March 29, 2004
Doing the right thing | A little-known federal requirement prompts banks to fund community development around Maine
By Jess Kilby
In February, Saco & Biddeford Savings made a $100,000 investment in the Genesis Community Loan Fund, a funding agency for Maine nonprofits, part of the $2 million the bank has in outstanding community investments at the moment.
Androscoggin Bank in Lewiston has been reinvesting in its community, too, with an eye toward the sizeable Somali population that has recently settled in the area. Among the various programs that benefited from the more than $2 million of community-related investments, donations and grants made by the bank last year, many related directly to helping new immigrants. Those include the Coastal Enterprise Income Education Program and the Maine Council on Economic Education, as well as the United Way, the Boys and Girls Club and the Salvation Army.
The money reinvested by those banks, and by every bank in the state, is the result of a federal law called the Community Reinvestment Act. Enacted in 1977, the CRA calls for financial institutions to "help meet the credit needs of their communities." Banks are expected to direct a certain, albeit unspecified, amount of their resources toward loans and investments, including grants, as well as financial services like first-time homebuyer classes, that benefit low-income populations in their areas.
The program has had a significant impact on Maine, even though it was formed to address lending problems among banks in the country's largest cities. Financial institutions frequently engaged in a discriminatory practice known as "redlining," which involved denying mortgage loans in areas with large minority populations. (The term comes from the metaphorical, and sometimes literal, concept of minority neighborhoods being circled in red pen on bankers' maps.) Officially speaking, the CRA merely "encourages" banks to play nice. Compliance, however, is essentially mandatory, since federal regulators, part of an affiliation of financial agencies known as the Federal Financial Institutions Examination Council, periodically evaluate institutions on their CRA performance, and the results of those exams have a direct bearing on an institution's application to open or close branches, buy other banks, or engage in interstate banking.
Additionally, there's a cogent social factor: Chris Pinkham, president of the Maine Association of Community Banks, notes that if a bank were to receive an unfavorable CRA rating from federal regulators, "the black eye in the community would be just about unbearable." With so many banking choices for consumers, he says, residents of most communities "can speak with their feet and go to the next office."
While no numbers exist regarding the cumulative effect of the CRA over the years, compliance in Maine has funneled millions of dollars to affordable-housing projects, social service organizations and financial education programs. The Farmington-based Western Mountain Alliance, a public-interest coalition that serves Oxford, Franklin, Somerset, Piscataquis and northern Androscoggin counties, has long been a beneficiary of CRA funds from Maine banks. "We're a 16-year-old regional nonprofit, and we've been supported by almost all the banks in the region throughout our history," says Deborah Burd, WMA's executive director. "We greatly appreciate it, and it has been incredibly helpful in our long-term sustainability as an organization."
Burd says the money that comes from banks has been unobligated, allowing the WMA to put the funds directly toward operating expenses. "We work in 40% of the state, with 12% of the population, and our staff does a lot of the programming work," she says. "[These funds] allow us to have a great staff and program money to work across the state."
Vigilant for opportunities
In Maine, and typically elsewhere in the country, banks have responded to this open-ended regulation with an equally ad-hoc method of compliance. Rather than establish an annual CRA strategic plan, most banks evaluate CRA opportunities as they come along. "In all honesty, we're pretty open to anything in our community, which extends from northern York County to southern Cumberland County," says Kevin Savage, president of Saco & Biddeford Savings.
For banks that are less community minded, the CRA is even more instrumental in encouraging these types of investments. "There are some banks we work with where I get a sense they wouldn't even be talking to us if there wasn't this CRA plug," says Garrett Martin, director of development for the Damariscotta-based Genesis Community Loan Fund, which gets 40% of its $3 million fund from the state's small banks as a result of CRA compliance. "But Saco & Biddeford is, I think, a committed and involved organization in their community."
The bank has made donations to the Genesis Community Loan Fund for the past several years, Martin says, even though Genesis isn't based in Saco & Biddeford's "assessment area," the region where the bank primarily does its business. Genesis qualifies as a CRA-related target for Saco & Biddeford because the loan fund works with nonprofits statewide.
Savage notes that at Saco & Biddeford Savings, the regulation is a helpful reminder to stay alert to pro-community investment opportunities. "It does actually encourage banks to be involved in programs that they might otherwise not have the time to look at," he says. "If something comes up and it's a CRA-related program, [bank officers] will say, 'Let's take a look at that ˆ it not only takes care of a CRA responsibility, but it helps in the community, too.'"
David Norburg, chief marketing officer for Androscoggin Bank, says his bank takes a similar approach. "It's kind of a judgment call ˆ we look at individual applicants as they come to us," he says. "It sounds really simple, but we look at how much impact a program can make in the community, in terms of working with lower income families."
The CRA was streamlined in 1995 to reduce the amount of paperwork required of banks ˆ particularly small banks with less than $250 million in assets ˆ a move that helped make the CRA more of a force in Maine. So far, the state's financial institutions have a pretty solid track record when it comes to CRA performance; none of the 41 banks in the state have received a rating below "satisfactory" (the second-highest rank) since 1993. And as far back as 1990, when the Federal Financial Institutions Examination Council began tracking such data, no Maine bank has ever received the lowest rating, "substantial noncompliance." During the past 14 years, Maine banks have received 54 "outstanding" ratings, the highest rank. Banks receiving top marks in 2003 (with the caveat that not all banks are evaluated every year) include Maine Bank & Trust Company, First Federal Savings and Loan Association of Bath, Gardiner Savings Institution and Androscoggin Bank.
Pinkham says that nationwide, only 14 of the banks that were evaluated in 2003 received "needs to improve" ratings. Only three were deemed to be in "substantial noncompliance." Pinkham says "outstanding" can come with a burden of its own. "The curse of 'outstanding,' of course, is that when you get one, you typically lose it the next time," he says with a laugh. "The bankers think it's a curse because they're not going to let you have two in row."
How much is enough?
Despite the ratings system, it's difficult for banks to figure out how they're evaluated because the CRA is so vague about the criteria. "As a bank you say, 'Do you have any sort of unofficial guidelines?'" says Saco & Biddeford's Savage. "But they don't disclose what they're looking for. Their basic response is typically that they're looking at the overall effort [the bank makes]."
A 2001 document produced by the FFIEC sheds a little more light on the matter, but still refrains from citing any numerical benchmarks for banks: "Some of these performance criteria [for the lending, investment, and service tests] are quantitative, such as number and amount, and others, such as the use of innovative or flexible lending practices, the innovativeness or complexity of qualified investments, and the innovativeness and responsiveness or community development services, are qualitative." The document goes on to note that "an institution's performance under these qualitative criteria may augment" the consideration given to [its] performance under the quantitative criteria," and may lead to that elusive 'outstanding' rating.
Federal regulators are aware, though, that too much of a good thing can sometimes become a bad thing. To ensure that financial institutions don't abandon other obligations in their pursuit of CRA compliance, FFIEC documents say that "if an institution is making loans mostly to low- and moderate-income individuals and areas and referring the rest of loan applicants to an affiliate for the purpose of receiving a favorable CRA rating, examiners may conclude that the institution's lending activity is not satisfactory because it has inappropriately attempted to influence the rating."
For his part, MACB's Pinkham believes that Maine banks are innocent of such practices. "I honestly would say no, there is not a line of influence [for CRA-related programs]," he says. "They try to weigh those thingsˆ but demand always outstrips the money available."
Still, Pinkham believes Maine banks will always make CRA-related activity a priority. "It's partly a pride issue, but [bankers] also have to live in these communities," he says. "These people are Rotarians, Lions ˆ they're around all the time. It's a wonderful check and balance, even without the regulations. It's just good business to do it."
Androscoggin Bank in Lewiston has been reinvesting in its community, too, with an eye toward the sizeable Somali population that has recently settled in the area. Among the various programs that benefited from the more than $2 million of community-related investments, donations and grants made by the bank last year, many related directly to helping new immigrants. Those include the Coastal Enterprise Income Education Program and the Maine Council on Economic Education, as well as the United Way, the Boys and Girls Club and the Salvation Army.
The money reinvested by those banks, and by every bank in the state, is the result of a federal law called the Community Reinvestment Act. Enacted in 1977, the CRA calls for financial institutions to "help meet the credit needs of their communities." Banks are expected to direct a certain, albeit unspecified, amount of their resources toward loans and investments, including grants, as well as financial services like first-time homebuyer classes, that benefit low-income populations in their areas.
The program has had a significant impact on Maine, even though it was formed to address lending problems among banks in the country's largest cities. Financial institutions frequently engaged in a discriminatory practice known as "redlining," which involved denying mortgage loans in areas with large minority populations. (The term comes from the metaphorical, and sometimes literal, concept of minority neighborhoods being circled in red pen on bankers' maps.) Officially speaking, the CRA merely "encourages" banks to play nice. Compliance, however, is essentially mandatory, since federal regulators, part of an affiliation of financial agencies known as the Federal Financial Institutions Examination Council, periodically evaluate institutions on their CRA performance, and the results of those exams have a direct bearing on an institution's application to open or close branches, buy other banks, or engage in interstate banking.
Additionally, there's a cogent social factor: Chris Pinkham, president of the Maine Association of Community Banks, notes that if a bank were to receive an unfavorable CRA rating from federal regulators, "the black eye in the community would be just about unbearable." With so many banking choices for consumers, he says, residents of most communities "can speak with their feet and go to the next office."
While no numbers exist regarding the cumulative effect of the CRA over the years, compliance in Maine has funneled millions of dollars to affordable-housing projects, social service organizations and financial education programs. The Farmington-based Western Mountain Alliance, a public-interest coalition that serves Oxford, Franklin, Somerset, Piscataquis and northern Androscoggin counties, has long been a beneficiary of CRA funds from Maine banks. "We're a 16-year-old regional nonprofit, and we've been supported by almost all the banks in the region throughout our history," says Deborah Burd, WMA's executive director. "We greatly appreciate it, and it has been incredibly helpful in our long-term sustainability as an organization."
Burd says the money that comes from banks has been unobligated, allowing the WMA to put the funds directly toward operating expenses. "We work in 40% of the state, with 12% of the population, and our staff does a lot of the programming work," she says. "[These funds] allow us to have a great staff and program money to work across the state."
Vigilant for opportunities
In Maine, and typically elsewhere in the country, banks have responded to this open-ended regulation with an equally ad-hoc method of compliance. Rather than establish an annual CRA strategic plan, most banks evaluate CRA opportunities as they come along. "In all honesty, we're pretty open to anything in our community, which extends from northern York County to southern Cumberland County," says Kevin Savage, president of Saco & Biddeford Savings.
For banks that are less community minded, the CRA is even more instrumental in encouraging these types of investments. "There are some banks we work with where I get a sense they wouldn't even be talking to us if there wasn't this CRA plug," says Garrett Martin, director of development for the Damariscotta-based Genesis Community Loan Fund, which gets 40% of its $3 million fund from the state's small banks as a result of CRA compliance. "But Saco & Biddeford is, I think, a committed and involved organization in their community."
The bank has made donations to the Genesis Community Loan Fund for the past several years, Martin says, even though Genesis isn't based in Saco & Biddeford's "assessment area," the region where the bank primarily does its business. Genesis qualifies as a CRA-related target for Saco & Biddeford because the loan fund works with nonprofits statewide.
Savage notes that at Saco & Biddeford Savings, the regulation is a helpful reminder to stay alert to pro-community investment opportunities. "It does actually encourage banks to be involved in programs that they might otherwise not have the time to look at," he says. "If something comes up and it's a CRA-related program, [bank officers] will say, 'Let's take a look at that ˆ it not only takes care of a CRA responsibility, but it helps in the community, too.'"
David Norburg, chief marketing officer for Androscoggin Bank, says his bank takes a similar approach. "It's kind of a judgment call ˆ we look at individual applicants as they come to us," he says. "It sounds really simple, but we look at how much impact a program can make in the community, in terms of working with lower income families."
The CRA was streamlined in 1995 to reduce the amount of paperwork required of banks ˆ particularly small banks with less than $250 million in assets ˆ a move that helped make the CRA more of a force in Maine. So far, the state's financial institutions have a pretty solid track record when it comes to CRA performance; none of the 41 banks in the state have received a rating below "satisfactory" (the second-highest rank) since 1993. And as far back as 1990, when the Federal Financial Institutions Examination Council began tracking such data, no Maine bank has ever received the lowest rating, "substantial noncompliance." During the past 14 years, Maine banks have received 54 "outstanding" ratings, the highest rank. Banks receiving top marks in 2003 (with the caveat that not all banks are evaluated every year) include Maine Bank & Trust Company, First Federal Savings and Loan Association of Bath, Gardiner Savings Institution and Androscoggin Bank.
Pinkham says that nationwide, only 14 of the banks that were evaluated in 2003 received "needs to improve" ratings. Only three were deemed to be in "substantial noncompliance." Pinkham says "outstanding" can come with a burden of its own. "The curse of 'outstanding,' of course, is that when you get one, you typically lose it the next time," he says with a laugh. "The bankers think it's a curse because they're not going to let you have two in row."
How much is enough?
Despite the ratings system, it's difficult for banks to figure out how they're evaluated because the CRA is so vague about the criteria. "As a bank you say, 'Do you have any sort of unofficial guidelines?'" says Saco & Biddeford's Savage. "But they don't disclose what they're looking for. Their basic response is typically that they're looking at the overall effort [the bank makes]."
A 2001 document produced by the FFIEC sheds a little more light on the matter, but still refrains from citing any numerical benchmarks for banks: "Some of these performance criteria [for the lending, investment, and service tests] are quantitative, such as number and amount, and others, such as the use of innovative or flexible lending practices, the innovativeness or complexity of qualified investments, and the innovativeness and responsiveness or community development services, are qualitative." The document goes on to note that "an institution's performance under these qualitative criteria may augment" the consideration given to [its] performance under the quantitative criteria," and may lead to that elusive 'outstanding' rating.
Federal regulators are aware, though, that too much of a good thing can sometimes become a bad thing. To ensure that financial institutions don't abandon other obligations in their pursuit of CRA compliance, FFIEC documents say that "if an institution is making loans mostly to low- and moderate-income individuals and areas and referring the rest of loan applicants to an affiliate for the purpose of receiving a favorable CRA rating, examiners may conclude that the institution's lending activity is not satisfactory because it has inappropriately attempted to influence the rating."
For his part, MACB's Pinkham believes that Maine banks are innocent of such practices. "I honestly would say no, there is not a line of influence [for CRA-related programs]," he says. "They try to weigh those thingsˆ but demand always outstrips the money available."
Still, Pinkham believes Maine banks will always make CRA-related activity a priority. "It's partly a pride issue, but [bankers] also have to live in these communities," he says. "These people are Rotarians, Lions ˆ they're around all the time. It's a wonderful check and balance, even without the regulations. It's just good business to do it."
Most Recent
Most Recent
Comments