How Green Multifamily Helps Bank CRA Ratings
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Greetings from N’ahlins!
(that’s “New Orleans” for non-Southerners).
I am conducting workshops on Underwriting Green Multifamily Development this week at the 2010 National Community Development Lending School (”NCDLS”), hosted by the San Francisco Federal Reserve Bank.
NCDLS takes place within the National Interagency Community Reinvestment Conference, a big national event for community development professionals, Community Reinvestment Act (CRA) officers, lenders, investors, non-profits and intermediaries.
This is the first time that the topic of underwriting green multifamily developments is part of the NCDLS curriculum. We’ll share more tips from the course for you in Tuesday’s Pacesetter (subscribed, yet?)
A main point we are stressing in workshops is that green multifamily investments fulfill a far larger set of objectives than just better quality housing (which, of course, is a great start). We’ll be educating colleagues on how sustainably-designed apartments help regulated financial institutions to go beyond simply fulfilling CRA requirements. Done right, green apartments can materially improve bank CRA examination outcomes, which satisfies the institution’s broader business objectives.
But first, a short background: The Community Reinvestment Act of 1977 was established to ensure that regulated financial institutions would have an obligation to help meet the credit needs of local communities in which they were chartered. Briefly, financial institutions demonstrate compliance with these laws by providing “qualified community development loans, investments and services.”
The actual performance requirements needed to comply with the CRA vary by institution size and charter, however, it’s enough to know here that regulators use CRA examinations to verify an institution’s compliance with these laws. Those examination results are considered whenever a financial institution applies to open a branch, merge with another institution or become a financial holding company, which are the key moves bank need to make in order to grow and survive.
The CRA examination can result in four possible ratings: “outstanding,” “satisfactory,” “needs to improve” and “substantial non-compliance.” In work and conversations with CRA officers and other professionals, we learned that many banks typically receive “satisfactory” ratings, but it is very hard to improve an examination rating from “satisfactory” to “outstanding.” If you take a look at the Cliff Notes version of CRA requirements here, especially those for large banks (assets > $1billion), receiving an “outstanding” across examination categories is not a matter of simply being “very good” at a few things, the institution has to be “excellent” at many requirements, which can be very challenging, particularly during a tough economy.
One of the toughest requirements to fulfill-let alone demonstrate excellence at-is in the “Product Innovation” category, where the large bank has to “make EXTENSIVE USE of innovative and/or flexible lending practices in serving [assessment area] credit needs.” And this is where green multifamily investments help greatly.
Sustainably-designed multifamily investments not only satisfy multiple regulatory requirements, but also fulfill that elusive rating of excellence in innovation. So a bank’s investment in green projects has multiple benefits all around for occupants, communities and the institutions themselves.
The only caveat here is that in order to demonstrate extensive use of innovation via green multifamily investments (as phrased by the requirement), CRA compliance officers must look beyond the mere regulatory benefits from green properties. And our course will be raising those issues:
- Determine the risks of the status quo: They will have to take a deeper look at the current impact of doing business as usual on the markets they serve, determining the true position risk of their client borrowers.
- Assess differing value propositions within rating standards: If they cover a large assessment area, they will have to work with multiple green building certification standards, translating each standard’s requirements into target economic and environmental metrics in order to understand the level of performance they should expect from properties in different regions or being built with different green strategies.
- Develop a pipeline of the right green multifamily investments: They must strategically assess where the desired green investments will most likely come from within their assessment areas and help position their institutions to support those key borrower relationships.
- Build organizational capacity: They will have to coordinate the education of adjacent business lines within their own organizations about the deep opportunities associated with this product so that the institution can address those key relationships with a unified voice.
- Create strategic alliances to achieve common objectives: Mo`reover, they will have to foster partnerships in order to determine exactly how green strategies affect project value.
Without that coordinated action both internally and externally, it will be difficult for the institution to realize the benefits that green multifamily can bring its CRA rating. Sufficient green investment opportunities won’t materialize or the collateral won’t be properly managed when it does.
But I guess that’s where we come in…Enjoy!
Notes:
When it comes to CRA resources, you can go in two directions -
Punditry:
» LISC’s Buzz Roberts delivers fresh ideas on adapting the CRA to compensate for lost LIHTC capital
Geekery:
» SF Federal Reserve Bank’s CRA page
» CRA page at Cornell Law School’s Legal Information Institute
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- Photo credit: Cast Iron by David Paul Ohmer (on Flickr)
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