Teaching the Risks Away (1989)

Teaching risks away Bankers are turning to educational tactics in order lower risk on CRA loans Loans made according to provisions of Community Reinvestment Act of 1977 have been something of a test for banks. One reason why is that packaging these loans into secondary market has often been difficult since they are generally perceived to be of a higher risk. Rather than accumulate an overflowing portfolio of CRA-inspired loans, some banks are launching a campaign to educate community groups about procedures and information required before a bank can approve such loans. They feel that this will lower CRA loans' high-risk image and enable loans to be packaged and sold. Tough market. While bankers surveyed expressed a willingness to make CRA loans, they also expressed frustration at futility of trying to get CRA loans packaged into secondary market. Joseph Tockarshewsky, chairman of recently-formed Community Development Lending Subcommittee of ABA's Housing and Real Estate Finance Division, says getting these loans into secondary market is the biggest concern we've all had. Tockarshewsky, who is executive vice-president of American Security Bank in Washington, D.C., adds that these loans wind up staying in bank's portfolio because they are incorrectly perceived as being too high a risk. We see these loans as being profitable and collaterally sound, he states. Just because it's a community development loan doesn't mean it is a loan being made in a blighted area which is economically hopeless. Community development is an area ripe for investment, Tockarshewsky says. When you sit down and look at various marketplaces, there are many instances of office space construction being overbuilt and hotel construction being But there are few instances, if any, of inner city properties being overbuilt. John White, senior vice-president at Centerre Bank in St. Louis, agrees with Tockarshewsky. In lending circles, CRA loans are considered to be of a higher risk. But compared to same ratios and same percentage of loans of their counterparts in other areas, they're not. But where does image of higher risk originate? Deborah Randolph at First Interstate of Texas says notion of high risks results because typical response of banks making these loans is to make blind commitments to dollar amounts. Randolph is vice-president of community affairs at Houston-based bank, which received a CRA challenge last year during its acquisition of Allied Bancshares Inc. Randolph adds that risk factor increases because most of those agreements have no teeth in them, and there's no way of monitoring or evaluating their effectiveness. However, she notes that many banks, her own included, are relative newcomers to this type of lending and lack expertise in dealing with these types of loans because they require creative financing. The learning process. The bankers surveyed feel that one way to reduce CRA loan risk is to show community groups, through seminars and publications, what is required from them if they wish to meet loan approval guidelines. Any loan that is made must be mindful of sacred obligations in preserving integrity of funds, says Robert Bouchard, executive vice-president of Keycorp, an Albany, N.Y.-based holding company. These can be self-serving investments in our communities, but it isn't a hand-out program. The belief that bank loans are similar to hand-outs is sometimes due to ignorance. Some people don't understand what is expected from them when they need credit, says Michael D. Taschner, vice-president of public affairs, Manufacturers National Bank of Detroit. We have tried to address that through seminars and a series of `Straight Talk' brochures that explain products and services to community. …