How banks use investment funds to spread CRA risk

By Allison Prang for American Banker,

Banks of all sizes — from Bank of America to the $1 billion-asset Howard Bank near Baltimore — are investing in small-business loan funds to promote economic development while sharing risk.

The funds allow banks to avoid the risk of directly investing in small companies that might not yet meet the standards for traditional bank loans. Participation in such funds is also a way for commercial banks and thrifts to satisfy investment-test qualifications under the Community Reinvestment Act, industry experts say.

A fund in Baltimore County, Maryland, has the backing of 23 financiers, including B of A, BB&T, Sandy Spring Bancorp in Olney, Md., SunTrust Banks, Wells Fargo and Rosedale Federal Savings and Loan in Nottingham, Md. Investment recipients are chosen by a board selected by the banks, according to Baltimore County’s website.

Howard Bank invests about $250,000 in the $13.9 million fund annually, CEO Mary Ann Scully said.

Small-business funds channel millions of dollars to companies that might otherwise not qualify for traditional bank loans, allowing banks to share risk and meet CRA requirements. “I would encourage all counties to look at doing this,” Howard Bank CEO Mary Ann Scully says.Adobe Stock

“It specifically supports small businesses … not totally ready for traditional bank financing, and so it allows us to bridge that gap,” Scully said. And, “it helps a little bit on the CRA investment rating.”

Scully — whose bank also takes part in another fund in Maryland, in Anne Arundel County — said, “I would encourage all counties to look at doing this.”

Commercial investments can help banks’ CRA scores. A quarter of CRA compliance is based on investments, a quarter on service, and the remainder is lending.

Ken Thomas, president of Community Development Fund Advisors, said regulators want to see that banks are continuing to innovate when it comes to community reinvestment.

“There’s never a shortage of good ideas like this,” said Thomas, who is developing a similar fund in Florida.

Stephen Primosch, vice president of financial services for the Anne Arundel Economic Development Corp., a nonprofit that gets funding from the county, said most of its loans are between $50,000 and $300,000. The program has been around since 1993.

“We consider it a job creator and a capital investment here in the county,” he said, noting that since its inception, the fund has made more than 150 loans for a combined $17.6 million.

Cleveland adopted something similar called the Cleveland Capital Access Fund in early in 2017. The investment bank Morgan Stanley put $2 million in the Community Impact Loan Fund primarily to help businesses started by people of color. The KeyBank Foundation also participates in it.

“There was a clear market inefficiency there,” said Carla Harris, Morgan Stanley’s leader for its multicultural client strategy group, referring to the decline in loans made to black-owned businesses. “Anytime you have a market gap, there’s an opportunity there.”

Morgan Stanley, which works with the National Urban League and the National Development Council, plans to expand the program in different cities, Harris said. Harris declined to say where its next fund will be, but she said more cities could be announced this year.

The $8 million fund, while not called a small-business loan fund, operates like one. Harris said getting loans between $50,000 and $350,000 is the most difficult for business applicants. So far, the program has made loans as small as $5,000 and as big as $1 million-plus.

“It’s that missing gap in the middle,” she said. “That’s the real problem.”

For the more than $500 million-asset Hamilton Bank, participating in Baltimore County’s small-business loan fund has helped bring in more business. Some businesses have ended up coming to the bank directly for loans, said President and CEO Robert DeAlmeida. He, too, said that participating in the program helps the bank’s CRA rating.

“It all helps because it goes toward the investment test,” he said. “For all community banks it certainly helps.”

FIrst appeared at American Banker