Not-So-Voluntary Loans Boost Affordable Housing

Out-of-state banks buying into Massachusetts must pay `admission'

MELLON Bank Corporation of Pittsburgh announced this week that it would contribute $74.3 million in low-cost loans to a Massachusetts affordable-housing fund. Another example of corporate philanthropy? Not entirely. Call it statutory charity.

When a banking corporation wants to acquire a Massachusetts bank, it cannot get by with promises of goodwill toward the community. It has to make ironclad loan commitments, because state law says so.

A 1990 statute, chapter 102 of the Massachusetts Interstate Banking and Community Reinvestment Act, requires that the acquirer loan the Massachusetts Housing Partnership (MHP) Fund an amount equal to 0.9 percent of the acquired company's assets in the state.

As one Boston housing advocate puts it, ``This is the price of admission into this state.''

The mechanism, says John Taylor, president of the National Community Reinvestment Coalition, a Washington-based consortium of affordable-housing groups, appears to be the only one of its kind in the nation. For housing advocates, that is unfortunate.

`Merger madness'

``If there was a law in every state, particularly with merger madness being the order of the day, that every merger ... required these forms of [loan] commitments, there would be substantial investments in affordable housing that otherwise wouldn't be there,'' Mr. Taylor says.

It is not unusual for financial institutions to huddle with community groups during merger and acquisition talks in order to devise goodwill projects that will impress regulators who must approve a transaction. But the Massachusetts law is remarkable because it requires the acquiring banks to make the low-cost loans and provides a formula that specifies the amount of money involved.

So far, the 1990 law has resulted in four banking corporations committing a total of $161 million to the MHP Fund, according to Clark Ziegler, the organization's executive director. He says $30 million has gone to a statewide affordable-housing loan pool, and $11 million has been loaned to nonprofit and private investors to build or rehabilitate low-cost housing.

There have been complaints about what critics call the slow pace of the money's use. And one of the four banks initially balked at complying with the statute, saying its transaction was not subject to chapter 102. But the law generally seems to raise money without raising rancor.

Mr. Ziegler says more loans have not been made because MHP is concentrating on improving rental units. ``It's very difficult to operate rental housing these days.'' he says. ``It's very difficult to go out, get a loan, buy a rental building, and break even.''

``We're trying to figure out how to rehabilitate the small, one-to-four family rental [properties],'' adds Ricanne Hadrian, director of community investment for the Massachusetts Association of Community Development Corporations (MACDC). Because rehabilitating small, distressed properties is cumbersome to promote on a broad scale, she says, advocates have had to devise ways to bundle units together to make them easier to manage and more cost-efficient.

The money is not a gift, of course. The banks, over a 10-year period, make the money available at ``cost of funds'' to investors and nonprofit community development corporations who then pay it back. What the banks do not do is loan the money at market rates, and they do not decide who gets the loans. That job is entrusted to MHP, a quasi-public organization whose board is appointed by the state's governor. The bank gets to ``review'' the loans, but MHP's Ziegler says the banks do not have veto power.

Mellon's initiative

Mellon, which last year finalized its $1.45 billion acquisition of The Boston Company, a bank holding company, actually seems to like the arrangement. Mellon officials sought out state housing advocates to determine areas of special need, and will make $10 million of its commitment available at lower-than-mandated interest rates.

The bank, working with Ms. Hadrian's MACDC, is targeting the money for use in restoring urban rental housing.

The $10 million will be loaned at interest rates of 7 percent to 7.5 percent over a 20-year term; borrowers will have to pay about 8 percent interest on loans from the remaining $64.3 million.

In ``meeting with community groups,'' says Boston Company vice president Jonathan Hubbard, ``Mellon became aware of the need to help rehabilitate rental housing in this state.''

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