the Office of the Comptroller of the Currency (OCC) will discuss the erroneous connection that has been made between the mortgage crisis and the Community Renivestment Act (CRA) on the May 18 edition of Economic Perspectives, 5:30 p.m. – 6 p.m. on KAZI 88.7 FM.  Enclosed below are selected excerpts from a statement on the mortgage crisis and CRA given by Deputy Comptroller Wides at the public briefing of the United States Commission on Civil Rights on March 20, 2009.

…Let me start off by assuring you, unequivocally, that CRA is not the culprit behind the abuses in subprime mortgage lending nor the broader credit quality issues in the marketplace, as some have suggested. CRA lending and investment has been responsibly underwritten and conducted in a safe and sound manner. The CRA was enacted by Congress in 1977 to encourage banks and thrifts to increase their lending and services to low- and moderate-income persons and areas in their communities consistent with safe and sound banking.  It also requires the federal financial supervisory agencies to assess the record of each covered institution in helping to meet the credit needs of its entire community, including low- and moderate-income individuals and neighborhoods.

Barry Wides

The CRA applies only to banks and savings associations whose deposits are insured by the Federal Deposit Insurance Corporation. Affiliates of insured depositories that are not themselves insured depository institutions are not directly subject to the CRA, nor are credit unions or independent mortgage companies. ..

There has been much public discussion over the past several months concerning whether CRA may have contributed to the mortgage crisis. This discussion has focused on the connection between CRA-related lending to low- and moderate-income borrowers and what some allege to be a disproportionate representation in failing subprime loans.

The OCC and other Federal banking regulatory agencies have been looking at this question in some detail, and all four agencies have concluded that CRA was not responsible for the current mortgage crisis. 3 In analyzing independent studies and comprehensive home lending data sets, we have concluded that only a small portion of subprime mortgage originations are related to the CRA.

CRA-related loans appear to perform comparable to or better than other types of subprime loans. For example, single-family CRA-related mortgages offered in conjunction with NeighborWorks organizations have performed on par with standard conventional mortgages.  Foreclosure rates within the NeighborWorks network were just 0.21 percent in the second quarter of 2008, compared to 4.26 percent of subprime loans and 0.61 percent for conventional conforming mortgages. Similar conclusions were reached in a study by the University of North Carolina’s Center for Community Capital, which indicates that high-cost subprime mortgage borrowers default at much higher rates than those who take out loans made for CRA purposes.  Overwhelmingly, CRA lending has been safe and sound.

The Federal Reserve Board (FRB) has reported extensively on these findings for all CRA loans. A FRB study of 2005 – 2006 Home Mortgage Disclosure Act data showed that banks subject to CRA and their affiliates originated or purchased only six percent of the reported higher-priced loans made to lower-income borrowers within their CRA assessment areas.6 The FRB also found that less than 2 percent of the higher-priced and CRA credit-eligible mortgage originations sold by independent mortgage companies in 2006 were purchased by CRA-covered institutions. FRB loan data analysis also found that 60 percent of higher-priced loan originations went to middle- or higher-income borrowers or neighborhoods and, further, that more than 20 percent of the higher-priced loans extended to lower-income borrowers or borrowers in lower-income areas were made by independent non-bank institutions that are not covered by CRA.

OCC analysis of the lending of banks that we regulate also confirms that the vast majority of subprime loans were not originated by national banks supervised by the OCC. In 2006, subprime lending by national banks amounted roughly to 10 percent of the total of subprime mortgage originations by all lenders.8 Further, our analysis also shows that subprime and Alt-A loans originated by national banks defaulted at a lower rate than those originated by non-bank lenders.9 Our analysis compared the foreclosure start rates for loans originated between 2005 and 2007 that were placed in subprime and Alt-A securities. The loans originated by OCC-regulated institutions defaulted at roughly two-thirds the rate of comparable loans originated by non-bank lenders.

In conclusion, I want to reiterate my belief that CRA has made a positive contribution to community revitalization across the country and has generally encouraged sound community development lending, investment, and service initiatives by regulated banking organizations. Only a small percentage of higher priced loans were originated by CRA-regulated lenders to either lower-income borrowers or in neighborhoods in the banks’ CRA assessment areas. Similarly, banks purchased only a small percentage of higher-priced, CRA-eligible loans originated by independent mortgage companies. Finally, the performance of higher-cost loans originated by national banks is markedly better than loans originated by non-bank institutions…

For the full text of the statement click here.

The Community Reinvestment Act Did Not Cause the Subprime Mortgage Meltdown

By Hopeton Hay

With the crisis in the American banking and finance system, there is a growing chorus of voices attempting to lay some of the blame for the subprime mortgage meltdown at the feet of the Community Reinvestment Act (CRA) and efforts to promote homeownership for low income and minority families.  Last October in a column on the financial crisis called The Roots of Our Disaster in the Austin American Statesman, columnist Scott Burns referred to the Community Reinvestment Act as one of the “Four Horseman of Our Apocalypse.”   He blamed “innovations to mortgages to comply with CRA” charging that it forced “the institutional reduction of lending standards.”

Hopeton Hay

Others have argued that the efforts by Congress, the U.S. Department of Housing and Urban Development (HUD), Fannie Mae, and others to increase homeownership in low income and minority communities played a significant role in the subprime mortgage debacle.  At the same time however, CRA advocates expressed strong concern about the growth of subprime lending in low income and minority communities

If CRA and promoting increased homeownership in the minority community played major role in the subprime disaster, why did that occur now?  CRA has been around since 1977, enforced in earnest since 1989, and enjoyed unprecedented federal support during the Clinton Administration. It was in 1989 that Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), which amended the CRA, giving it more teeth, and required collection of data on home loans by race.  In 1994 HUD launched the National Homeownership Strategy. 

When one reviews the rules of CRA and the concerns expressed by CRA advocates with subprime mortgage lending to minorities it renders those arguments baseless.

So what is CRA and does it require financial institutions to loosen underwriting standards loans to comply?  According to the Community Reinvestment Act and Interstate Deposit Production Regulations, CRA requires federal financial supervisory agencies “to assess an institution’s record of helping to meet the credit needs of the local communities in which the institution is chartered, consistent with the safe and sound operation of the institution, and to take this record into account in the agency’s evaluation of an application for a deposit facility by the institution.”

Well the first thing of note is that CRA applies to depository institutions. According to testimony on CRA provided to the U.S. House of Representatives Financial Services Committee on February 8, 2008 by University of Michigan Law Professor Michael Barr, more than half the subprime mortgages were originated by independent mortgage companies in 2005.  That is half the subprime mortgages were made by lenders not being examined for compliance to CRA. 

The second important fact from the CRA rules is the expectation that credit needs are met in a safe and sound manner.  Now the rules do encourage some underwriting flexibility.  The rules state that “Banks are permitted and encouraged to develop and apply flexible underwriting standards for loans that benefit low- or moderate-income geographies or individuals only if consistent with safe and sound operations.”   Yes, flexibility is encouraged, but not mandated, but it still must be done in a safe and sound manner.  There is a section in CRA rules called safe and sound operations that says “the CRA does not require a bank to make loans or investments or to provide services that are inconsistent with safe and sound operations. “ 

Some of the leading CRA advocates expressed concern about the use of subprime loans long before the meltdown.  Many of them felt that racial minorities and low income communities were being disproportionately targeted by subprime lenders.  In 2002, the Center for Community Change’s Neighborhood Revitalization Project published a report, Risk or Race? Racial Disparities and the Subprime Refinance Market.  In the executive summary of the report, the Center for Community Change declares its concern that “high foreclosure rates for subprime loans indicate that many subprime borrowers are entering into mortgage loans they cannot afford.”

Also in 2002, the Southwest Regional Office of Consumers Union published the report, Minority Subprime Borrowers.  Like the report from the Center for Community Change, the report focused on the disproportionate number of subprime loans being made in minority communities, but examined it from a Texas perspective and looked only at home refinancing. The report recognized the danger of subprime lending saying that,  “Subprime lending can have disastrous consequences for low income and minority communities.”  Consumers Union went even further recommending state legislation that would “require loan counseling for any borrower getting a high cost loan during the existing 12 day waiting period before the loan closes” and “prohibit lending without due regard to repayment ability.”

In the 2005 report by the National Community Reinvestment Coalition (NCRC), The 2005 Fair Lending Disparities: Stubborn and Persistent II, concern about the impact of subprime lending was again the major focus. “Our analysis revealed a disproportionate amount of high-cost lending targeted to vulnerable borrowers and communities…,” wrote NCRC.

“Further,” comments NCRC, “ the pervasiveness of subprime lending in communities of color, in all regions and in metropolitan areas of all sizes, raises important public policy concerns about possible adverse implications stemming from these heavy geographic concentrations.”

As the information above clearly reveals, CRA advocates identified the threat of subprime lending long before it threatened the financial stability of our banking industry and were concerned about its heavy concentration in low income and minority communities.  They clearly did not support market driven subprime lending with little regulation.  Also, while CRA did give banks permission to modify underwriting to meet the lending needs of low to moderate income communities, it was not a requirement, and the regulators made it plain that it should be done in a safe and sound manner.  As articles written recently in the New York Times document, it was the desire for quick and easy profits more than anything that drove many of the decisions that led to the subprime meltdown.

Hopeton Hay is editor and publisher of the Economic Perspectives blog and chairman of the Economic Development Committee of the Texas NAACP.  He also spent 5 1/2 years working for the NAACP Community Development Resource Center, a CRA partnership between the NAACP and Bank of America.

Podcast: SBA Official Provides Information on Latest Steps to Increase Small Business Loans

The U.S. Small Business Administration’s Associate Administrator for Capital Access Eric Zarnikow revealed that the U.S. Treasury Department will commit up to $15 billion to help unlock the frozen credit markets by purchasing small business loan securities currently frozen on the secondary market in his interview on the March 16 edition of Economic Perspectives.  By purchasing these securities the SBA expects to jumpstart small business lending.  Zarnikow said the number of SBA loans this fiscal year has declined 50 percent compared to last year.

Eric Zarnikow

Zarnikow also discussed the benefits small businesses will receive as a result of the American Recovery and Reinvestment Act in the interview.  The Recovery Act contains a package of loan fee reductions, higher guarantees, new SBA programs, secondary market incentives, and enhancements to current SBA programs that are designed to unlock the credit markets and facilitate the economic recovery of the nation’s small businesses.

Among the key provisions being implemented this week to enhance SBA loans are the following:

• Temporary elimination of all borrower fees for SBA 7(a) loans and borrower and lender fess for SBA 504 loans until the end calendar year 2009 or until funds are exhausted
• Temporary increase of 7(a) loan guarantees up to 90 percent until the end calendar year 2009 or until funds are exhausted

Zarnikow will host a web chat on March 19, 12 p.m. – 1 p.m. Central Standard Time to provide small business owners an opportunity to obtain answers to their questions about how the Recovery Act will assist them.  Participants can join the live web chat by going online to www.sba.gov and clicking the “online Business Chat” icon.

To listen to the Economic Perspectives’ interview with Zarnikow, click here.

Stimulus Bill Enhances Small Business Lending Through SBA Funding

The American Recovery and Reinvestment Act contains a package of loan fee reductions, higher guarantees, new SBA programs, secondary market incentives, and enhancements to current SBA programs that will help unlock credit markets and begin economic recovery for the nation’s small business sector.

“The tax incentives and credit stimulus elements of the Recovery Act will truly help small business owners affected by the credit crunch, and will provide financing opportunities to help them create new jobs in their communities,” said Acting SBA Administrator Darryl K. Hairston. “There’s a lot to digest in the legislation, and SBA has established teams to tackle a wide variety of policy decisions, system modifications, regulatory changes, legal requirements, and new program launches authorized by the President and Congress,” said Hairston.

 

The bill provides $730 million to SBA and makes changes to the agency’s lending and investment programs so that they can reach more small businesses that need help. The funding includes:

·         $375 million for temporary fee reductions or eliminations on SBA loans and increased SBA guaranteed shares, up to 90 percent for certain loans

·         $255 million for a new loan program to help small businesses meet existing debt payments

·         $30 million for expanding SBA’s Microloan program, enough to finance up to $50 million in new lending and $24 million in technical assistance grants to microlenders

·         $20 million for technology systems to streamline SBA’s lending and oversight processes

·         $15 million for expanding SBA’s Surety Bond Guarantee program

·         $25 million for staffing up to meet demands for new programs

·         $10 million for the Office of Inspector General

 

The bill also authorizes refinancing for certain SBA loans so borrowers can expand their businesses on favorable terms, and expands leverage capability for Small Business Investment Companies.

 

“We are going to be part of the solution, and this bill gives us specific tools to make it easier and less expensive for small businesses to get loans, give lenders new incentives to make more loans, and help restore healthy SBA secondary markets to boost liquidity,” Hairston said, noting also that more details on implementation will be coming over the next few weeks.

 

The stimulus bill takes a comprehensive approach and attacks several problems facing small businesses at once by reducing fees, guaranteeing a greater share of certain loans, expanding capacity in the Microloan program, providing new loans to help small businesses keep their doors open through economic hardship, as well as new mechanisms to help unfreeze the secondary markets for SBA-backed loans.

 

Declines in SBA lending volume last year, which are continuing in FY 2009, reflect problems in the broader credit markets, and present hurdles to small businesses that are seeking credit in the current economy. The financial crisis has created a variety of conditions that impact small businesses, including a lack of liquidity in the banking system, a reluctance of many lenders to extend new loans, tightened credit standards, weaker finances at small businesses, and uncertainty about taking on new debt on the part of many entrepreneurs.

 

The Recovery Act addresses small businesses’ lending problems, and addresses key investment and contracting issues. The bill helps Small Business Investment Companies better leverage investment capital to reach more small companies. The bill also increases the current contract limit for SBA’s Surety Bond Guarantee program, which will help small businesses compete for contracts.