Only a year ago, crack-cocaine users were climbing the stairs at the elegant old brownstone on Bainbridge Street in Brooklyn.
But now Pam Flaherty, a senior officer at Citigroup, is admiring the African-inspired furniture and parquet floors.
"Isn't it beautiful," she enthuses. "It's hard to believe it wasn't that long ago that this place was infested with cockroaches," says Ms. Flaherty, whose bank made the loan that helped revitalize the building whose renovated rooms are being turned into affordable housing for families.
A few years ago, it would have been unusual to see pinstriped bankers making housing loans in places that once had a reputation for crime, drugs, and violence.
But now banks are actually seeking out minority businesses, funding affordable-housing projects and offering lines of credit for everything from day-care centers to public libraries. The MBA set is signing contracts with black church leaders and minority entrepreneurs to become partners in redeveloping large areas of inner-city neighborhoods.
"It's a growing field - there are more players looking to do deals," says Flaherty.
Behind the lending are commitments bankers have made to be in compliance with the Community Reinvestment Act (CRA), legislation that requires banks to invest some of their assets in low- and moderate-income communities. Since it was established in 1977, some $1 trillion, equivalent to the annual GDP of Brazil, has been committed to CRA projects.
Sudden influx of money
A significant amount of the money - 10 times the annual budget of the US Housing and Urban Development Department - has been promised in the past two years alone, in large part because of the wave of bank mergers. That's the case with Citigroup, which made a 10-year commitment of $115 billion in April 1998 immediately after it merged with Travelers. "A lot of people felt Citibank would disappear forever and our interest in doing community work would disappear," says Flaherty.
After its merger with Nationsbank, Bank of America Corp. made an even larger 10-year commitment - $350 billion. It has to average $14 million per hour in loans to meet that goal. On May 11, it plans to hold a press conference in Washington to show the audited results of its first year. "We are at a minimum on target," says Cathy Bessant, president of Bank of America Corp.'s Community Development Banking.
Critics call the large commitments a form of pay-off. "The numbers get larger and larger: They were intended to preempt criticism of the mergers," says Sarah Ludwig of the Neighborhood Economic Development Advocacy Project.
Despite the big numbers, she says, "I still see communities starved for credit."
Others criticize the CRA from the opposite side - they see the requirements as too burdensome for business. Sen. Richard Shelby (R) of Alabama, in fact, wants the whole requirement repealed.
"It's a burden, it's not needed, it runs up the cost of doing business," says Senator Shelby, who tried unsuccessfully to get legislation through Congress that would exempt small banks with less than $100 million in assets from the law. "It's just allowed a bunch of groups to hijack banks."
But many grass-roots organizations believe dramatic change is taking place in urban America. Benson Roberts, of the Local Initiatives Support Corporation (LISC), says loans that were not available a few years ago are now offered.
"We've seen single-mother households become homeowners in the last two to three years," he says. "There are loan products available with down-payment flexibility and terms that simply did not exist a few years ago."
US Treasury numbers quantify some of the changes. Between 1993 and 1998, home loans to low- and moderate-income people grew by 64 percent, compared with 42 percent for middle-income and 37 percent for upper-income borrowers. Loans to African-Americans increased by 72 percent, for Hispanics 87 percent, and for whites 31 percent.
In 1998, loans to small business were up $30 billion, while the increase for community development for multifamily housing was $16 billion.
"It shows that the CRA, where there is stepped-up enforcement and streamlined regulations, makes a difference," says a US Treasury official.
The Treasury official, who requested anonymity, says this does not mean that the enduring problem of redlining - in which financial institutions discriminate on the basis of location - has ended. But, he adds, "the amount is hard to ascertain."
According to the Treasury, the "vast majority" of US banks get either satisfactory or outstanding reviews in their CRA audits.
Making the loans does not mean that banks are going to lose money. In Iowa, Bankers Trust of Des Moines has found that its CRA loan losses are less than for any other category.
"The idea that making CRA loans is making a bad loan is not a true statement," says Paul Erickson, a senior vice president.
Financial institutions are experimenting with a number of different ways to aid communities:
*Citigroup is using its different operating units to create a package that will save money for developers of affordable housing. For example, in San Francisco, close to the city's new ballpark, a developer is erecting low-income housing.
Instead of taking just one piece of the deal, the bank offered to do everything - from issuing a construction loan to selling the bonds. Citigroup estimates it can save the developer $400,000 annually in interest costs, plus some legal fees.
*Chase Manhattan Bank, which plans to spending $18.1 billion over five years, has gone beyond housing. In New York and nearby states, it has become the top lender to small business, including $48 million to the Harlem USA shopping center. It was also a lead lender for Harlem's first major supermarket, a Pathmark that opened last April.
"The way we think of it is how can we expand access to credit so a business that did not have it before, or a homebuyer who did not have it before, can get it now," says Mark Willis, executive vice president of Chase.
Still, to change the way a large financial institution thinks isn't easy. "I can't tell you how many meetings, how many project teams, how many task forces, how many new products it took to produce this," says Flaherty. "But I can tell you it isn't easy. It doesn't come rolling in the door."
Linking up with churches
One reason why the bankers feel more comfortable making loans for affordable housing is because they have learned to layer their risk. Most now work with organizations, such as LISC, who then partner with a Community Development Corporation (CDC), a local group that focuses on developing neglected real estate.
Most of the banks now have a strategy that includes developing relationships with religious organizations - from churches to mosques - many of them with their own CDCs.
"These loans are helping us stabilize the area, to get us back on our feet," says Colvin Grannum, chief executive officer of Bridge Street Development Corporation, an affiliate of the Bridge Street A.M.E. Church in Brooklyn. "It's a long-term process."
"We've been calling on most of the major faith-based groups to try to get a better understanding of what they are doing...," says Andy Ditton, director of Citigroup's new Center for Community Development Enterprise. "We'll be doing that in each city, and hope to show people you can do well by doing good."
(c) Copyright 2000. The Christian Science Publishing Society