CRA – Taking It To the Next Step
The success of the Community Reinvestment Act (CRA) has been significant. Thanks to the CRA, community groups have negotiated agreements with banks, including many of the largest in the country, to provide loans and services to low-income communities. Many of the negotiations have been adversarial. Complaining that the CRA imposes undue compliance costs on banks and that business generated by these agreements is unprofitable, the banking industry continues to fight for CRA’s elimination, or at least its evisceration. Many individual banks approach negotiations as if they have much to lose and little to gain.
But not all banks share these views. Some have negotiated large agreements and found that loans in communities they previously shunned were profitable and had a significantly lower default rate than loans made in affluent communities. These banks have approached their negotiations with hard-nosed, but enlightened, self-interest. We asked two CRA veterans about their recent negotiations that resulted in a five-year, $319 million agreement. Phyllis Salowe-Kaye is the executive director of New Jersey Citizen Action, which has negotiated with lenders to commit over $3 billion in community reinvestment lending. Jerome Greco, Senior Vice President of First Fidelity, whose recent merger with First Union makes the bank one of the largest in the country, began negotiating agreements with Citizen Action eight years ago. These commitments have helped neighborhoods around the state, while providing solid returns for First Fidelity.
We hope the lessons from 20 years of CRA battles and agreements will soon filter throughout the banking industry and into the halls of Congress. Then, perhaps, we can move from adversarial negotiations to collaborations. It is, after all, very good business.
Jerome Greco: The program will work basically as all our agreements have. Our centralized department of public affairs will implement the program. On a quarterly basis we will give progress reports to representatives of Citizen Action, letting them know how we’re doing, what areas we think are good, what areas we might need to change, and what areas are not feasible. We’ve usually had three-year agreements with Citizen Action. With a five-year agreement, we can’t see the future that far down. There might be things like the economy, interest rate changes, etc., that make parts of the agreement unachievable. But future economic conditions might enhance other parts of the agreement.
SF: How is the $319 million in loans allocated under the agreement?
JG: The money is designated for specific programs, like our discount mortgages; nonprofit housing, both construction and permanent financing; and home equity loans. Over the five years, there’s $75 million in mortgages, there’s a few million more in home equity, and the rest is mostly aimed at community development, both construction and permanent financing. We’re going to make low-income tax credit investments in shelter as well.
SF: What is the need for this program, and how did First Fidelity come to see that it should address that need?
SF: Can you discuss your relationship with Citizen Action, and how it helped lead to this agreement?
JG: I think it came about as a result of years of trust. I value the relationship with Citizen Action as highly as any in our company, because of Phyllis Salowe-Kaye [Citizen Action’s director] and others on the board. It’s analogous to when our private or trust people partner up with accounting firms and law firms to look for high net-worth customers. To be effective on the community development side, you have to understand that you don’t know the whole community, and you need insight and input from people who do – on everything from developing, pricing, and marketing products, to what that community’s needs are.
The other thing at the core of our relationship is respect. There’s no qualification for a community group to be a community group, other than to say they are and incorporate. They can issue press releases and criticize people, and then come with requests for contributions. There’s nothing in the CRA regs that says you have to have an agreement, but when you can partner up with somebody that brings something to the table, other than just demands, it makes good sense to do it.
SF: Did you have any reservations going into these negotiations?
JG: Not really, because I knew who I was dealing with. This is our third written agreement with Citizen Action, and we’ve had a few others that were handshakes. It’s far easier now also because Tony Terracciano [CEO of First Fidelity] has given me the wherewithal, both in staff and budgeting, to implement these agreements. There’s no stress level or concern – although you try to do the best job you can in structuring an agreement. But when your boss is talking about a billion dollar commitment to community development lending across the company, you know that he is very comfortable with this being part of it.
SF: Does your recent merger with First Union affect this agreement?
JG: The merger doesn’t affect the agreement at all. At the request of Phyllis Salowe-Kaye, I informed Ed Crutchfeld, CEO of First Union, about the agreement. He said to go ahead with it, and he wrote a letter indicating that First Union would be bound by this, because they feel good about relationships with groups that are noteworthy.
We’ve got groups that we don’t deal with, like some in Philadelphia that protested the merger. I said, go ahead and do it; on the technical part of the law, I’ll submit our program, and you do what you want. But I’m not going to negotiate with a gun to my head when I know we’re not the bad guys. The law says that you can protest, but it doesn’t say I have to negotiate with you. Some of these groups weren’t concerned about building long-term relationships. This was about, how much are you going to give us in contributions, and how much are you going to give us to lend. And there’s no accountability in terms of their ability to do the lending, there’s no accountability as to the staffing of that nonprofit, what they’ve done in the past, and whether they have in fact helped people in a minority community. Those are community groups that I don’t have a relationship with, or I terminate relationships with. On the other hand, at the top of the spectrum is New Jersey Citizen Action.
SF: What makes Citizen Action different?
JG: The difference is as basic as bringing the same people to the table to negotiate all the time. They understand that they have a role to play in prodding financial institutions to do more, yet they are sophisticated enough to understand when banks do make that commitment, in terms of staffing, product development, and marketing efforts.
There are other groups in different states that I have the same amount of respect and admiration for, such as the Maryland Alliance for Responsible Investment, and certain ACORN Chapters across our franchise, like the one in Philadelphia. Here in Newark, New Community is top drawer. And there are others that are really outstanding. But Citizen Action is certainly the leader in New Jersey in advocacy for low- and moderate-income consumers.
SF: Can you sum up what First Fidelity gains from this?
JG: It’s really a partnership, and it really benefits the bank. We get qualified originations from the counseling centers for our discount mortgages; when we have a question about new regulations, and what role community groups and banks can play in influencing those, we talk; and we trust one another. That’s the ideal.
I don’t want to paint this as if we sit down and everybody pats each other on the back. We argue and fight for points and positions, and that’s healthy. The respect lies in their knowing we’re being truthful with them. Out of that process, comes that benefit to the consumers.
Phyllis Salowe-Kaye: This is our fifteenth agreement, and the renewal of a previous agreement with First Fidelity, so we expected that things would progress smoothly. Then, in the middle of negotiations, the acquisition of First Fidelity by First Union was announced.
SF: What concerns did this raise for Citizen Action?
PSK: I found out about a lawsuit resulting from an earlier First Union merger, over the fact that First Union had fired a significant number of women and minorities following the merger. Also, First Union’s mortgage company is on The National Community Reinvestment Coalition’s Worst Lenders List.
SF: What did Citizen Action decide to do, in light of this information?
PSK: First, we got verbal assurances that our agreement would be honored after the merger, but then decided we’d better get it in writing. Mr. Greco (First Fidelity Senior Vice President) got a letter from First Union’s CEO pledging to abide by our agreement with First Fidelity. We then decided to up the ante, so we asked for more money and more assurances on what would happen in terms of layoffs. We also wanted to know who would be in charge in New Jersey. With Jerry Greco staying for five years, we felt comfortable with the leadership.
SF: What has allowed you to build this working relationship with First Fidelity?
PSK: There’s no question that, with First Fidelity, the message comes from the leadership. With some banks, the CRA officer may be very sympathetic, but that attitude may not be shared in the executive suite. In the case of First Fidelity, Greco is free to make decisions, and Tony Terracciano [First Fidelity CEO] supports community reinvestment lending. Maybe most importantly, Jerry Greco brings experience from a political career to his banking position.. As a former mayor and president of the county legislative body, he’s comfortable with community organizations and with meeting in church basements. He’s willing to negotiate and to compromise.
SF: This agreement contains some new components that are considered groundbreaking. Can you highlight those?
PSK: Like all of our agreements, it includes discounted mortgages and home improvement loans and community development lending to nonprofits. One significant new program is the Line of Credit for nonprofits to quickly acquire and rehabilitate deteriorated housing. It also includes a major initiative expanding minority and small business lending.
SF: Does the agreement leave room for First Fidelity to modify the terms, if there are changes in the economy over the five years?
PSK: No, definitely not. It’s a signed agreement. If there was wiggle room, it wouldn’t be a strong agreement.
SF: What, if any, lessons does your negotiation of this agreement hold for other groups negotiating CRA agreements?
PSK: First, don’t view your agreement as an enforcement mechanism for the Community Reinvestment Act. Use the opportunity of a merger or acquisition to bring banks to the bargaining table to negotiate significant lending programs with the best terms you can negotiate. Insist on a signed agreement with specific amounts and conditions.
SF: What about the fact that while you were signing with First Fidelity, groups in other states were protesting this merger?
PSK: I don’t know whether groups in other states have legitimate complaints about First Fidelity, but if they do, that’s what makes a signed agreement so important. Put those issues on the table when the bank’s looking for federal approval for their merger and you’re guaranteed to get their attention. Then negotiate a solution.
SF: Based on your agreement, do you feel comfortable with First Union coming into New Jersey?
PSK: We have a comfort level with First Fidelity that’s based on trust. We’re not so sure about First Union, but if they don’t fulfill the agreement, we have recourse. But we’re cautiously optimistic that the goals of the agreement will be met.