Congress passed the Community Reinvestment Act in 1977 to encourage depository institutions to lend to low- and moderate-income neighborhoods where the financial institution conducts business. Regulators assess the lending record of each bank in these low- to moderate-income areas, and that assessment becomes part of the bank’s overall examination the regulator uses to evaluate future bank business such as mergers, acquisitions, and charters.
Banks can earn CRA credit by participating in qualified investments whose primary purpose is community development. These include affordable housing or projects designated for low (50% of the area median income) and moderate (80% of the area median income) income.
Another way banks can get CRA credit is to invest in pools of mortgage-backed securities (MBS) composed of mortgages that meet the definition of qualified investments. In other words, mortgage loans made to low- to moderate-income borrowers in a geographic area in which the bank conducts business.
Why Credit Unions Should Care
Data pulled from Mortgage Analyzer by Callahan & Associates allows users to look at 2013 HMDA data and see credit unions are fulfilling their mission to serve members of modest means.
|CRA Loan Information||Loans (#)||Loans ($000s)|
|Total Loans Originated||706,690||$107,362,137|
|Total Loans Originated with Sufficient Info*||695,576||$105,066,683|
|CRA Eligible Loans Originated||171,553||$18,150,277|
|% of Total Loans Originated||24.3%||16.9%|
|% of Total Loans Originated with Sufficient Info*||24.7%||17.3%|
In 2013, credit unions made more than 700,000 loans totaling more than $107 billion. The average balance of these loans was slightly more than $150,000. More than 24% of the total, however, went to low- to moderate-income borrowers. Those loans totaled more than $18 billion with an average balance of slightly more than $105,000.
What happened to the $18 billion in CRA eligible loans that credit unions originated?
- Some are retained as part of the credit union’s own portfolio.
- Some are sold directly to a local bank to help them meet their CRA requirement.
- Most are packaged with similar production and sold in bulk to either Fannie Mae or Freddie Mac (FNMA or FHLMC).
Point No. 3 is where credit unions lose the extra value of their production. By packaging CRA loans with generic loans, credit unions lose any premium associated with CRA eligibility. According to Investopedia:
Because the percentage of CRA loans that a mortgage lender originates or purchases in the secondary market is important, CRA loans tend to trade at a premium price in the secondary market. Generic packages of loans are frequently searched by traders looking to find overlooked individual CRA loans within the package, which can be extracted and sold for a premium, independent of the entire package.
In other words, the housing agencies and broker-dealers cull through loan packages and extract mortgages that meet the CRA definition. They combine mortgages from other originators and form a pool with a similar geography to create a CRA MBS pool. They then charge a premium for that MBS pool to the bank that needs to fulfill their community investment.
What Can Credit Unions Do?
First, be aware of this when a bank calls looking for loans. The credit union might be able to extract a premium for its loans.
Second, be aware of this when selling a loan package. It might contain valuable loans that will be extracted.
Third, when selling loans to the agencies, be aware that the credit union might be making competitors jobs a little easier.
Kevin Heal is vice president of Callahan Financial Services (www.TRUSTcu.com). He has more than 25 years of sales and trading experience with both large investment banks and regional broker-dealers.