Nicole Bennett - Community Affairs Analyst
Published November 1, 2001 | November 2001 issue
Bankers understand the practices and regulation of banks, and community development professionals understand the practices and constraints of community development and nonprofit organizations. Bankers and community development professionals regularly form partnerships. But do they understand one another well enough to optimize those partnerships? And do they understand all the tools available for community development?
To help address these questions, the Community Affairs section of the Federal Reserve Bank of Minneapolis and Twin Cities Local Initiatives Support Corporation (LISC) cosponsored a program in the spring of 2001 for financial institutions, nonprofit organizations, intermediaries and government agencies. The three-part series, titled Partnership Tools for Community Development, offered information and an opportunity for discussion of the Community Reinvestment Act (CRA), community development organizations and new tools and programs available for community development partnerships.
Part I of the series, held on April 18, featured information on the basics of the CRA presented by Margaret Tyndall, Federal Reserve Bank of Minneapolis. The CRA overview highlighted the challenges and opportunities that banks encounter in fulfilling CRA regulatory obligations and attempted to dispel some misconceptions about the CRA.
A panel discussion on the relationship between banks and community development corporations (CDCs) followed the CRA overview. Panel members John Flory of Whittier Community Development Corporation and Ed Lambert of the Minneapolis Consortium of Community Developers spoke about the structure and operations of a typical CDC and the types of assistance CDCs need from banks. Orlena Iverson, TCF National Bank Minnesota, discussed how banks evaluate proposals and requests for assistance from CDCs and how lenders approach community development. The panel members underscored the need for CDCs to understand the constraints under which banks operate. They also emphasized the need for banks to understand the purpose and day-to-day workings of CDCs.
During a question-and-answer session facilitated by Paul Williams of Twin Cities LISC, participants and panelists identified potential opportunities, challenges and mutual benefits created by forming community development partnerships.
The second session of Partnership Tools for Community Development, on May 17, focused on community development under the CRA. Lisa DeClark, a field supervisory examiner in Consumer Affairs with the Federal Reserve Bank of Minneapolis, provided a bank examiner's perspective and discussed what activities qualify banks for CRA credit. She explained how banks receive credit for certain community development activities under the lending, investment and service tests. DeClark also provided information on qualified community development investments under the CRA, including a review of past investments made by banks in the Ninth Federal Reserve District. (More information is available in the report CRA Qualified Investments in the Federal Reserve's Ninth District)
One tool that may provide opportunities to both bankers and their nonprofit partners is an Equity Equivalent Investment (EQ2). Beth Lipson of National Community Capital Association presented information on EQ2s, describing them as long-term, deeply subordinated loans with specific features that allow them to function like equity for nonprofit community development financial institutions (CDFIs). For nonprofits seeking new ways to raise equity, EQ2s provide an exciting alternative to grants. For lenders who invest, EQ2s can provide enhanced CRA credit and flexibility under either the investment test or lending test. They can also earn the lender points for innovation. Lipson presented two case studies illustrating the use of EQ2s and discussed some positive implications of this new community development tool.
On June 20, the final session in the three-part series featured information on several innovative programs designed to facilitate community development partnerships. Matt Josephs of the U.S. Department of the Treasury's CDFI Fund provided general information on the CDFI Fund and its programs. He explained the purpose and structure of CDFIs and their benefits to the community. David Reiling of St. Paul's University Bank, who recently completed an application for the bank to become a certified CDFI, offered a practitioner's perspective on the CDFI program. Reiling discussed why his bank was interested in becoming a CDFI and the benefits, challenges and opportunities associated with operating one. He also described how CDFIs bring nonprofits and banks together in partnership to accomplish community development objectives.
Matt Josephs then discussed another tool, the Bank Enterprise Award (BEA) Program. This program recognizes two major categories of activities for which banks receive monetary awards through the CDFI Fund: 1) CDFI-related activities and 2) development and service activities. CDFI-related activities include various equity investments in CDFIs and other CDFI-support activities. Development and service activities range from loans or investments in development projects to deposits and Individual Development Accounts. Josephs provided examples of the types of activities that fall into these two categories, then briefly summarized the monetary award percentages associated with each type of activity.
Following Josephs' overview, Muffie Gabler of Wells Fargo Bank shared insight on the BEA program from a lender's perspective. She acknowledged some of the logistical challenges that large banks face in compiling information on community development activities to apply for BEA funds, but emphasized the value of the program in helping banks leverage additional community development resources.
The program also provided an overview of a new tool on the community development horizon: the New Markets Tax Credit (NMTC) program. Benson F. "Buzz" Roberts of LISC discussed this initiative of the CDFI Fund, which will allocate tax credits for community development investments. (For more information on the NMTC program, please see Buzz Roberts' article "New Markets Tax Credits: the next tool for community development financing" in Issue No. 1, 2001 of Community Dividend.)
The series concluded with a panel discussion. The panel, composed of Mary Tingerthal of the Community Reinvestment Fund plus Matt Josephs, David Reiling, Muffie Gabler and Buzz Roberts, engaged in a lively question-and-answer discussion. Topics included the workings of the NMTC program, limitations of and recommendations for improving the various programs presented and opportunities for creating future community development tools that will encourage partnerships among nonprofits, financial institutions and intermediaries.