On October 7, the Federal Reserve Bank of Cleveland sponsored the 1997 Community Reinvestment Forum in Columbus, Ohio. Hosted by the Cleveland Fed’s Community Affairs Department, the conference provided an opportunity to hear from experts in the fields of community building, brownfields redevelopment, CRA strategy, and the secondary market for community development loans. Alice M. Rivlin, vice chair of the Board of Governors of the Federal Reserve System, delivered the keynote presentation. The Cleveland Fed is pleased to present excerpts from our speakers’ remarks in this special issue of CR Forum.

Sustaining CRA's Successes

ALICE M. RIVLIN Vice Chair of the Board of Governors of the Federal Reserve System

Dr. Rivlin was appointed to her four-year term as vice chair in June 1996. Prior to joining the Federal Reserve Board, she served as director and deputy director of the White House Office of Management and Budget. Dr. Rivlin has also served as deputy assistant director of the Department of Health, Education, and Welfare. From 1983 to 1987, she was Director of the Economic Studies Program at the Brookings Institution. A former Hirst Professor of Public Policy at George Mason University, Dr. Rivlin has also taught at Harvard University. She has written several books and numerous articles on budget, tax, and related public policy issues. Her most recent book, Reviving the American Dream: The Economy, the States, and the Federal Government, was published in 1992. She earned her bachelor’s degree in economics from Bryn Mawr College and her master’s and doctoral degrees in economics from Radcliffe College.

I feel very strongly that the future of America over the next few decades depends on community action at the local level. That is where the public policy action is going to be as we enter the twenty-first century. For much of this century, the important policy decisions were national, with the action occurring in Washington. This was necessary as Americans created a national market economy that requires institutions and infrastructure, such as the national highway system, the Social Security system, federal institutions that facilitate housing finance, and, of course, the Federal Reserve System.

Now that we have completed this, the policy frontier has shifted to the community level. The future now depends on people all over the country working together to make things better in their particular place. It depends on people in different kinds of places—large and small towns, urban and rural neighborhoods—asking what they can do to make their community a more hopeful place to be young, a more rewarding place to work, and a more friendly place to grow old. It also depends on people acting on the answers.

You are here today because you and your groups also believe in the importance of local community effort. You know that for community development to succeed, many different groups—businesses, labor, churches, educators, community organizations, and various levels of government—need to work hard together. Banks and other financial institutions have to be part of the team. Indeed, community effort works best when the financial institutions in the community believe they have a long-term stake in its vitality and act accordingly.

I did not come to my current level of enthusiasm for local community action because I am sour on the federal government or think that there is little role for national policy and national institutions, such as the Federal Reserve. I have spent much of my career working hard to improve national fiscal policy, and I am working hard at the Federal Reserve because I believe that monetary policy matters a lot to the health of the economy.

WHAT CAN THE FEDERAL RESERVE
DO TO HELP YOU BE MORE SUCCESSFUL?
First, and probably most important, we can do our best to keep the national economy growing as fast as it can without overheating or generating corrosive inflation.

Right now, the national preconditions for community development are very favorable. At the national level, the economy is growing at a healthy clip, with payrolls up and unemployment low. With these labor market conditions, businesses are more willing to hire people with lower skills and to provide the job training and experience necessary for them to get ahead. Family incomes are beginning to rise, making better housing more affordable. The primary challenge for the Federal Reserve is to try to keep this good news coming, and to be especially vigilant against the threat of accelerating inflation, which has so often derailed our economy.

My point here is not to elaborate on economic or monetary policy, but to make clear that the Federal Reserve’s role in supporting community development is not exclusively related to the Community Reinvestment Act. To the extent that we are successful in implementing sound monetary policy, we directly further the goals of community development.

BANKS AND COMMUNITY DEVELOPMENT
Let me turn now to our other major role—that of bank supervisor, which requires us not only to protect the safety and soundness of the banking system, but also to enforce the CRA.

Banks are natural participants in the community development process. In the broadest sense, most financial institutions always could be considered “community development” institutions. Chartered to meet the convenience and needs of their communities, most banks remain closely tied to the economic health and growth prospects of their local markets. Even those larger interstate institutions, or “mega-banks,” continue to depend on the collective health of economies that are quite local in nature.

By virtue of their traditional functions—taking deposits and reinvesting them in loans and other investments— banks help create economic value and growth by financing businesses, housing, and community facilities. These functions are central to anyone’s concept of community development. Therefore, it is no wonder that the activities of banks often have been a focus of attention when questions about the health of neighborhoods and local economies are raised.

THE IMPORTANCE OF CRA
However, getting beyond banks’ traditional role of fostering general community growth to the more collaborative effort of helping to meet specific community credit needs has not always been easy. As generally conservative, risk-averse institutions, many banks historically did not view low- and moderate-income areas or people as profitable markets for their loans and services. Bankers sometimes did not know enough about those communities and neighborhoods, or about the wide variety of tools and techniques they could use to help meet credit needs in those areas.

The CRA was designed to change all that. We at the Federal Reserve believe that it has been quite successful in educating bankers, and we are proud of our role in that education process.

In the 20 years since CRA’s passage, financial institutions have learned a lot about low- and moderate-income markets, and about how to serve them on a profitable basis. They have learned that their loan underwriting standards could be modified to take into consideration common arrangements found in lower-income families. For example, lower down-payment mortgage products that recognize lack of capital and consider consistent income from multiple jobs or job changes are now widely accepted.

As regulators, we know that we need to continue the education process. We regularly remind financial institutions about the importance of their CRA obligations. We do so through examinations conducted once every 18 months, and through the publication of CRA evaluations. We remind them at application time, when we review their CRA performance. And we remind them through numerous conferences and forums, as well as through newsletters, publications, videos, and other means. This past year alone, the Federal Reserve System sponsored more than 200 conferences and workshops on community development and reinvestment topics—attended by almost 11,000 bankers and others.

REGULATORY ISSUES
In the context of the overall success of CRA, community organizations, bankers, and others have raised many issues over the years about CRA’s implementation. In response to concerns of many in this audience and others, the supervisory agencies revised and updated the CRA regulations. I, for one, will be watching closely to see how effective the new rules are in practice.

Over CRA’s history, community groups have focused on gaining access to information and to the regulatory decision-making process. The push for public disclosure of CRA ratings and evaluations, permanent extension of the Home Mortgage Disclosure Act, and the disclosure of small business lending data are just some examples. As one who values public information and open comprehensible governmental processes, I understand the importance of these issues to community groups.

CONCLUSION—
SUSTAINING CRA’S SUCCESSES
The success of community development depends far more on establishing good working relationships between banks and their communities than it does on regulations or regulators. I hope that CRA does not get bogged down in a slavish devotion to implementation of regulatory minutia, or in an excessive focus on protests, which always create an adversarial tension. Now that CRA has gotten the attention of the bankers, community groups should focus on solidifying partnerships and collaboration with banks at the local level.

In the long run, CRA’s success will depend on good and frequent communication among banks, local government agencies, community organizations, and the rest of the business community. I encourage community organizations to do everything they can to facilitate that communication.

The Case for Pooled Lending
INFORMATION DYNAMICS
AND CRA SRATEGY

MARK S. SNIDERMAN Senior Vice President & Director of Research Federal Reserve Bank of Cleveland

Sniderman joined the Bank’s research department as an economist in 1976. He has pursued an active research program in the fair lending/HMDA area during the past few years, and has authored numerous articles on this subject. In 1982–83, while on leave from the Bank, Sniderman served as Senior Economist for Economic Policy Analysis for the U.S. Senate Budget Committee in Washington, D.C. Before joining the Fed, he held teaching and research positions at the University of Wisconsin at Madison. He earned a bachelor’s degree from Case Western Reserve University and holds master’s and doctoral degrees in economics from the University of Wisconsin at Madison.

Noting that CRA has clearly focused attention on underserved markets and has most likely increased credit availability to many low- and moderate-income individuals, Sniderman argued that in areas where too many lenders are competing for a limited number of qualified mortgage applicants, a disproportionate number of applicants may be turned down.

He attributed this outcome to the expense incurred by lenders in collecting and processing information about applicants and neighborhoods. Sniderman noted that the per unit cost of gathering information rises as the number of applications processed by an individual lender falls. Increased lender competition in neighborhoods with limited loan demand could thus result in the collection of less information at a higher cost. The additional expense, as well as greater uncertainty about home values, induces lenders to deny more applications.

Citing evidence from his recent study of national Home Mortgage Disclosure Act (HMDA) data, Sniderman told attendees that lenders who received 30 or more loan applications from a given neighborhood had denial rates roughly three percentage points lower than lenders who received fewer than three applications from the same neighborhood.

Sniderman suggested several alternatives to the notion that all lenders need to be active in all neighborhoods in their communities. He noted that banking regulators could allow individual lenders more scope to specialize so that they could achieve the critical mass of applications necessary to exploit economies of scale. He also discussed several types of cooperative arrangements that would specialize in collecting and analyzing local market data, as well as extending credit. These programs include community development corporations, loan consortia, and other joint lending programs and investments that present alternatives to direct lending.

Sniderman concluded his remarks by noting that recent revisions to the CRA allow lenders more flexibility in pursuing the goals of the Act. He urged lenders to take advantage of these changes by experimenting with different vehicles through which they can concentrate their lending efforts and achieve the desired outcome of the CRA—more housing, consumer, and neighborhood development financing.

SUSTAINABLE COMMUNITY
DEVELOPMENT–A DIALOGUE 

Sniderman’s presentation was followed by a panel discussion on CRA strategy. The participants were (left to right)  A. Lamont Mackley, president, Shore Bank and Trust Company, Cleveland; David C. Fynn, regulatory risk manager, National City Corporation; and senior vice president, National City Bank, Cleveland; and Lisa Rice, director, Fair Housing Center, Toledo

brown.field 1: As defined by the U.S. Environmental Protection Agency (EPA), brownfields are “abandoned, idled, or underused industrial and commercial sites where expansion or redevelopment is complicated by real or perceived environmental contamination that can add cost, time, or uncertainty to a redevelopment project.”

Todd Davis (left), president of the Hemisphere Corporation, explains the brownfield redevelopment process to Conference attendees

Formed in 1996 by Davis and Margolis, the Hemisphere Corporation has beeninvolved in several large brownfield redevelopment deals. Davis and Margolis told attendees that there are an estimated 125,000 to 450,000 brownfields around the country. Brownfields are usually associated with distressed urban areas, particularly central cities and inner suburbs that were once heavily industrialized, but have since been vacated. A brownfield may be as small as an abandoned gas station on a one-acre plot or as expansive as a steel manufacturing operation sprawled out over several hundred acres.

Formed in 1996 by Davis and Margolis, the Hemisphere Corporation has beeninvolved in several large brownfield redevelopment deals. Davis and Margolis told attendees that there are an estimated 125,000 to 450,000 brownfields around the country. Brownfields are usually associated with distressed urban areas, particularly central cities and inner suburbs that were once heavily industrialized, but have since been vacated. A brownfield may be as small as an abandoned gas station on a one-acre plot or as expansive as a steel manufacturing operation sprawled out over several
hundred acres.

Brownfield sites typically are divided into four categories:

1) sites that, despite needed remediation, remain economically viable because of sufficient market demand

2) sites that have some development potential, provided that financial aid or other incentives are available

3) sites that have extremely limited market potential even after remediation

4) sites that, although currently operating, are in danger of becoming brownfields because historical contamination will ultimately discourage new investment and lending

From the developer’s perspective, real estate professionals, corporations, government authorities, and other stakeholders should be focusing on brownfields that are viable for economic development. Essential to the brownfield issue is distinguishing between National Priority List (NPL) sites—the worst-known contaminated sites with little prospect for economically viable reuse—and those sites characterized by low to medium levels of environmental contamination. Presently, the U.S. EPA has identified nearly 1,250 high-priority sites that pose significant risks to human health and safety. These NPL, or “Superfund,” sites demand monumental effort and resources to restore and manage. The balance of contaminated sites generally are easier to clean up and offer greater opportunities for reuse.

Noting the enormous number of brownfields in the nation, Davis and Margolis stated that their real impact is more dramatically summed up in dollars and cents. Current estimates place the cost of cleanup at $650 billion. And that is just the initial tab. Brownfields’ presence contributes to reduced economic development and job creation in urban areas,
particularly in central cities and older suburbs. Thus, they also represent millions of unrealized tax dollars and millions in lost wages.

According to a recent survey by the U.S. Conference of Mayors, 33 cities with brownfield sites conservatively estimated their cumulative annual tax loss at $121 million. Other municipalities nationwide could be losing billions of dollars each year in local tax receipts because of their failure to restore brownfields to economic viability.

Cleveland Mayor Michael White has cited contamination as the prime obstacle to urban redevelopment. In large part, the frustration of Mayor White and other officials stems from the ambiguity surrounding brownfields—ambiguity related to legal and environmental issues, liability, cleanup standards, public opposition, competition from greenfields (undeveloped areas), and the unavailability of financing.

BRINGING DOWN THE BARRIERS
Leaping the multiple hurdles to the successful redevelopment of brownfields can be an arduous process. Nonetheless, stakeholders across the nation are attempting to do just that. State Voluntary Cleanup Programs are emerging as one of the most innovative trends in this area. Designed to address the obstacles to redevelopment, these programs integrate issues involving legal liabilities, technical requirements, and economic incentives. Many provide technical assistance from regulators, liability assurances through covenants- not-to-sue, and financial incentives, including tax abatement, not available through other state regulatory programs.

JEFF NUGENT
Senior Vice President
Development Training Institute (DTI)
Baltimore

For the past 20 years, Nugent has been active in developing the strategies, workshops, and training programs that have enabled community-based development to become an integral part of the community revitalization effort. He has conducted leadership training sessions for bank regulators, lenders, directors, and developers. Prior to joining DTI, Nugent served as program officer for HUD’s Office of Neighborhood Development, administering more than $42 million in project grants. He began his career by organizing a community development credit union and a collaborative community revitalization project in Springfield, Massachusetts, where he attended Springfield College. He resides in Baltimore.

Community building’s central theme, stated Nugent, is to obliterate feelings of dependency and replace them with attitudes of self-reliance, self-confidence, and responsibility. According to Nugent, the feature that most starkly contrasts community building with typical approaches to poverty alleviation is that its primary aim is not simply to give more money, services, or other material benefits to the poor. By design, community building places high priority on establishing and reinforcing sound values.

During his presentation, Nugent noted that seven themes define the essence of the new community building effort. Today’s community building needs to be

1 Focused around specific improvement
initiatives in a manner that reinforces values
and builds social and human capital.
Compared to previous leaders of neighborhood initiatives, today’s community builders give more emphasis to building the friendship, mutual trust, institutions, and capacity that form the social capital which is, in turn, essential to fundamentally strengthening the lives of families and individuals.

2 Community-driven with broad resident involvement.
If social capital is to be built—if attitudes of dependency are to be replaced with those of self-reliance—community residents must largely do it themselves. “Community participation” is not enough. The community must play the central role in devising and implementing strategies for its own improvement.

3 Comprehensive, strategic, and entrepreneurial.
Impoverished neighborhoods are beset by multiple, interrelated challenges. Although all of them eventually need to be addressed, successful community building today often starts with an assessment of community assets and a brief planning phase before moving into action. It works entrepreneurially to identify and tackle one or two high-priority issues and to produce some quick results that build confidence and capacity. The groundwork can then be developed to address other linked initiatives.

4 Asset-based.
Planning community initiatives from the perspective of “solving problems” or “meeting needs” casts a negative tone on what should be an exciting capacity-building venture. The alternative is to identify community assets and develop plans that build on them. All distressed neighborhoods have a substantial number of assets: the skills and entrepreneurial ideas of local residents, neighborhood businesses, churches and other community institutions, and sports and social clubs. Even things that cannot be directly controlled such as hospitals, vacant land, schools, and libraries, can become assets if communities plan and partner as needed to take advantage of them.

5 Tailored to neighborhood scale and conditions.
The core unit for the new community building should be a neighborhood (about 5,000 to 10,000 people) for two reasons. First, the natural face-to-face interactions that support friendships and mutual trust among residents do not work as well much above that scale. Second, even in the concentrated poverty areas of inner cities, neighborhood conditions vary substantially—planning only for larger areas is likely to miss nuances that are often critical to effective strategies.

6 Collaboratively linked to the broader society
to strengthen community institutions and enhance
outside opportunities for residents.
Community activists of the past sometimes conveyed the impression that they wanted to make inner-city neighborhoods self-contained and largely independent. Today’s community builders look proactively to end the self-defeating isolation of the inner city. They mount initiatives to prepare their residents for work and link them to outside jobs. They look for opportunities to partner with outside institutions (social service agencies, police departments, universities) in ways that will serve the community’s interests and strengthen its internal institutions.

7 Consciously changing institutional barriers and racism.
Community building is not simply a matter of strengthening the connection between the mainstream economic, political, and social institutions and those neighborhoods that have become isolated; it also requires all the institutions involved to give up “business as usual.” Community building by linking the isolated community to mainstream structures provides the contact through which a demand for fundamental change can be proffered by those who need it most. As in all relationships, the coming together is not without conflict, but community building efforts bring the skills of organizational development and conflict resolution to bear so that solution, rather than blame, is the focus. Thus, parties see— in their differences—assets they can contribute to the common endeavor.

To heighten awareness of the obstacles to community building, Jeff Nugent, senior vice president of DTI, conducted an interactive community building exercise. Attendees were divided into small teams and instructed to organize and operate mock community development groups. Each team then reported its experiences to the group.

FRANK ALTMAN
President & CEO Community
Reinvestment Fund (CRF) Minneapolis

Prior to co-founding CRF, Altman held senior positions in several state agencies in Minnesota, including the Minnesota Housing Finance Agency. In addition to his responsibilities at CRF, he serves on numerous national boards and commissions. In 1993, he was named Financial Services Advocate of the Year for Minnesota and Region V by the U.S. Small Business Administration. Altman holds a master’s degree in public administration from the Hubert H. Humphrey Institute of Public Affairs at the University of Minnesota, and an A.B. degree from Brown University.

Nine years ago, when Altman was working for the state of Minnesota’s economic development department, tightened federal restrictions began to constrict the flow of money to development projects and loan programs. Among these restrictions were limits on the issuance of industrial development bonds, which had provided a substantial source of economic development financing. Altman began to search for new ways to fill the funding pipeline. He soon hit upon the idea of forming a nonprofit corporation that would provide a secondary market for these loans, in much the same way that a mortgage company buys home loans from lending institutions.

Thus, he told conference attendees, the Community Reinvestment Fund (CRF) was born. Altman, who has been CRF president since its inception, said that his initial goal was to “demonstrate, create, and operate a secondary market for economic and community development loans, particularly in the inner city and rural areas.”

From the very beginning of CRF, Altman said he believed that the organization should be a new model for financing community development— market-driven, and not a government agency.

Since 1989, CRF has bought about 850 loans totaling $40 million in 12 states. About 65 percent are small business loans, and the rest are for housing assistance and rehabilitation. The default rate is less than 2 percent, and the delinquency rate is 1.5 percent.

CRF works to develop a well-functioning secondary market for community development loans in three ways: First, it promotes access to a steady source of funds for borrowers by purchasing loans from community-based lenders, such as local revolving loan funds, city governments, and housing and economic development authorities. Second, its loan-servicing organization, Community Reinvestment Services, strives to ensure that borrowers repay their loans as agreed. Finally, CRF issues loan-backed securities with competitive rates and a low risk-profile, factors that are attractive to investors and promote the long-term viability of the market.

PROMOTING INCREASED ACCESS TO LOANS
CRF was designed to address a fundamental problem most community-based lenders face: Demand for loans often exceeds their availability. After a community-based lender has loaned out its initial pot of money, new loans can be made only from loan repayments. These repayments are often inadequate to replenish the loan fund and meet borrowers’ needs. Excess demand for loans is generally a “good” problem to have, since it indicates an active and developing community, and because lenders can choose the strongest applicants. However, if the supply of funds is too scarce, qualified borrowers who could be creating housing or jobs in a community do not receive funding. Community-based lenders often find it difficult to raise additional capital, especially in times of increasingly limited government grant availability.

By purchasing loans, CRF provides community-based lenders with new funds that they can lend to other borrowers. The loan sellers must agree to relend the proceeds of the sale for economic and community development projects.

QUALITY LOAN SERVICING
In its years of operation, CRF has determined that standardized loan documentation, and specialized loan monitoring and servicing, are vital to creating and maintaining a functional secondary market. The staff of a small community revolving- oan fund may lack the time and expertise to service loans properly or to work out new terms with a borrower who is having trouble making payments.

In response to these concerns, CRF developed Community Reinvestment Services (CRS) as a separate division to provide monitoring and servicing for community development loans. CRS provides training and information to loan-fund managers to teach them about proper loan documentation and servicing.

ISSUING ATTRACTIVE LOAN-BACKED SECURITIES
The sale of securities to investors completes the cycle of reinvestment that begins when CRF purchases the loans from local sellers. According to Altman, CRF has a strong commitment to ensure that investors in its securities receive a competitive return. CRF purchases below-market-rate loans at a discount and prices them to yield a market return. On average, sellers receive about 90 percent of the value of their loans, which is not unusual because many of these organizations offer loans at below-market rates.

CRF securities are attractive to investors because of their low risk-profiles. CRF has successfully solicited foundations for money to fund a credit reserve. This reserve allows CRF to overcollateralize its bonds and maintain loan cash flows of at least 120 percent of bond debt service. This extra cash flow gives investors a cushion to ensure that they receive full payment even if some loans are not paid as agreed.

LOOKING TO THE FUTURE
As resources for community development decline, revolving loan funds will need to look for innovative ways to continue making investments that create jobs and housing in their communities. Altman estimates that $4 billion to $5 billion is currently tied up in revolving loan funds. While not all of these loans are salable, selling only a portion on the secondary market could free up a substantial amount of money. Organizations such as CRF are likely to continue to grow as community-based lenders recognize that they can stretch their development funds—and build stronger local economies—by utilizing the secondary market.

This article was excerpted from Altman’s conference presentation and material provided by the Federal Reserve Bank of Minneapolis.

The Greater Cleveland Residential Housing and Mortgage Credit Project has been honored by President Clinton’s Initiative on Race, a yearlong effort to promote multiracial harmony. The Cleveland project was among 14 nationwide programs singled out by Clinton as a “Promising Practice” worthy of emulation. In a recent announcement from the White House, the President said he was impressed by the Cleveland project’s efforts to eliminate discriminatory practices and stimulate “racial healing.”

Launched in 1993, the Cleveland project was a three-year program aimed at identifying and eliminating potential discrimination in the home buying process. Nearly 140 representatives of various home buying industries participated in the community-based effort, which was sponsored by the Federal Reserve Bank of Cleveland, the Greater Cleveland Roundtable, the Cuyahoga County Department of Development, and the Ohio Civil Rights Commission.

The Cleveland project’s model has been adopted by five other Federal Reserve Banks to address inequities in mortgage access in their own cities. Cleveland’s methodology is also being used by the “Access to Capital Initiative,” which is attempting to link small business owners with capital providers in Northeastern Ohio. In addition, a partnership that is spearheaded by the Cleveland Fed’s Cincinnati office is using Cleveland’s model for a similar program in Greater Cincinnati/Northern Kentucky.

The Cleveland project is profiled on the White House’s “Initiative on Race” website, http://www.Whitehouse.gov/Initiatives/OneAmerica, and will be mentioned in a report Clinton is scheduled to release early this year. It is also the subject of the Cleveland Fed’s 1996 Annual Report, which can be viewed on the Cleveland Fed’s website http://www.clev.frb.org/ 1996ar.htm).

FIEC INTERNET SITE EXPANDED

The Federal Financial Institutions Examination Council (FFIEC) Internet site contains additional information on the Community Reinvestment Act. The web site now includes redacted Interagency CRA Interpretive Letters (with the identity of the addressees and proprietary information suppressed unless government sponsored), Examination Procedures, the CRA Regulation, Questions and Answers, as well as links to the CRA home pages of the five regulatory agencies that make up the FFIEC.

The expanded FFIEC/CRA web pages are located at http:/www.ffiec.gov/cra/dcca, or you can access them by going to the FFIEC home page (http:/www.ffiec.gov) and selecting “Regulations, Ratings, Schedules, and Documents” under “Community Reinvestment Act” within the section on “Information Services.”