Helping Neighborhoods Revive Seen as Compatible With Profit : Banks Looking Anew at Community Projects

WASHINGTON â€”  Banks are becoming convinced that they can make profits while revitalizing deteriorating neighborhoods, meeting federal regulatory requirements and satisfying the demands of local governments, according to participants in a Washington seminar.

About 100 bankers, many more than expected, attended a recent meeting organized by the Office of the Comptroller of the Currency to discuss ways that banks can help finance low- and moderate-income housing.

Bankers traditionally have considered investment in community development projects as charity rather than profit-making ventures or as a way to forestall redlining complaints. Redlining occurs when an institution refuses to lend money within a specific area, usually a run-down neighborhood.

As federal subsidies ebb and the new tax law discourages investment in low-income housing, however, community groups and city administrations are becoming more creative in their search for ways to attract funds. Along with bank officials in some instances, they are devising ways that banks can make the profits they want while investing or lending for community development projects.

Banking officials’ growing interest in community development may also be connected with the growing number of mergers and merger attempts by financial institutions, one conference participant said. City and state governments are increasingly demanding that out-of-state banks prove that they will make contributions to local communities before approving mergers.

Subsidies in Los Angeles

Security Pacific National Bank and the City of Los Angeles have been devising property improvement loans for low- and moderate-income California homeowners for the past 10 years, said Phil Long, a bank vice president. The bank has earned 12% interest on $34.6 million in loans, with the borrowers paying 6% and the city government making up the difference with a lump-sum interest subsidy payment, Long said.

Los Angeles housing authorities use federal Community Development Block Grant funds to make many subsidy payments.

Federal cutbacks “in the last couple of years . . . have reduced our ability to provide affordable housing,� said Ralph Esparza, assistant director of the Los Angeles Community Development Department.

The Chicago Housing Partnership is Chicago’s answer to the drastic reductions in the federal grants and subsidies that local governments have long used to house their poor citizens, said Patrick C. Johnson, president of a recently created financing arm for the organization.

The organization typically funds low-income housing with below-market loans from banks, other low- or zero-interest-rate second mortgages provided by the city from federal grants and money from corporate investors. The new tax law provides low-income housing tax credits that will be useful to companies but not to most individual investors, Johnson said.

Until recently, three-fourths of Chicago’s low-income housing was produced by private developers using federal subsidies and tax benefits, but “the for-profit developers have fled the field,� Johnson said.

Now nonprofit organizations produce most of the housing for the poor. First National Bank of Chicago lends money for and invests in community development projects because “it is the right thing to do� to win support from the community and the city administration and “it helps meet regulatory requirements,� said Marina Carrott, a vice president of the bank.

Record of Community Service

Under the Community Reinvestment Act, federal regulatory agencies must take into consideration a financial institution’s record of community service when deciding whether to approve an application to open a branch office or merge with another financial organization and some other requests. The legislation also requires banks and savings and loans to post notices and maintain public records of their activities and efforts to meet community credit needs.

Banks have had the regulatory authority to set up community development subsidiaries since 1972, but only about 40 banks have established them, according to the Community Development Digest, a private publication. Rules against bank participation in some real estate and business activities are suspended as long as the projects pursued have a public purpose, such as revitalizing deteriorating neighborhoods or rehabilitating or building low-income housing.