Different kind of banking helps renters buy homes Community development lending gains friends in cities, attention in D.C.

May 24, 1993|By Gilbert A. Lewthwaite | Gilbert A. Lewthwaite,Staff Writer

How Mary Williams, 29, a single mother of three with no credit rating, found a home of her own is a key part of the Clinton administration's proposed solution to the nation's urban crisis.

With an income of $19,600 as an office cleaner, she was able to buy her $38,000 three-bedroom row house in Southwest Baltimore through a lending institution willing to take a credit risk no commercial bank would ordinarily consider.

Through the same system, Wilbert and Betty McManus, in their 50s, bought their own first home -- a $42,000 three-bedroom shingled cottage with a pleasant yard -- last year after a lifetime of renting low-income housing.

"We thought we were too old for this," said Mrs. McManus, 50, a nursing technician at St. Agnes Hospital. "Then we thought, 'Oh heck, we can live to enjoy it.' "

Both families are beneficiaries of community development banking, a form of banking driven more by social conscience than cash consideration.

Community banking is not new. It started in its current form in the 1970s with passage of the federal Community Reinvestment Act to counter credit discrimination against low- and moderate-income families.

But suddenly it has become a hot political item. President Clinton sees targeted credit as a viable 1990s way for the federal government to help inject pride and prospect into the nation's neediest areas. It is in line with his emphasis on individual responsibility, which helped define him as a different kind of Democrat.

Community banking enjoys some bipartisan support: Republicans can view it as bootstrap capitalism; Democrats see it as a way to ease urban need.

The administration is to propose, as early as this week, a new public-private enterprise to channel $382 million over the next four years into the sort of community development financial institution that helped the Williams and McManus families.

Democrats on the House Banking Committee were briefed on the initiative by Robert E. Rubin, the director of the National Economic Council, last week. The $382 million falls short of earlier figures of $600 million and $850 million mentioned during the campaign, and reflects the administration's encounter with budget reality.

"This is not the only solution to community problems, but it's part of our approach," said a White House official involved in designing the program. "We think it's going to have a considerable impact."

The federal money will be targeted to 100 enterprise communities and 10 major empowerment zones, the Clinton administration's terms for depressed areas. Enterprise communities would be given investment and employment incentives, and empowerment zones would benefit from a wider range of federal programs including education, health and worker training.

The injection of federal funds will go to a variety of lending institutions -- banks, development funds, community credit unions and other community development groups. During the campaign, Mr. Clinton talked of creating 100 community development banks modeled on Chicago's successful South Shore Bank. But as with some other campaign promises, he has scaled back that commitment, relying more on the existing network of financial institutions.

Currently, development banks rely mainly on private investors -- individuals, religious organizations, foundations -- for their capital. Only about 5 percent of their funding now comes from government sources.

There have been failures in community banking, usually because of the closure of a local plant that dominated the area's economy, or because the initial loans went into default quickly. But overall the industry has an impressive record.

Its private investors have been assured a secure rate of return, often below market rates but offering the satisfaction of making a social contribution.

"No investors who didn't want to have lost money," said Julia Parzen, program officer in economic development and the environment for the Joyce Foundation, of Chicago, and co-author of a 1992 book on community development banking, "Credit Where It's Due."

"There have been sufficient reserves. If they are going to do things that are going to have risks with investors' money, they make sure they have loan-loss reserves. Those absorb the losses," she said, adding: "The community banks' business practices are as good as their mainstream peers, and they might be better."

The success of the Clinton program will depend on its ability to raise matching funds from private financial institutions and other sources.

Over the past seven years, the 41 members of the National Association of Community Development Loan Funds -- just one sector of the industry -- have raised $1.7 billion in public and private matching funds on loans of $119 million, which has provided 18,322 housing units and created 3,867 jobs for poor Americans. If this rate of leverage could be extended to the Clinton funding, it would convert the $382 million into more than $5 billion.

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