Pub. 11 2016-2017 Issue 3

www.nebankers.org 28 Extraordinary Service for Extraordinary Members. O VER THE PAS T 37 YEARS, WE’VE ALL BECOME acquainted with the Community Reinvestment Act, or CRA—the law that requisitely encourages federally insured deposit institutions to meet the credit needs of low- to moderate-income individuals in their communities. Originally, the act was passed as a measure to address what became known as “redlining.” This action taken by bankers at the time excluded borrowers in low-income and minority neighborhoods, and was thought to have led to the deterioration of many American cities. Since it was originally enacted in 1977, the Community Reinvestment Act has endured many legislative and regulatory changes, but nonetheless remains a compulsory standard in today’s banking practices. In addition to requiring banks and thrifts to meet the credit needs of their entire community, consistent with safe and sound operations, this act directs the regulatory agencies to assess each institution’s record of doing such. This record is then taken into account when evaluating each institution’s application for deposit facilities (i.e., a merger with another bank). Of course, regulators could be satisfied with direct loans to low- and moderate-income borrowers, but if that isn’t an option in your metropolitan statistical area (MSA), a CRA TargetedMortgage-Backed Security (MBS) could be the answer. These MBSes are pooled based on the investors’ CRA requirements, and are designed as an investment option that addresses the affordable housing needs of low- to moderate- income borrowers. Putting together a pool of CRA eligible loans can be simple, depending on the population density of your specified metropolitan statistical area. The investor (banker) specifies the geographical area from which the loans included in the pool will be sourced. These are conforming, 30-year amor- tizing loans made to low- and moderate-income individuals. Once the area is specified, the assembler (e.g., CCB Capital Markets Group) will find qualifying loans and submit them to Fannie Mae, Freddie Mac, or Ginnie Mae for securitization. Once securitized, the pool will be backed by the full faith and credit of the issuing agency—just like any other MBS pool. GinnieMae pools fall into your zero risk-based capital bucket, while Fannie Mae and Freddie Mac pools are 20 percent risk weighted and to-be-announced (TBA) eligible. Ginnie Mae and Freddie Mac pools require a minimum investment of $1 million. With a $2millionminimum investment, Fannie Mae pools will be published to the agency’s website within 30 to 45 days after securitization. This allows any interested party to reference the pool details, making your next exam simple and effective. While CRA MBS will trade at a slight premium to equivalent coupon pass-through mortgage pools, you are significantly reducing credit risk and enhancing your bank’s liquidity. These pools provide the dual advantage of perform- ing as a standard bond portfolio asset, while simultaneously satisfying CRA requirements. CCB Capital Markets Group has a long history of compiling these securities and providing documentation that will satisfy your regulators. If your last CRA exam was not satisfactory or you’re concerned about your next one, please reach out to your CCB Capital Markets Group representative. We are happy to help you explore this investment option with you and your bank.  A CRA Option for Your Bank Christopher R. Morgan, The Capital Markets Group