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Lead Banks have reservations about committing to communities



Banks Have Reservations About Committing to Communities

As the number of locally based banks dwindles and even larger statewide banks are gobbled up by larger mega-banks, the extent of community reinvestment activity by banks is also declining, said the director of the San Diego Reinvestment Task Force, a joint city-county agency.

Jim Bliesner, who heads up the task force that oversees the banks’ efforts to reinvest in the communities they serve, said the ongoing consolidation in the financial services industry along with changes to the federal Community Reinvestment Act have dampened banks’ efforts in such things as making more small business loans in lower income areas and making contributions to nonprofit organizations.

Bliesner cited the mergers involving two of California’s largest banks, Bank of America with Charlotte, N.C.-based Nations Bank, and Wells Fargo Bank with Minneapolis-based Norwest Bank, as causing these institutions to reduce their CRA commitments in recent years.

As a result of the mergers, the local banks are now controlled by headquarters offices in other states, with lending policies that have become more standardized and homogenous, thus reducing local decision-making.

“The trend of these mergers along with recent changes to the law covering community reinvestment have significantly changed the character of many banks’ CRA activity,” Bliesner said. “A lot of banks’ products are now determined by the credit needs of other cities and are not focused on what’s happening here.”

Although the amount of bank community reinvestment activity in San Diego has gradually increased in recent years, the ongoing industry consolidation and changes to the CRA law have created obstacles to keeping the banks’ commitment growing along with their expanding deposit bases, Bliesner said.


– Diversity Dilutes Local Involvement

Banks are now permitted to join forces with insurance companies and investment houses, and to cross-sell these services, making it easier for the institutions to dilute their commitment to CRA, Bliesner said.

“The size, scale and diversity of banks has expanded greatly in the past few years, and they are shifting a lot of their functions to subsidiary firms,” he said.

In some cases, banks are simply reducing staffs that formerly dealt with community development activity, or relocating these responsibilities to an out-of-state office, making it tougher to extract local commitments, or even comment on what the bank is doing, he said.

“There’s not as much communication about local needs, and if there is, it is ignored,” Bliesner said.

Despite these obstacles, the amount of CRA activity by local banks has increased more than sixfold from $175 million in 1993 to $1.3 billion in 1999, the most recent year figures are available, according to the Reinvestment Task Force’s master plan report.


– Small Businesses Still See Benefits

The largest chunk of that number, $604 million, was for small business lending. Other categories of CRA activity were mortgage loans to low- and moderate-income areas, $281 million; community development, $279 million; affordable housing, $86 million; consumer loans, $83 million; and corporate giving, $3.3 million.

While some mega-banks have boosted their CRA activity in recent years, when compared to the amount of deposits these banks control, it doesn’t quite measure up, Bliesner said.

For example, Bank of America had the largest deposit base here in 1999, controlling some $5.1 billion or 19.4 percent of the total deposits in the county, according to statistics provided to the Federal Deposit Insurance Corp.

According to figures provided by the banks in its CRA report, BofA did $204.5 million in total community reinvestment activity in San Diego during 1999. That represented 4 percent of the bank’s local deposits.

In contrast, San Diego National Bank, which is owned by First Bank of Oak Park, Ill., provided more than $157 million in community reinvestment in the region, which represented 16 percent of its deposit base.

San Diego National President Robert Horsman said the bank has long been an active participant in extending credit to all the communities it serves, but doesn’t set specific goals for its CRA investments.

“We’re always looking for opportunities that make sense for us,” Horsman said. “If we see a deal (that may not fit the bank’s underwriting) we try to make suggestions to help the potential borrower, try to let them know what it takes to make a deal happen. We don’t like to say ‘no.'”


– Banks Dedicated To Development Projects

Horsman said about two-thirds of the total CRA activity involved community development or construction loans on projects in lower income areas. Two specific projects the bank has provided loans for was the Asian Business Center in City Heights and the Siempre Viva industrial warehouse project in San Ysidro. The bank was an early investor to a Bankers Small Business Community Development Corp., a loan pool that allowed smaller banks to spread out their risk for business loans. It also contributes to other loan and investment pools that target riskier borrowers such as ACCION and Emtek, and created a checking account tailored to low-income customers that puts a cap on the monthly checks they can write to nine without any fee.

Bliesner said while BofA has done some outstanding things in the past, since its merger with Nations Bank, it has dismantled its community development department from about 10 people to two, reflecting the bank’s reduced CRA commitment to this region.

BofA spokesman Harvey Redin said the bank has a 12-member team in San Diego carrying out community development work, including small business lending, strategic equity and nonprofit lending.

As for the bank’s CRA activity in San Diego, during 1999, BofA made more than $147 million in small business loans, and $552 million in affordable housing loans, Redin said.

Last year, following its merger with Nations Bank, BofA pledged $350 billion over 10 years in community development loans, he said.

Yet Bliesner said the changes to CRA and continuing consolidation will likely result in reduced investment, particularly in lower and moderate income areas. As a solution to an expected pull-back by the banks, the Reinvestment Task Force’s master plan recommends establishing an equity capital fund that would provide the needed capital for local start-up businesses, and financing for affordable housing.

The larger banks, including BofA, Wells Fargo and Washington Mutual, have supported similar equity funds in San Francisco and Los Angeles, and the idea has worked in other regions, Bliesner said.

“It’s easier for these large banks to make a $10 million investment in a local equity fund than to make a $3,000 small business loan,” he said.

Not only does the equity fund cut down on all the time involved with extending credit, the risk is spread out to a larger number of investors. The idea is to attract not only banks, but other funding sources to the fund, including insurance companies and brokerage houses, private corporations, and individual investors.

The proposed $60 million fund would encompass five funds, which would be managed separately under a single umbrella organization, and address specific credit deficiencies in the county.

The five funds would be for equity/venture capital, targeting small businesses in low-income areas; a mezzanine fund for small business loans between the micro- and small-business levels, or from $100,000 to $750,000; a smart growth real estate development fund for capital on affordable housing, and commercial and industrial projects; and an environmental redevelopment fund, for environmental clean-up financing.

“We’re hoping to create a clear program for reinvestment in this region and enlist new partners into the program, and by doing this to maintain the high levels of reinvestment that have been going on,” Bliesner said.

In addition to forming the equity investment fund, the Reinvestment Task Force also recommended bringing credit unions, which do not have any CRA requirements, into the proposed equity collaborative; and to develop clearer policies intended to attract nonprofit development of affordable housing; and expand home mortgage counseling services.

The task force master plan and recommendations have been reviewed by the San Diego City Council and Board of Supervisors this month, and should come before both bodies later this year with specific requests to fund a consultant’s study on how the two government agencies can establish the investment equity fund.

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