How Green Multifamily Helps Bank CRA Ratings

(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.

» SF Federal Reserve Bank’s CRA page
» CRA page at Cornell Law School’s Legal Information Institute

Green Banks Enter — and Exit — The Fray

March 25 has turned out to be a day of beginnings and endings for green banks.

US Green Bank Act aka The Green Bank that “Might Be”

Today US representative Chris Van Hollen introduced the US Green Bank Act of 2009, which — if passed in its proposed form — would result in the federal government establishing and owning a tax-exempt bank that would operate solely for the purpose of providing clean energy and energy efficiency financing, plus some related, unspecified green finance products.

Bill sponsors proposed that the US government capitalize the bank with $10 billion in “Green Bonds”, which would grow to $50 billion.

Frankly I’m torn: between supporting the US Government (potentially) putting its money where its mouth is with green energy, energy efficiency and quietly worried about whether Uncle Sam is really any better at running a bank than the rest of us finance professionals.

Side note: We were shocked to see that, given the national media’s spotlight on banks and the federal government’s many actions on funding green initiatives, this particular announcement received virtually no national press whatsoever. It did receive some attention in the renewable energy and green business camps, however.

One Earth Bank aka The Green Bank that “Might Have Been”

And fortunes hit the wall for Austin-based One Earth Bank. The Bank’s ownership, which included several Texas heavy hitters, decided to call it quits on their efforts to obtain FDIC approval for their proposed $23 million dollar bank, due to (in their words) a bad market for starting banks. [No kidding...]

The story puts the FDIC approval problem down to the investors characterizing the bank as a “green bank” in their FDIC discussions. They eventually understood over time that FDIC officials were more interested in a plain vanilla bank structure and were not as excited about approving any type of special green bank in today’s tough banking climate that might potentially veer off the path of typical banking. The article information does not provide details on any specific products or services One Earth proposed to offer that would have been different from any other bank.

I’m not sure whether this particular green bank’s demise represents a lesson for green finance as a whole. There are a few green shoots within the banking market, trying to tweak their plain vanilla banking services with green touches, leaving us unsure about the real impact that they are accomplishing. I’m sure that, as the economy turns around, we will see more attempts to reshape traditional finance into providing greater support for sustainability.

You can read more on green banks in these related posts:

ShoreBank Pacific Leads with Green Building Loan Program

Bankers Call for More Green Banks