NJBIZ

Coaxing Community Funding Out Of Banks

NJBIZ — Monday, July 28, 2008

By Shankar P.

CHERRY HILL — TD Bank collected bonus points when it announced its commitment last month to provide $676.5 million in loans over the next three years for affordable housing, small and mid-sized businesses and community development projects in the state.

The bank made its pledge under the Community Reinvestment Act, a federal law enacted in 1977 to prevent banks from redlining their lending and to provide credit to underserved sections of society and small businesses.

At the same time, the bank ensured community and activist groups wouldn't launch protests against its $9.17 billion merger. TD Banknorth and Commerce Bank became TD Commerce on March 31. Last week it was announced that the bank has officially been renamed TD Bank because of a legal snafu involving a similarly named bank in Massachusetts.

Regulators allow banks to determine the quantity of their CRA obligations, but subsequently use performance ratings to hold the banks to their commitments. Many banks arrive at a "negotiated number" for their CRA obligations with nonprofit groups in their markets, as TD Bank did, according to Dennis Lagueux, its senior vice president of community development.

"We talked about a number of things, such as our ability to make those commitments and the needs of the market," says Lagueux of his discussions with two nonprofits that will guide TD Bank's CRA investments.

That joint approach helps banks satisfy their nonprofit partners that they are doing enough to meet the needs of the underserved sections in the community; the nonprofits also help identify beneficiaries of the banks' loans under their CRA obligations. In the bargain, the banks can also avoid objections from those nonprofits to their merger plans or other endeavors, like opening new branches, that need regulatory approval.

"Sometimes in a merger, [the banks] don't want [nonprofit] groups filing protests that might slow down that process," says Mira Marshall, chief of the compliance policy section at the Federal Deposit Insurance Corp., one of several banking regulators. "On occasion, nonprofits have filed protests," she says, clarifying that no such protests were filed against TD Banknorth's merger with Commerce Bank.

"If a bank is merging, a group like New Jersey Citizen Action could file a challenge to the merger," says Phyllis Salowe-Kaye, executive director of the Newark-based group. Citizen Action is one of the two nonprofits that worked with TD Bank in arriving at the bank's CRA obligations.

"The threat [of a protest] is implicitly on the table, and that's why we start meeting with them early on [in the merger process]," says Paige Carlson-Heim, managing director of the Housing and Community Development Network of New Jersey, the other nonprofit TD Bank worked with.

Carlson-Heim recalls the negotiations with TD Bank running close to the deadline fixed by regulators for filing protests to the merger. Her organization and New Jersey Citizen Action started talks with TD Banknorth in December, and reached "an informal agreement" by the end of February, she says.

Regulators gave final approval to the merger on March 31, and TD Bank signed its CRA agreement with the two nonprofits in May. In fact, TD Bank began allocating those funds as early as April, says Lagueux.

TD Bank and its two nonprofit partners maintain that their negotiations were friendly and that no threats were issued of protests against the merger. "It is not my style," says Carlson-Heim, although she recalls Salowe-Kaye testifying in hearings and coming close to filing a protest during Bank of America's takeover of Fleet Bank in 2003.

Carlson-Heim says she had "a gut feeling that it [TD Bank's CRA commitment] would go through." Also, she had worked with Lagueux and his colleagues at the bank on other community investment programs in earlier years. Salowe-Kaye says she drew comfort from the fact that her organization had worked with Commerce Bank on CRA lending and the latest deal was akin to renewing that relationship.

"There are consumer watchdog groups out there that follow the CRA and we make sure it is part of our business," says Lagueux. "We did not go about this [discussions with the nonprofits] in an adversarial way."

Commerce Bank had committed $463 million in CRA lending between 2005 and 2007 in an agreement with the two nonprofits, says Carlson-Heim. They didn't have such an agreement with the erstwhile TD Banknorth, "but they were a very good partner... and designed a grant program with us," she adds.

Lagueux says his bank embraces CRA commitments as part of its business and its "overall strategy to work neighborhood by neighborhood." He says CRA loans are not sub-prime and that their performance compares well with lending elsewhere at the bank. In the latest survey of such lending released by the Federal Reserve in 2000, 82 percent of 143 banking institutions said CRA-related home purchase and refinance lending was "either profitable or marginally profitable."

Even if a bank is able to satisfy its nonprofit partners that it is meeting its CRA obligations, it continues to be under the watchful eye of its federal regulators. That regulator could be the FDIC, the Federal Reserve, the Office of Thrift Supervision or the Office of the Comptroller of the Currency, depending upon the bank's charter.

Examiners from a bank's regulatory agency periodically measure performance against the CRA obligations that the bank agreed to, and penalize those institutions that fall short. Banks could fulfill those obligations both through lending and services, such as having staff serve on nonprofit boards or provide financial-literacy training in the communities they operate in, according to the FDIC's Marshall.

A regulator's rating could be "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance," according to CRA guidelines. "It is very rare that we have 'needs to improve' or 'substantial noncompliance' ratings," says Marshall. Only four out of 1,017 FDIC-supervised banks got a 'substantial noncompliance' rating for 2007, she adds, declining to identify them.

Banks that get "outstanding" or "satisfactory" CRA ratings receive preferential treatment with regulators, says Marshall. "It can help in ensuring we expeditiously look at various types of applications a bank might file, such as for permission to open new branches," she adds.

"The biggest penalty [for a bank that fails to meet its CRA obligations] is that it does not get expedited processing," says Marshall. It could also result in denial of applications that "ordinarily would be allowed," she adds.

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