COMMUNITY AND WELFARE INVESTMENTS FOR STATE AND NATIONAL BANKS
This is the third article on what banks can do. Welfare tends to be understood in two ways. One is an immediate need, where people need money, food, shelter, or some immediate assistance to stabilize their situation and help them on the way. We’d like to focus on the second view, which is the long-term need to help people take care of themselves. It’s the old proverb that if you give a man a fish, you feed him for a day. Teach a man to fish, and you feed him for a lifetime. Banks and financial institutions are in a great position to do this by providing capital and support to their communities and building infrastructure and resources that allow communities to take care of themselves.
Banks are well positioned, probably more so than most other types of entities, to provide these sorts of resources and make them available in their community. Let’s give you one example. We think this is a great one. We were excited to see that one of our banks made an investment this year with a business that makes loans to individuals who don’t have credit scores or individuals who have poor credit scores and no credit to make car purchases. These car purchases are for people who can’t get a job because they don’t have transportation. If they receive a loan to get a car, they now have transportation, can get a job, and repay the loan.
One of the main beneficiaries of this lending program turns out to be single mothers. You have a single mother who is dropping her kids off at the bus; she is then trying to find a bus to go to work or to go job hunting; she has to get a bus to go back home to pick up her kids from school, and then take them home. If you give her a car, it cuts hours out of her day. She becomes much more employable, and it’s much easier for her to develop a career and access a good-paying job. She now has a steady income for the family.
Again, we were so excited to see one of our banks make an investment in that program. What it turned out to be was an investment in a lender. The result is that it’ll pay back, provided that the lending program is managed appropriately. What’s more, if you consider the impact, it’ll be so many cars to many families in the bank’s immediate area. So, it’s a good community reinvestment act.
MAKING EQUITY INVESTMENTS INTO OTHER BUSINESSES OR INSTITUTIONS
Why are we talking about it this way – not making the loans directly? If you look at national bank powers and state bank powers, banks are confined to lending and taking deposits. When it comes to welfare-type investments, however, investments in the public interest, the lines blur just a little bit on what a bank can do in terms of making an equity investment in other businesses and other institutions. For our example, the investment bank made an equity investment directly into another lender, and that lender can take the investment proxies to make loans.
You may have noticed that another thing happening here is that these types of loans aren’t showing up as applications for the bank. So, that’s necessarily a fair lending risk. You’re putting in place a special-purpose lending program without taking on all of the typical fair lending risks that would normally come with that. These sorts of loans would look slightly different than the other loans that are traditionally on your books because they aren’t used in the fair lending assessment.
This type of investment takes this learning program and puts it in the hands of the specialist, somebody who’s experienced in their area. The bank doesn’t have to develop that talent in that experience in learning in that very particular area.
If you were to take this concept and apply it a little bit more broadly, there are a lot of other opportunities to be made with this sort of investment.
SPECIAL INTEREST LENDING
While I was at Utah State University, we did some work with micro-lending programs. We raised some money for a micro-lending program that made loans in South America for things like sewing machines and basic equipment. They were short-term loans that would be paid back within a few months to maybe a year. Payments were regular, weekly, or monthly small payments. What these small loans would do is give somebody with nothing the ability to go out and buy some basic equipment so they can spend their time producing goods to sell to people in their area. It’s such a great program.
There is a need in the United States for programs like this, but more likely, you’ll see a need for small business lending, SBA program lending, or other small business lending that normally may not quite fit what’s good for the bank. There are, however, special purpose lenders in the United States who can make loans in the 5 to 10, 20, 30 or $40,000 range. You might look at if there’s a need in your community, inviting one of these groups in by making an investment, bringing capital to your community to make loans to people who, “Hey, I want to run a concession stand,” or “I want to run a booth at the carnival,” something that will pay back a basic equipment loan. Or maybe someone is starting a small auto shop, car detailing business, or something along those lines where it’s very simple, low equipment costs. Maybe it doesn’t fit the ticket for the bank’s typical loan portfolio, but it would be really good for a person to start a business and have a strong public impact.
We would encourage you to be on the lookout for instances where you can make a community impact by providing funding capital to programs that could benefit your area.
WELFARE INVESTMENTS
You may not know that state and national banks have a welfare investment power that is usually buried at the end of the list of bank powers that are available. While banks are normally limited to taking loans taking deposits, and running related activities that are incidental, we’ve talked about some of the exceptions and add-ons that you can do. Welfare investments are another.
When you get into welfare investments, the lines really blur a little. Were you aware that banks can participate more directly in investments designed to promote public welfare? Most of the time, this translates into investments in affordable housing and affordable housing credits. It’s a way for a bank to invest, produce some affordable housing, and get some large tax write-offs on federal income taxes.
There are also some other programs where a bank can write off taxes and make investments. We wanted to get your thoughts going and throw around some ideas as to what possibilities might be there for the bank in meeting its CRA obligations in a more flexible and creative way.
The OCC keeps a running list of Community Reinvestment Act investments over the past few years. You can find that on their website. If you want help finding that, let us know. They also keep a running list of precedent letters where banks have written and expressed that they would like to make this particular type of investment. Is that appropriate under the National Bank Act? The OCC will say yes or no. Often, you’ll see the OCC say yes to some flexible interests where public welfare is promoted. We want to share one example of a public welfare-type investment that has a good chance of being approved.
We worked with an electricity co-op that sold solar panel installations to their customers on credit with financing. The deal was that they would take a look at a homeowner’s monthly electricity payment and finance purchases of solar panels, with the net benefit being positive for the co-op member. As they came to the close of this program, they had a number of investments they wanted to make, many with regard to lower-income households.
The goal was to take a lower income household that would typically be living in older housing that’s less fully insulated, thereby usually resulting in higher electricity costs and lower the cost required to actually heat the unit in the winter and cool the unit in the summer. This would make a really big difference for somebody who doesn’t have to come home to a freezing cold house or sweat out the evening.
The co-op was taking solar panels and building arrays in parking stalls or on top of other low structures near residential or commercial developments. A home or business owner. or the co-op member could purchase an interest in the solar panels. The maintenance and routine work on the solar panels will be managed as part of the cost of the unit, with the net benefit being to lower the electrical usage from hundreds of dollars a month down to $90 or less, making it so much easier to swallow for people with their electricity bills.
A bank can certainly jump in on several fronts here – with the financing and probably also with making a direct investment into the company or into an installation vehicle to help finance and drive volume in this sort of installation. If you take a minute and think about that sort of arrangement and the different ways it can be applied in other types of investments where you’re creating infrastructure, you’re reducing the cost of that infrastructure. We believe that you will see that there are some of these types of opportunities in your community to make such an investment or create that sort of financing program.
These programs don’t have to be directly through the bank. In fact, many of these types of investments are not made directly by a bank. They’re made through a CDC, a bank subsidiary designed to make welfare-purpose investments.
TAX INVESTMENT AND TAX CREDIT-BASED TOOLS
In conclusion, we just want to mention a few tools you may not know. These are tax investment and tax credit-based tools. Some may require a bit of a heavy lift, but certain facets of these programs don’t require as much effort. These are the affordable housing tax credits, new markets tax credits programs, brownfields, and historic tax credits. These credits take a portion of the project costs and allow a developer to get the project costs back in the form of a tax credit. The beauty of the program is that the tax credit can be assigned to another entity, like a bank or an insurance company. The other entity can come in and provide cash financing for the development of the project.
In the affordable housing context, this means lower-cost housing, usually in mixed-use or mixed-rent type scenarios. On the New Market’s tax credit side, it looks at impoverished areas or businesses that serve low to moderate-income households. Historic tax credits are more geared towards developing historic buildings. Typically, these buildings are in areas that have become run down and really need a lot of investment. This tends to drive investment towards low to moderate-income areas. Brownfields are designed to promote investment in old manufacturing and industrial facilities. If a plant has gone out of business or a large empty building is available, those credits are designed to bring financing in to repurpose the building, clean it up, or make it available for something else. Great programs, very powerful.
CONCLUSION
This year, if you’re looking or planning on your community Reinvestment Act activities, special interest investments and welfare investments are a little more flexible in terms of what you can do that you couldn’t do if you’re just making regular financing for a business. If you are interested in learning more about these or any other income-generating activities for banks, please feel free to contact us at Farley Law, where we help our client financial institutions develop new products and financial services.
Farley Law specializes in working with both community banks and small businesses. If you are interested in learning more about these or any other income-generating activities for banks, please feel free to contact us at Farley Law, where we help our client financial institutions develop new products and financial services. Have a question or a comment? Send us a note at business@farleylawpllc.com, or set up an introductory call using our bookings service.