Bank Loans Surge In Low-Income Areas
Citibank innovates by investing in nonprofit lender
CHICAGO — Like most people, Ann Deuel doesn't like to be jeered at. But the barbed laughter was especially sharp coming from a loan officer who derided her plan to open a home for abandoned children.
Ms. Deuel sought a loan three years ago from a large Chicago bank to found Jamal Place, a shelter for abused boys in Chicago's Lawndale neighborhood. "The banker said, 'What do you mean you don't have any collateral?' - I was virtually laughed out of the office," says Deuel.
Today, Deuel is having the last laugh. She eventually secured two loans and now 10 boys live at Jamal Place. The gray-stone building stands out amid the drug dens, tumbledown tenements, and weed-rich lots as a small oasis of order and security.
More important, banks in recent years have stepped up lending to low-income home-buyers, businesses, and welfare programs like Jamal Place.
Fresh money arrives
"In the last three years in particular there has been a rapid acceleration in the pledge commitments that the banks are making" to low-income areas, says Allen Fishbein, general counsel at the Center for Community Change in Washington. "It's off the graph." From 1993 to 1995, the number of home loans to the nation's lowest-income borrowers rose 21.4 percent, a far greater jump than for any other income group, according to the Federal Financial Institutions Examination Council.
The banks have been prodded into low-income neighborhoods by new creative financing plans and federal mandates. Once there, they have recognized the potential payoffs from lending to depressed communities desperately in need of money for new businesses, jobs, homes, and bedrock social services, say bankers and experts on community development.
For example, Citibank announced recently that it is investing $2 million in the National Association of Community Development Loan Funds (NACDLF), a nonprofit community lending organization like the one that gave Jamal Place its crucial first loan.
The Citibank investment - a new financial innovation conceived by the bank and the NACDLF - is the first by a commercial bank to a nonprofit community-development organization.
The investment is a deeply subordinated loan that the community group may consider as permanent capital. The group can thereby vastly expand its borrowing and lending.
A bank that invests in a nonprofit community-development group gets credits under the Community Reinvestment Act (CRA) that far exceed the investment's dollar amount. Federal regulators review such credits when considering whether to approve a bank's plan to expand. The CRA was implemented in 1977 to discourage redlining and promote lending and financial services in low-income areas.
Investment by banks in nonprofit community-development groups nationwide is expected to jump to $15 million in the next few months, says Mark Pinksy, executive director of the NACDLF, which is based in Philadelphia. If traditional multipliers hold steady, total loans to impoverished areas within the next five years should thus balloon by $500 million.
Critics worry that, after compiling CRA points by investing in nonprofit lenders, many banks will duck riskier direct loans to businesses or homebuyers in depressed areas.
"If you want a short-term hit for CRA credit, this would not be the way to do it," says Pam Flaherty of Citibank in New York. The $2 million investment will not yield credits for at least four years, after it is shown to bear fruit in higher loans. (Over 15 years, however, the investment could reap as much as six times more credits than a direct loan of the same amount, she says.)
The NACDLF says the commercial bank investments will undoubtedly boost the total private money trickling into troubled neighborhoods. "We demanded that Citibank make it clear - and it has - that the investment doesn't take a penny away from what it would otherwise do under CRA," says Mr. Pinsky at the NACDLF. "We will not be a CRA escape hatch."
Ann Deuel's struggle
Deuel's travail to get financing for Jamal Place shows how, without nonprofit community lenders, loans often remain beyond reach in poor neighborhoods.
Bankers at several institutions told her that without collateral, she would never gather the $500,000 in loans needed to open the house.
Then Deuel visited the Illinois Facilities Fund, which uses capital raised from foundations, banks, and other investors to make below-market loans to borrowers of modest means. The fund provided loans worth $325,000. Following the fund's lead, a local bank loaned the remaining $175,000.
"If we didn't have a nonprofit community lender like the fund, then we wouldn't be here, and the children would not be cared for as well as they are being cared for," says Deuel.