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Texas Community Reinvestment Update 2007
Community Reinvestment and State Agency Programs
Banking
The Texas banking industry has undergone significant changes over the last 25 years. In the 1980s and early 1990s, a number of banks and savings institutions failed under what some analysts characterized as the financial equivalent of the "perfect storm." The ingredients of this financial catastrophe included economic instability, changes in tax law for real estate investments, a dramatic fall in crude oil prices, high inflation, excessive leverage, disproportionate lending concentrations, deregulation and fraud and insider abuse.
During this period, market interest rates increased dramatically. Savings institutions that held large volumes of fixed rate mortgages suffered an erosion of their net interest margins. In the aftermath of this upheaval, many Texas-based institutions were left in a weakened condition. Interstate banking that began in Texas in 1987 allowed out-of-state holding companies to enter Texas and infuse much-needed capital into these troubled institutions through mergers and acquisitions.
While the Texas economy recovered from these harmful conditions, the trend of mergers and acquisitions in the banking industry continues, most pronounced among the larger multi-state institutions. In 2006, large multi-state operations controlled $221 billion, more than half, of $402 billion in deposits in banks in Texas. Small locally-owned banks control a higher percent of the market in smaller communities. A large number of out-of-state banks are conducting business in Texas, and the Texas Department of Banking expects this trend to continue.
The number of out-of-state banks and thrifts, both state and national charters conducting business in Texas, has increased by more than 50 percent in the last five years, increasing from 24 on June 30, 2001 to 38 at year-end 2006. As markets in other states approach saturation, the vibrant and diversified economy of Texas will attract other out-of-state financial institutions.
In the last 10 years, mergers and acquisitions have resulted in fewer financial institution charters, which are the main bank offices or bank headquarters. The trend in Texas is that fewer charters are issued, while remaining banks continue to expand operations by building new branches to meet the customers' need for convenience. The number of charters for banks and savings institutions decreased 26 percent from 954 in 1996 to 703 in 2006. Improving economic conditions in Texas and a favorable banking climate encourage the "branch building" trend. Texas branches increased 51 percent between 1996 and 2006, growing from 4,146 to 6,259 branches. The following table "Offices and Deposits of Depository Institutions Operating in Texas," depicts the number of office locations, branches and deposits as of June 30 of 1996, 2001 and 2006.
Due in part to the robust Texas economy and the trend toward more branch locations, the deposits controlled by the remaining banks and savings institutions increased over the last five years, from $243 billion in 2001 to $402 billion in 2006. The average asset of financial institutions in Texas, excluding credit unions, was $271 million at the end of 2006, compared with $248 million at the end of 2005. Out-of-state, state-chartered banks' total assets reached $16.3 billion in 2006. The sum of all assets of state-chartered deposit institutions, excluding credit unions, equaled nearly $110 billion in 2006.
Given the positive estimates for both job and population growth for the next five years, the Texas Department of Banking anticipates that banks and savings institutions will continue to establish new branches, and the average bank size is expected to increase. Industry executives, previously displaced when their employer institutions were sold, are entering into ventures to charter new financial institutions.
The Texas banking environment outlook is favorable for the remainder of 2007, following a year of excellent financial performance of Texas' commercial banks and savings institutions. Factors supporting the banking industry included an improving and healthy economy, robust consumer spending and strong housing and construction markets. While the state's housing market has escaped the weakening found in other states, recent statistics reflect that single-family building permits and new house construction have decreased.
Despite a flattening of the yield curve, the financial industry in Texas has been able to maintain its margin. Financial institutions traditionally rely upon earning the spread between longer term assets funded by short-term deposit liabilities. In 2006, the yield curve became inverted, meaning that short-term rates exceeded long-term rates. Typically, this causes a narrowing of financial institutions' net interest margins. In the second half of 2006, this became apparent as many banks saw a reduction in their net interest margins.
The Texas Department of Banking expects overall performance for banks and thrifts to be favorable through 2007 due to the renewed strength of the Texas economy in 2005 and 2006. Bank and thrift managers must manage their interest rate risk during a rising rate environment or suffer deterioration in their net interest margin. This would be necessary if higher gasoline prices persist into 2008. Combined with an escalating amount of consumer debt and delinquencies in the subprime mortgage loan market, consumer confidence may drop and depress consumer spending and home sales.[53]
Banking contributions to the Texas economy are vital to stimulating opportunities to small businesses and entrepreneurs. Capital loans to small businesses by banks fuel employment opportunities for Texans. The Texas Department of Banking assesses how well banks are meeting the needs of their communities through funding of affordable housing projects, loans to low- and moderate-income businesses and individuals and projects compliant with the CRA. The agency follows up on the reported CRA performance of the banks it oversees and the findings of CRA examinations. The agency also provides consumer assistance through its Web site, the agency's consumer complaint section and periodic agency publications.
The Finance Commission of Texas serves as the statutory oversight body for the Texas Department of Banking, the Texas Department of Savings and Mortgage Lending and the OCC. Under section 11.305 of the Texas Finance Code, it is the responsibility of the banking commissioner, savings and mortgage lending commissioner or consumer credit commissioner to research the availability, quality and prices of financial services, lending and depository services and the practices of business entities in the state that supply financial services to agricultural businesses, small businesses and individual consumers. In December 2006, the Finance Commission conducted a financial services study.
Economic Development
The Texas Economic Development and Tourism Division (EDT) is part of the Office of the Governor. Senate Bill 275 of the 78th Legislature transferred the functions of the Texas Department of Economic Development to the Governor's office and created the Economic Development Bank within EDT by combining finance programs previously administered by the Department. The finance programs include the Texas Small Business Industrial Development Corporation, the Industrial Revenue Bond Program established under the Development Corporation Act of 1979 (Article 5190.6, Vernon's Texas Civil Statutes), the Texas Enterprise Fund established under S.B. 1771, the Product Development Fund and the Small Business Incubator Fund established under Government Code, Chapter 489, Subchapter D.
The EDT works with companies seeking to expand or relocate into Texas communities and administers programs that encourage the financing of local economic development projects. These include the Capital Access Program (CAP) and the Texas Linked Deposit Program. The Governor's Small Business Assistance team provides additional help, information and support for communities and businesses.
Created by the 75th Legislature in 1997, the CAP is a public/private partnership between the Texas state government and lending institutions that allows eligible businesses to access needed capital for start-up or expansion. The chart below shows the CAP transaction history from fiscal 2001 through fiscal 2005 (funding was not available in 2006).
The Linked Deposit Program is a partnership between the EDT, the Comptroller's office and approved depository lenders that encourages lending to minority and women-owned businesses, child-care centers, non-profit organizations and small businesses located in state-designated enterprise zones. Loans range from $10,000 to $250,000 and can be used as working capital and for the lease, purchase or construction of capital assets such as land, building and equipment. Since 1995, the Linked Deposit Program has participated in creating 63 new jobs and retaining 199 jobs in Texas.
The Small Business Assistance section of the EDT serves as the principal focal point in the state to assist small and historically underutilized businesses. The program represents the Governor's Office as an advocate for small business issues affecting the state of Texas.
Starting in fiscal 2005 and continuing into fiscal 2006, Small Business Assistance provided support to the Governor's Small Business Economic Development Summits held in El Paso, San Antonio, Edinburg, Tyler, Houston, Lubbock and College Station with more planned for fiscal 2007. The summits discussed obtaining financing from a variety of sources, opportunities for exporting, developing the work force, taxes and tax credits, starting your own small business, doing business with the state and providing employee health care.
The summits identified sources of financing for start-up and expanding businesses including conventional lenders, the Small Business Administration (SBA), community development corporations and non-profit community micro-lenders (community development financial institutions). Representatives of each group presented a short seminar on how to obtain financing and were available during a "Meet the Lender" session. The summits also provided information on loan requirements of lenders and afforded small businesses the opportunity to make direct contact with various lenders.
| 2001 | 2002 | 2003 | 2004 | 2005 | |
|---|---|---|---|---|---|
| Loans Enrolled | 395 | 421 | 184 | 310 | 195 |
| Amount Enrolled | $15,674,027 | $10,136,574 | $2,063,206 | $5,273,692 | $3,295,158 |
| Total Investment | $21,139,379 | $17,237,719 | $2,607,077 | $9,406,617 | $10,801,801 |
| State's Participation | $718,549 | $481,840 | $116,429 | $360,151 | $227,152 |
| Average Loan Size | $53,517 | $40,945 | $11,213 | $17,012 | $16,898 |
| Participating Lenders | 9 | 13 | 7 | 8 | 6 |
| Jobs | 2,987 | 2,202 | N/A | N/A | N/A |
| Leverage Ratio | 29:1 | 36:1 | 22:1 | 26:1 | 47:1 |
| Cities | 96 | 106 | 62 | 65 | 53 |
Source: Economic Development and Tourism Division, Office of the Governor.
Housing
A number of housing programs encourage community reinvestment in Texas. The programs provide down-payment assistance, low-interest rate loans or subsidies for the acquisition, development or rehabilitation of both single-family and multifamily housing.
The Texas Department of Housing and Community Affairs (TDHCA), the state's lead agency for affordable housing and community assistance programs, annually administers funds of more than $400 million. The majority of TDHCA housing program funds are federal grants and tax credits combined with money derived from mortgage revenue bond financing. Ninety-two percent of the households served by TDHCA housing programs in fiscal 2005 were low-income at or below 80 percent of the area median family income (AMFI).
TDHCA's housing programs also help fuel the Texas economy. For example, the National Association of Home Builders (NAHB) reported that building 100 single-family units generates 347 jobs and $19 million in new income in the state.[54] Several TDHCA programs support and encourage community reinvestment.
The Single-Family Bond Program, funded from tax-exempt and taxable mortgage revenue bonds, assists low- to moderate-income Texas residents with the purchase of their first home or those who have not owned a home during the past three years. Participating lenders must complete a Mortgage Lender Questionnaire that asks for the institution's current rating under the CRA, although this is not a requirement for participation. TDHCA does not require the CRA rating because it does not seek to restrict participation in the program by interested lenders.
Each year, TDHCA sets aside 20 percent of the funds in the Single-Family Bond Program for one year to encourage participation in areas most needing community reinvestment. TDHCA applies these funds toward loans in areas of chronic economic distress. At the end of the fiscal year, remaining funds may be used to purchase homes in non-targeted areas. In fiscal 2005, the program allocated a total of about $210 million and served 2,384 families. About 78 percent of those served had incomes below 80 percent of the area median family income (AMFI).
The program includes three activities. The Texas First-Time Homebuyer Program channels below-market interest rate mortgage money through participating Texas lending institutions to eligible families. Although income limits may vary with each bond issue, the program is designed to serve families with income ranging from 30 to 115 percent of AMFI. The American Dream Downpayment Initiative (ADDI), effective December 16, 2003, assists homebuyers with down payment and closing costs. ADDI aims to increase the homeownership rate, especially among lower income and minority households, and revitalize and stabilize communities. Under ADDI, a first-time homebuyer must not have owned a home during the three year period prior to the purchase of a home with assistance under ADDI. The initiative also helps displaced homemakers and single parents. ADDI assistance provided to any family may not exceed the greater of 6 percent of the purchase price of a single-family housing unit or $10,000 and is in the form of a second- or third-lien loan. The Down Payment Assistance Program (DPAP) helps low-income families purchase homes with interest-free loans ranging from $5,000 to $10,000, depending on the county where the property is located. The assistance is used as a down payment or to cover eligible closing costs. The borrower repays the loan when the original mortgage matures or when the home is either refinanced or sold.
The Grant Assistance Program (GAP) provides up to 4 percent of the loan amount for the down payment and closing cost assistance. The funds are available on a first-come, first-served basis for mortgage loans originated through the First Time Homebuyer Program. Assistance is available to eligible borrowers whose incomes do not exceed 60 percent of AMFI.
The Mortgage Credit Certificate (MCC) program provides a tax credit that will reduce the federal income taxes, dollar-for-dollar, of qualified buyers purchasing a qualified residence. The MCC reduces the monthly mortgage payment and increases the buyer's disposable income by reducing his or her federal income tax obligation. This tax savings provides a family with more available income to qualify for a loan and meet mortgage payment requirements. The amount of the annual tax credit will equal 35 percent of the annual interest paid on a mortgage loan. The maximum amount of the credit cannot exceed $2,000 per year and cannot be greater than the annual federal income tax liability, after all other credits and deductions are considered. MCC tax credits in excess of a borrower's current year tax liability may be carried forward for use during the subsequent three years. The MCC Program provides homeownership opportunities for qualified individuals and families whose gross annual household income does not exceed 115 percent of AMFI limitations, based on IRS adjusted income limits. To participate in the MCC Program, homebuyers must meet certain eligibility requirements and obtain a mortgage loan through a participating lender. The mortgage loan must be financed from sources other than tax-exempt revenue bonds. The mortgage may be a conventional, Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or Rural Housing Services (RHS) loan at prevailing market rates, but may not be used in connection with the refinancing of an existing loan.
TDHCA's Multifamily Mortgage Revenue Bond Program issues mortgage revenue bonds to finance loans for qualified nonprofit organizations and for-profit developers. Financed properties must meet what are known as "unit set-aside restrictions" to assist low-income tenants and may include rent limitations and other requirements set by TDHCA. Project developers may elect to set aside 20 percent of the units for households earning 50 percent or less than the area median income; or 40 percent of the units for households earning 60 percent or less than the area median income.
For developments financed under the 501(c)(3) tax-exempt Multifamily Revenue Bond Program, 75 percent must be occupied by households that are at or below 80 percent of the AMFI.[55] Five percent of the units are reserved for special-needs tenants. In fiscal 2005, a total of about $200 million was committed, and 3,288 affordable multifamily apartments were produced.
The Housing Tax Credit Program gives developers of low-income rental housing a tax credit to offset a portion of their federal tax liability in exchange for building affordable rental housing. Nearly $76 million in funds were committed in fiscal 2005 by TDHCA, creating a total of 18,350 housing units for persons at or below 60 percent of median family income. To qualify for the tax credit, 20 percent or more of the project's units must be rent-restricted and occupied by individuals whose income is 50 percent or less than the median family income. Forty percent or more of the units must be rent-restricted and occupied by individuals whose income is 60 percent or less than the median family income.
The HOME Investment Partnerships Program offers grants and loans to local governments, nonprofit agencies, for-profit entities and public housing agencies to provide safe, decent, affordable housing to low-income families. HOME allocates funds through Homebuyer Assistance, Rental Housing Development, Rental Housing Preservation, Owner-Occupied Housing Assistance and Tenant-Based Rental Assistance programs. The HOME program has a 15 percent set-aside for community housing development organizations and a 5 percent set-aside for those with special needs, including the homeless, the elderly, persons with disabilities, residents of colonias, victims of domestic violence, persons with alcohol or drug dependencies, migrant workers and persons with HIV/AIDS. A total of about $47 million was committed in fiscal 2005, serving a total of 2,253 households.
The Housing Trust Fund is the only state-authorized program dedicated to increasing the state's supply of affordable housing. The program' funds are legislatively authorized and competitively award by TDHCA to nonprofit and for-profit organizations, local governments, public housing authorities, community housing development organizations and income-eligible individuals and families for the acquisition, rehabilitation and new construction of affordable housing. Up to 10 percent of Housing Trust Fund annual allocations can be used to train staff and purchase computers. The Pre-Development Revolving Loan Program can also use up to 10 percent of the trust fund allocation to eliminate the barriers that predevelopment expenses, including architect and engineering fees, pose to housing development. About $6 million was committed in fiscal 2005, serving a total of 1,149 households.
TDHCA's Contract for Deed (CFD) Conversion Initiative assists residents of colonias, which are unincorporated communities often characterized by poverty, sub-standard housing and inadequate basic services within 150 miles of the Texas-Mexico border. The 76th Legislature in 1999 enacted Senate Bill 867, that creates a guaranteed loan fund to encourage more private lenders to participate in converting CFDs into traditional notes and deeds of trust so that colonia residents build equity in their homes.
The 78th Legislature passed a legislative directive (House Bill 1, 78th Legislature, R.S., Article VII-13, Rider 10) instructing the department to spend at least $4 million on contract for deed conversions for families that reside in a colonia and earn 60 percent or less than the AMFI. Rider 10 also directed TDHCA to convert no less than 400 contracts for deed into traditional notes and deeds of trust by August 31, 2005.
The program helps colonia residents become property owners by converting their contracts for deed into traditional mortgages allowing colonia residents to build equity in their homes. Since the program started in 1999, more than $12.6 million has been committed and more than 620 contracts for deeds converted.
| Program | Amount Committed |
|---|---|
| Single Family Bond Program | $210 million |
| Multifamily Mortgage Revenue Bond Program | $200 million |
| Housing Tax Credit Program | $76 million |
| Home Investment Partnerships Program | $47 million |
| Housing Trust Fund | $6 million |
| Contract for Deed (CFD) Conversion Initiative | $2 million |
| Texas Bootstrap Loan Program | $3 million |
Source: Texas Department of Housing and Community Affairs.
The "Bootstrap" Homebuilder Loan Program became law during the 1999 legislative session. The program requires TDHCA to establish a statewide loan program, working through certified nonprofit organizations to enable owner-builders to purchase real estate, construct or renovate a home. The 77th Legislature amended and continued this program under Senate Bill 322 (2001).
Currently, the Texas Bootstrap Loan Program promotes homeownership for low-income Texans by providing funds to purchase or refinance real property on which to build new residential housing, construct new residential housing or improve existing residential housing throughout Texas. Participating owner-builders must provide a minimum of 60 percent of the labor required to build or rehabilitate the home. SB 322 also removed the requirement that the owner-builder must reside with two other family members and increased the loan amount to $30,000. Total loans from the TDHCA and from other entities cannot exceed $60,000 per unit. The department continues its commitment to this program with $6 million over the biennium (fiscal 2006-07) to implement this initiative.
A growing number of lenders and affordable housing professionals recognize that it takes more than flexible underwriting in lending to expand homeownership for low- and moderate-income households. Counseling on the requirements and opportunities of homeownership may reduce mortgage delinquency and foreclosure rates and thereby enhance the availability and soundness of loans made to first-time buyers. TDHCA believes that homebuyer education and counseling can provide lenders, borrowers and policy-makers with the skills and confidence to make full use of the department's lending programs.
Accordingly, TDHCA created the Texas Statewide Homebuyer Education Program (TSHEP) in 1999. The program provides homebuyer counseling through experienced homebuyer education providers, nonprofit housing providers, low-income housing advocates, for-profit housing providers, lenders and realtors. To ensure a uniform quality of homebuyer education throughout the state, TDHCA contracted with the Neighborhood Reinvestment Corporation to teach local nonprofit organizations the principles and applications of comprehensive pre- and post-purchase homebuyer education and to certify participants as educational providers. During fiscal 2005, TDHCA helped facilitate more than 1,500 homebuyer education courses statewide. Since the program started in 1999, nearly 530 individuals have attended and received certification as trainers.
Insurance
The Texas Department of Insurance (TDI) regulates insurance policies and rates in Texas. It also provides consumer protection services and supervises an estimated 2,000 insurers, health maintenance organizations and continuing-care retirement communities. Annual statements filed by insurers and Health Maintenance Organizations (HMOs) for calendar year 2005 reported $78.7 billion in Texas premiums and $55.3 billion in payments to Texas claimants. These companies reported aggregate assets of $5.8 trillion, liabilities of $5.1 trillion and capital and surplus of $747.1 billion.
TDI's 2006 biennial report of Texas investments by life and health insurance companies with Texas premiums of $10 million or more shows investments of almost $45.6 billion in 2005 for the 262 insurance companies included in the report. These companies account for almost 98 percent of $31 billion of Texas life and annuity premiums collected in calendar year 2005. The reported Texas investments are not comprehensive since many of the companies' investments cannot be linked to an individual state. This is particularly the case with pooled investments.
Ninety-three percent of reported investments were in political subdivision/public utility bonds, commercial mortgages and corporate bonds. The largest categories of investments were investments in political subdivision/public utility bonds ($16.4 billion), commercial mortgages (almost $15.6 billion) and corporate bond investments (almost $10.4 billion). Due to the difficulty in linking some corporate bond investments to specific states, reporting for that category was optional, while reporting investments in political subdivision/public utility bonds and commercial mortgages was mandatory for the companies meeting the reporting criteria.
Insurance company residential mortgage investments are frequently made through pooled investments, so comprehensive data was not available for this category. Reporting companies, however, identified almost $382 million in Texas residential mortgage investments. For additional information these investments, see the December 2006 Community Investment Report available on the TDI Web site.
Property insurance company investments are not included in the December 2006 Community Investment Report since property insurance availability is a key to homeownership for millions of Texans. Homeowner's insurance is required on all properties that carry liens, so a shortage of available insurance can have a direct effect on a person's ability to purchase a property. TDI is concerned with ensuring that homeowner's insurance is available. In addition to implementing the Fair Access to Insurance Requirements (FAIR) Plan, TDI and the Legislature have worked together to expand coverage options.
In 2003, the 78th Legislature enacted Senate Bill 14 in 2003 due to concerns over the availability and affordability of insurance. S.B. 14 required insurers to charge rates that are just, fair, reasonable, adequate, not confiscatory, not excessive and not unfairly discriminatory. For the first time in Texas history, all companies writing homeowners insurance are subject to the same rate standards. Before S.B. 14, 95 percent of homeowners' insurers were exempted from rate regulation. SB 14 also:
- created standards to determine whether an insurer's rate is excessive, inadequate or unfairly discriminatory;
- made insurance rate filings public information, prohibited insurers from using a rate until approved by the Texas Insurance Commissioner, required insurers to refund policyholders the difference in an overcharged premium with interest and sent policyholders a written notice of a rate increase to exceed 10 percent of the current policy;
- authorized the TDI to regulate policy forms and endorsements for personal automobile insurance and residential property insurance;
- made amendments to prohibit insurers from using a credit score that is computed using discriminatory factors, e.g., absence of credit information or lack of a credit card account; and
- strengthened TDI's rulemaking powers by authorizing the commissioner to adopt any rules necessary and appropriate to implement the powers and duties of the agency.
CRA and the Insurance Industry
Several differences between the banking and insurance industries are worth noting. For example, a bank's fundamental purpose is to make loans, while an insurance company exists primarily to insure risks and pay claims. While insurers make investments, these are specifically designed to ensure funds are available to pay insurance claims. Industry representatives argue that undertaking the riskier investments required for community reinvestment places an unnecessary burden on insurers' ability to ensure that claims are paid.
TDI notes that a number of laws and regulations regulate insurers' investments to ensure they have sufficient funds available to pay their claims. Insurers also are subject to Risk Based Capital (RBC) standards, set by the Texas Insurance Commissioner, which requires insurance companies to set aside capital to support the various risks they assume. RBC requirements vary by investment types, with riskier assets subject to higher RBC requirements.
Certified Capital Company (CAPCO) State Economic Development Program
The Comptroller's office and the Texas Treasury Safekeeping Trust Company are responsible for administering the $200 million Texas Certified Capital Company (CAPCO) program. Funded by "Insurance Premium Tax Credits," the CAPCO program supports economic development and generates tax revenues for the state through business growth and job creation. During 2005, the Comptroller's office approved 10 venture capital companies to become CAPCOs.
In Texas, the law requires CAPCOs to invest 30 percent of their capital in "strategically located" businesses and 50 percent in "early stage" businesses within five years of funding. Based on investment commitments from eligible insurance companies (those having premium tax liabilities to the state), each CAPCO requested an allocation of the total $200 million in available premium tax credits.
The tax credits may not be used until 2009 and are restricted to offsetting future insurance premium taxes. Credits may be used starting with the 2008 return at a maximum rate of 25 percent of earned insurance premium tax credits annually.
CAPCOs repay the insurance company investors over time with a combination of earnings on their investments and future tax credits. CAPCOs earn the tax credits by investing in targeted businesses. A CAPCO must meet certain investment criteria and timeframe milestones, pay annual certification renewal fees to the Comptroller's office and adhere to reporting and spending requirements.
CAPCOs may ask the Comptroller's office to determine whether their investments are considered "Qualified Business Investments" under the program rules. The Comptroller's office must review the request and make a determination within a short time frame or the business investment becomes automatically qualified. Through August 31, 2006 the Comptroller had approved 51 of 54 proposed investments representing a total of $57.7 million in potential investments in Texas-based businesses.
The Comptroller's office reviews each CAPCO annually to ensure compliance with program requirements. Each CAPCO submits reports to the Comptroller's office with a nonrefundable annual fee of $5,000.
By December 15th of each biennium the Comptroller's office is required to report CAPCO-related job creation and program data to the governor, the lieutenant governor, and the speaker of the Texas House of Representatives. The Comptroller's office published the "Certified Capital Companies in Texas Report," on December 15, 2006.