How do we handle Community Development Loans? Note on Pre- Approvals
Two topics to tackle today. First a heads up/reminder on community development loans. Second, a quick note on pre-approvals in Massachusetts.
We get to travel around and hear a lot of war stories. John likes to have us out visiting with clients to "keep a finger on the pulse" of what's important to our clients.
One regulatory topic that keeps coming up lately is community development lending. Apparently, it's on the regulators' radar and more banks are missing this issue. Here's what we hear some regulators saying about this:
I can't tell you how often I go into a bank and they tell me they have no community development loans. Really? That's not acceptable. You need to have some community development loans. But often I go in and find the bank actually does have qualifying loans, they just haven't reported them correctly! It hurts to see, because, compared to other reporting requirements, such as HMDA, tracking and reporting community development loans is relatively easy. But unfortunately, even if the Bank has community development loans, I'm not supposed to give them credit unless they've reported them correctly.
Let's take a closer look, shall we?
#1- You Need Community Development Loans
If a regulator comes in and finds you have 0 community development loans, there's probably going to be a problem. You have to have some community development loans.
And it's not enough to have community development loans and not report it! Technically speaking, you're supposed to report these correctly in order to get credit for them. In your bank, someone should be responsible for the following:
Track/Report community development lending is able to demonstrate why a particular loan qualifies as "community development" (There are worksheets available to organize all the requirements into a "check box" format)
Keeping management informed on the need for community development loans and educated on the requirements
Note: Different standards apply here for "small banks" (under $250 million). For example, they do not need to file the above reports and would not be crucified for not having community development loans on the books.
#2- You Might Already Have Community Development Loans and Just Not Realize It
The basic definition of a "Community Development Loan" is a loan with a primary purpose of "community development" (Circular, I know. Obvious, okay! Give me a minute to explain!) Except for loans on multi-family properties, loans already counted towards small business or home mortgage lending under HMDA (including purchase, refinance, and home improvement loans) will not count.
Community development purposes include:
Affordable housing for low- and moderate-income individuals
Community services targeted to low- and moderate-income individuals
Activities that promote economic development by financing small businesses or small farms
Activities that revitalize or stabilize low and moderate income geographies
Note: Multi-Family is Dual-Purpose
A loan on a multi-family property, as an exception to the general rule, can be reported for BOTH Community Development (CRA) and HMDA purposes. *This is one reason, when you're scanning your portfolio for CD loans, that you can't just cross off your entire HMDA lar ... you might have some CDLs hidden in there!
If you haven't already, it would be worthwhile for someone to go through your portfolio to see if any loans qualify under this test. And get this organized before the examiners visit.
Here are some examples of community development loans:
Loan to attract a major new employer
Loan to support infrastructure necessary to retain an existing business (e.g. water or sewage facilities)
Financing for health services, public safety, or education Loans to: (a) local governments, (b) nonprofit organization, or (c) for construction/rehabilitation of community services (playground, park)
Loan to build a multi-family housing complex in a low-income census tract
Don't short yourself just because of the area!
A qualifying community development loan doesn't necessarily need to be inside a low or moderate-income area, disaster area, or underserved area. It instead needs to target such persons, regardless
of the location. For example, a loan to a grocery store in a middle income area (i.e. not low or moderate) could qualify where it serves
the needs of low- to moderate-income persons living in an adjacent area and there is a need for a place for those persons to shop.
Special Note: The DOB and Pre-Aprovals
I wanted to add an extra note on a topic, since I received the following note recently:
On one of the MMBA calls you spoke about pre-approvals versus pre-qualifications. I know this continues to be an ongoing issue with so many lenders. Questions arise such as if they should offer a pre- approval process and then there is the elephant in the room as to whether loan officers can provide pre-approval letters. There is not too much out there on this and was thinking this would be a great topic for one of your newsletters.
So, we've worked a lot with this in 2014, and I even filed a formal request for opinion with the Division of Banks at one point during the year. With that set-up, here are some thoughts to keep in mind:
The word "pre-approval" is not defined by State regulation. Applying the standard framework - at what point does a pre-qualification become a pre-approval? Generally, the fewer conditions and more work done before, the more likely it is to be a pre-approval. But the DOB is not willing to formally offer a definition.
But a definition for "pre-approval" is less important than we realize. The most important thing we can share with you on the issue of pre-approvals is this: The DOB is not concerned with accidentally calling a pre-approval a pre-qualification; but instead the DOB is most concerned with "over-selling" a pre-qualification as a real pre-approval. Example: You're offering a so-called "pre-approval" that is full of conditions, doesn't qualify as a "pre-approval" under Federal law, and is not based on verified information. Here, this is a "no no" because you're trying to pass off as a pre-approval to the borrower what is, in reality, only a pre-qualification.
For HMDA purposes, you can do a few "pre-approvals" without having a "pre-approval program." And if you don't have a program, you don't report any.
It's true that many lenders have shied away from pre-approvals, but it's becoming more important to bring back pre-approvals just to stay competitive as real estate agents and borrowers are demanding them.
With the upcoming HMDA and Integrated Disclosures rules on quickly approaching, your time today may be best spent making future plans for pre-approvals.
In other news:
For more info. on CRA matters, they tell me the Dallas Fed puts out the "gold standard" in CRA informational materials ... visit their website to find them
Why are articles about the CFPB always so negative? My Life on the CFPB 'Dark Side': A credit union vet on his time at what some see as the Death Star of agencies. (ABA Article)
Here is the unofficial transcript from the CFPB's most recent webinar on the new Integrated Disclosures Rule. Buckley Sandler is really doing a good job of sharing information on this
Cybersecurity is on everyone's mind, here's how the Onion represented Chase's policy in a 2013 article: "That's why, when you're finished with your online banking session, we recommend three simple steps to protect your personal information: log out of your account, close your web browser, and then charter a seafaring vessel to take you 30 miles out into the open ocean and throw your computer overboard."
As if we need a reminder that we can't discriminate against a borrower for receiving government benefits (on a loan decision or request for modification) ... reminder coming from the CFPB
FHA unexpectedly announced the expiration of its anti- flipping waiver on December 10, to take effect on January 1, 2015. The MMBA summarized it well in an announcement yesterday:
On December 10, 2014, the Federal Housing Administration announced that it will let its temporary waiver of the agency's regulation prohibiting the use of FHA financing to purchase single-family properties that are being resold within 90 days of the previous acquisition to expire at the end of the year. The anti-flipping waiver was first authorized in 2010 during the height of the foreclosure crisis to help stimulate repairs and sales in neighborhoods hard hit by recession. According to FHA estimates, about 102,000 homes were renovated and resold using the waiver. However, in response to a recent report by the HUD Inspector General, the FHA decided not to extend the waiver. Mortgages made on properties in which sales contracts have been executed prior to 11:59 PM, December 31, 2014, are eligible for a waiver.
In the "old" days, a company had about a day to make a public statement when a public relations problem emerged (just needed to get it out in time to make the nightly news or tomorrow's paper). But now, word (and bad publicity) travels so much faster. 24-hour news, blogs, online newspapers, tweets, posts, and who knows what else. That's why companies today strive to communicate with the public in real-time in and in the same mode (e.g., responding to a consumer e-mail with e-mail, tweet with tweet, even Youtube video with Youtube video). Let's look at the case of United Airlines and the broken guitar- a costly (some say $180 million), albeit amusing mistake. A musician seated in the plane watched as baggage handlers on the runaway threw (and dropped, ultimately breaking) his expensive guitar. At least according to the musician, United unfairly refused to pay for the guitar and made the musician's life miserable for the next 9 months. He memorialized the entire experience (from his perspective) into a funny song that he posted on Youtube, which you can find here on Youtube. United did not respond to dampen the effects or popularity of the video (not in real time, not in the same mode, not at all). The video caught fire, skyrocketing in popularity and reaching 14 million + views (14 million negative views), severely damaging United's reputation for customer service.
"The most respectful attitude you can offer someone is your unconditional interest."
- Rosalene Glickman, PhD
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