State Agency Programs and Community ReinvestmentThe Texas banking services sector (commercial banks and thrifts) changed during the last 20 years with multiple savings and loan closures in the 1970s and 1980s, bank closures during the 1980s and early 1990s and the consolidation of many financial institutions through mergers and acquisitions in the mid- to late-1990s. The result is a landscape of financial institutions with home designations either in Texas or in another state. The latter are referred to as out-of-state institutions doing business in Texas. These out-of-state institutions control more than 40 percent of the total deposits in the state. Each institution is either state chartered (Texas or another state) or federally chartered by an agency of the United States Government. In the aggregate, the Texas assets of all the institutions doing business in Texas exceed $311 billion.[40]
The Texas Department of Banking reported that despite the economic slowdown in 2001 and 2002, the Texas system of state-chartered financial institutions remained sound as of June 30, 2002.[41] The total assets of state-chartered banks is approaching $100 billion, state-chartered thrifts are $14 billion, foreign bank agencies reflect assets of more than $31 billion and trust assets under fiduciary control total more than $43 billion.[42]
The number of individual bank charters (state and national) in Texas fell from 754 institutions in June of 2000 to 676 in June of 2002. However, the Texas banking industry grew during the mid-1990s, with assets in the state banking system (state-chartered institutions) rising from about $45 billion in 1993 to $86 billion in June 2000, including $34 billion in Texas branches of out-of-state banks. Since 1996, only one national and three state-chartered banks have failed in Texas reflecting a significant change from 1990 when at least 103 Texas banks closed.
As of June 2002, Texas-chartered banks and thrifts held a total of almost $205 billion in assets noted in the chart below:
TEXAS CHARTERED BANKS AND THRIFTS – June 2002[43]
Source: Texas Department of Banking
Type of Institution Number Deposits (Billions) Assets (Billions) Texas-Chartered State Banks 341 $ 46.7 $ 58.2 National Banks Chartered in Texas 335 $ 75.0 $ 88.3 Texas-Chartered Savings Institutions 25 $ 9.3 $ 14.0 Federally-Chartered Savings Institu-tions 23 $ 21.9 $ 44.1 Total 724 $152.9 $204.6 The table on the previous page excludes $42.7 billion in assets of out-of-state state-chartered banks, $53.4 billion in out-of-state national banks and $10.4 billion in out-of-state federal thrifts doing business in Texas.
The Texas Department of Banking monitors and conducts follow-up on the findings of CRA examinations. It also provides consumer assistance through its Web site, the agency’s consumer complaint section and periodic agency publications.[44]
Created in 1905, the Texas Department of Banking adopted a system of corporate state bank chartering and regulation authorized by a constitutional amendment. Currently, the agency directly oversees the supervision and regulation of 351 Texas-chartered state banks with assets exceeding $58.2 billion, 27 Texas-chartered state trust companies with assets under administration totaling approximately $46.4 billion and nine foreign bank agencies with assets totaling $31.3 billion. Besides regulating state-chartered and licensed entities operating in Texas, the department assists in supervising 10 state-chartered banks from other states that maintain offices in Texas. These out-of-state chartered banks represent approximately $41 billion of the state’s banking assets.
Under provision 12 United States Code, 1820, Texas maintains the authority to examine branches operated in Texas by out-of-state insured state banks. The purpose of the examination is to determine their compliance with Texas laws, including those that govern banking, community reinvestment, fair lending and consumer protection and to ensure that branch operations are not conducted in an unsound manner.
The Finance Commission of Texas serves as the statutory oversight body for the Texas Department of Banking as well as the Texas Savings and Loan Department and the Office of Consumer Credit Commissioner. Section 11.305 of the Texas Finance Code assigns responsibility to the banking commissioner, savings and loan commissioner or consumer credit commissioner for conducting research on the availability, quality and prices of financial services, including lending and depository services and the practices of business entities in this state that provide financial services to agricultural businesses, small businesses and individual consumers.
In 2002, the Texas Finance Commission released a study it supervised conducted by the University of Texas at El Paso’s Institute for Policy and Economic Development. The study focused on non-agricultural, small business lending and examined the availability, quality and prices of financial services and the practices of business entities providing these services. The primary objective was to discern the nature and characteristics of non-agricultural, small business lending in Texas, which included identifying who receives credit, who is denied and who provides credit. Using a comprehensive statewide mail survey, the study generated 1,567 responses from Texas businesses with less than 100 employees.
The study determined that access to lending is broadly available even among small businesses that exhibit the most extreme set of conditions that work against loan approval, and that within sub-units of the state there exist varying patterns and conditions that lead to differences in how small business lending is conducted. Generally, the study concluded that small businesses gain access to lending opportunities primarily through traditional banking institutions and other sources including credit cards.
The Texas Department of Economic Development (TxED) works with companies seeking to expand or relocate into Texas communities and administers funds financing local economic development projects. These funds include the Capital Access Program (CAP) and the Texas Linked Deposit Program.
CAP, created by the 75th Texas Legislature, is a public/private partnership between the state and lending institutions that allow “near bankable” businesses to gain access to capital they need to start up or expand. A key component of the program is a loan loss reserve account comprised of funds from the state, the borrower and the lending institution based on a percentage of the principal amount of the loan. All of the money in a reserve account, including earned interest, established under this program is property of the state.[45] Lending institutions retain the reserve deposits in the account even after the loan is fully repaid. After completing a participation agreement and receiving approval by TxED, Texas law requires the participating financial institution to establish a reserve account in a money market fund at a competitive rate. The financial institution may only use the reserve account to cover any losses due to a charge-off of a capital access loan or a loan partially enrolled under the program made by the financial institution.[46]
Generally, financial institutions use the CAP as an alternative financing method for lending to businesses that do not fully meet criteria for conventional lending. In the event that a lender is unable to fund a loan through conventional means, they can suggest the Capital Access Program. This allows the business to receive the funding they need to start-up or expand, thereby sustaining and increasing the number of employed Texans. The business may use capital access loans for working capital, lines of credit or for the purchase, construction or lease of capital assets including buildings and equipment. Businesses may not use the loans to refinance existing loans with lending institutions not originally enrolled under the program, or for the construction or purchase of residential housing.
CAP is open to all nonprofit organizations and businesses with fewer than 500 full-time employees that are domiciled either in the state or have at least 51 percent of their employees residing in Texas.
TxED informs lenders, businesses, chambers of commerce and trade associations of the program and its benefits. CAP staff provides businesses with an overview of the program and directs them to participating lenders throughout the state. The businesses contact the participating lender of their choice and discuss loan options. After the initial contact with the Department, the businesses primarily deal directly with the lender. Lenders conduct a credit evaluation to ensure that the business meets their established loan criteria. If everything is favorable, the business receives the loan.
After approving a loan, the lender submits the enrollment forms to TxED. These forms are the only documents a business must complete to enroll in the program. TxED reviews the documents and, if all is in order, arranges for the State’s reserve contribution to be sent via direct deposit to the lender.
Texas Department of Economic Development
Capital Access Program Loans 1998 – 2002Source: Texas Department of Economic Development
1998 1999 2000 2001 2002 Loans Enrolled 42 199 415 395 421 Amount Enrolled $4,928,359.57 $9,932,397.59 $15,658,584.58 $15,674,026.27 $10,136,573.77 Total Investment $7,895,359.57 $24,777,779.75 $21,548,390.70 $21,139,378.74 $17,237,718.68 State's Participation $212,179.00 $472,180.00 $759,887.00 $718,549.00 $481,840.00 Average Loan Size $187,984.75 $ 124,511.46 $51,923.83 $53,517.41 $40,944.70 Participating Lenders 9 13 10 9 13 Jobs 854 2,108 2,679 2,987 2,202 Leverage Ratio 37:1 52:1 28:1 29:01 36:1 Cities 19 54 102 96 106 The number of new CAP loans fell from 415 in fiscal 2000 to 395 in fiscal 2001. However, a change in TxED’s marketing focus in fiscal 2002, emphasizing alternative lenders such as Community Development Financial Institutions (CDFIs), resulted in a dramatic 1,219 percent increase in the number of CAP loans enrolled by CDFIs from 21 in fiscal 2001 to 277 in fiscal 2002. This improved performance by CDFIs more than offset the reduction of 230 conventional loans during the same period. As a result, the total number of enrolled CAP loans grew to 421, or 6 percent, between fiscal 2001 to fiscal 2002.
During fiscal 2002, the program enrolled loans in the amount of $10.1 million, which generated capital investment totaling more than $17.2 million. This capital investment resulted in the retention of 1,587 jobs and the announcement of 615 new jobs. The average loan size for fiscal 2002 was $40,944.
The state’s total contributions to loan loss reserve accounts during fiscal 2002 were $481,840. For every state dollar invested, $36 was leveraged in the form of new business loans.
The total dollar amount of investment in capital access loans by lenders decreased 18 percent from $21,139,379 in fiscal 2001 to $17,237,719 in fiscal 2002. However, the amount invested by CDFIs increased 154 percent from $1,026,768 in fiscal 2001 to $2,612,878 in fiscal 2002.
Re-engineering the Capital Access ProgramDuring fiscal 2003, TxED made numerous improvements to CAP to increase customer service and operating efficiency and to ensure proper documentation and control of program contributions to the loan loss reserves of participating lending institutions. These re-engineering efforts were, in part, guided by recommendations generated by an internal audit conducted to ensure that the program was operating in accordance with pertinent statutes and rules and that program data was reliable, accurate and complete. In the course of achieving these objectives, TxED reviewed more than 1,700 loans from 17 lending institutions throughout the state.
The improvements have increased the efficiency with which lender applications, loan enrollments and lender reimbursements for defaulted loans are processed and instituted contractual, procedural and automated controls to ensure that CAP only reimburses lenders for qualifying loan losses and reasonable, documented and related expenses.
The Linked Deposit Program is a partnership between TxED, the Texas Comptroller of Public Accounts 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. Minimum loans amounts are $10,000 and maximum loans are $250,000 and can be used as working capital and for the lease, purchase or construction of capital assets such as land, buildings and equipment.[47] Since 1995, the Linked Deposit Program has created 63 new jobs and helped retain 187 jobs in Texas.
Borrowers also may use the funds for start-up business ventures. As of October 2002, the program provided 16 loans totaling $2.3 million.[48] The Texas Legislature set a statutory limit of $6 million for the program.[49]
Since it’s inception in 1995 and through the end of calendar year 2002, 16 linked deposit loans have been awarded to eligible participants and one loan is pending. Of these loans, two were awarded in 2001 and two in 2002.
The Linked Deposit Program has remained historically under-utilized. The low number of linked deposit loans resulted largely from fewer available resources to market and administer the program.
The Linked Deposit Program targets some of the same customer base served by CAP and due to funding constraints, TxED jointly markets the two programs. Marketing activities in calendar years 2001 and 2002 have included presentations on the Linked Deposit Program to groups such as the Texas Asian Chamber of Commerce Association, the African American Chamber of Commerce, the Texas Mexican American Chamber of Commerce and the Executive Business Women’s Council.
Texas has a number of housing programs that encourage community reinvestment. These programs offer 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) annually administers funds of more than $400 million as the state’s lead agency for affordable housing and community assistance programs. Federal grants and tax credits combined with money derived from mortgage revenue bond financing comprise the majority of the TDHCA housing program funds. Ninety-nine percent of the households served by TDHCA in fiscal 2002 were low-income, which means they were at or below 80 percent of the AMFI.
TDHCA’s housing programs help fuel the Texas economy. For example, the National Association of Home Builders estimated that the building of 1,000 single-family homes generates 2,448 full-time jobs in construction and construction-related industries, $79.4 million in wages and $42.5 million in combined federal, state and local revenues and fees.[50]
Several TDHCA programs support and encourage community reinvestment.[51]
The Single-Family Bond Program, funded from tax-exempt and taxable mortgage revenue bonds, assists low- to moderate-income Texas residents who are purchasing their first home or 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 sets aside 20 percent of the funds in this program for one year to encourage participation in areas most in need of community reinvestment. TDHCA applies the funds set aside to make loans in areas of chronic economic distress. After the one-year set-aside is removed, any remaining funds may be used to purchase homes in non-targeted areas.
In fiscal 2002, the program allocated about $95 million and served 1,710 individuals and families. About 92 percent of those served had incomes below 80 percent of the AMFI. The program includes two 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. Through an innovative partnership with Fannie Mae in 2002, TDHCA launched the Expanded Approval Program. This enables households with slight blemishes on their credit report to qualify for a homebuyer loan with interest rates lower than that of alternative financing arrangements such as subprime (higher interest rate) lending products offered through a myriad of lending institutions. Through a separate bond issuance, TDHCA made $10 million in single-family bond proceeds available for borrowers with special credit needs; and
- the Down Payment Assistance Program (DPAP) helped 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. This assistance applies to down payments and eligible closing costs. The borrower pays the loan when the original mortgage matures or when the home is either refinanced or sold. TDHCA allocated $4,000 to this program in fiscal 2002.
TDHCA’s Multifamily Mortgage Revenue Bond Program issues mortgage revenue bonds to finance loans for qualified nonprofit organizations and for-profit developers. To assist low-income populations, financed properties are subject to what are known as “unit set-aside restrictions” for low-income tenants such as rent limitations and other requirements set by TDHCA and its governing board. For example, owners may elect to set aside 20 percent of the units in each project for households earning 50 percent or less of the AMFI; or 40 percent of the units for households earning 60 percent or less of the AMFI. For developments financed under the 501(c)(3) authority, 75 percent must be occupied by households that are at 80 percent or less of the AMFI. Also, 5 percent of the units are reserved for special-needs tenants. In fiscal 2002, about $112 million was committed, and 2,209 affordable multifamily apartments were produced.
The Low-Income Housing Tax Credit Program directs private capital towards the creation of affordable rental housing. Developers of low-income rental housing use the tax credit to offset a portion of their federal tax liability in exchange for the production of affordable rental housing. About $38 million in funds were committed in fiscal 2002, creating 14,471 units for persons at or below 60 percent of median 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 of the median family income or 40 percent or more of the units must be rent-restricted and occupied by individuals whose income is 60 percent or less of the median family income.
The HOME Investment Partnerships Program offers grants and loans to help local governments, nonprofit agencies, for-profit entities and public housing agencies provide safe, decent, affordable housing to low-income families. HOME allocates funds through five activities: Homebuyer Assistance, Rental Housing Development, Rental Housing Preservation, Owner-Occupied Housing Assistance and Tenant-Based Rental Assistance. The program has a 15 percent set-aside for community housing development organizations and a 20 percent set-aside for those with special needs, including the homeless, the elderly, persons with disabilities, colonia residents, victims of domestic violence, persons with alcohol or drug dependencies, migrant farmworkers and persons with HIV/AIDS. About $43 million was committed in fiscal 2002, serving 2,080 individuals and households.
The Housing Trust Fund is the only state-authorized program dedicated to increasing the state’s supply of affordable housing. The program competitively awards funds 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. The Housing Trust Fund sets aside 10 percent of each annual allocation for any activity/funding that improves the ability of an organization to achieve its mission (capacity to serve) and up to 10 percent for a Pre-Development Revolving Loan Program. This program is intended to eliminate the barriers that predevelopment expenses pose to housing developments. About $8 million was committed in fiscal 2002, serving 1,670 individuals and 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, lying within 150 miles of the Texas-Mexico border. The Comptroller’s Challenging the Status Quo report recommended that TDHCA create a guaranteed loan fund to encourage more private lenders to participate in converting CFDs into traditional notes and deeds of trust to help colonia residents build equity in their homes.[52] The 1999 Texas Legislature enacted this recommendation in Senate Bill 867 in 1999. Afterward, the 2001 Legislature passed Appropriations Rider 13, a legislative directive requiring 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 of the AMFI. Rider 13 also directed TDHCA to convert no less than 400 contracts for deed into traditional notes and deeds of trust by August 31, 2003.
The program helps colonia residents become property owners by converting their contracts for deed into traditional mortgages. This will allow the colonia residents to build equity in their homes. Since the program started in 1999, more than $11.2 million has been committed and more than 512 contracts for deeds converted. To continue this initiative, another $2 million was made available to nonprofit organizations in the fall of 2002.
The “Bootstrap” Homebuilder Loan Program, also recommended in Challenging the Status Quo, became law during the 1999 legislative session. The program requires the department to establish a statewide loan program, working through certified nonprofit organizations, enabling owner-builders to purchase real estate, construct or renovate a home and solicit gifts and grants to fund the program. The 2001 Legislature amended this program under Senate Bill (SB) 322 with a legislative directive requiring continuation of an Owner Builder Loan Program.
The Texas Bootstrap Loan Program promotes and enhances homeownership for low-income Texans by providing funds to purchase or refinance real property on which to 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 loan amounts from the TDHCA and from other entities cannot exceed $60,000 per unit. The department is required to commit $6 million over the biennium (fiscal 2002-03) to implement this initiative. For fiscal 2002, the department awarded $3 million to seven nonprofit owner-builder housing providers to implement this initiative. TDHCA will announce another $3 million for fiscal 2003.
Housing Programs Fiscal 2002
Source: Texas Department of Housing and Community Affairs
Program Amount Committed Single Family Bond Program
Texas First-Time Homebuyer Program
Down Payment Assistance Program
$91 million
$ 4 millionMultifamily Mortgage Revenue Bond Program $112 million Low-Income Housing Tax Credit Program $38 million Home Investment Partnerships Program $43 million Housing Trust Fund $8 million Contract for Deed Conversion Initiative $2 million Bootstrap Loan Program $3 million 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 in the requirements and opportunities of homeownership may enhance the availability and soundness of loans made to first-time buyers, while reducing mortgage delinquency and foreclosure rates. TDHCA believes that homebuyer education and counseling can provide lenders, borrowers and policymakers with the skills and confidence to make full use of the department’s lending programs.
In 1999, TDHCA created the Texas Statewide Homebuyer Education Program (TSHEP). The program aims to provide 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. Three training seminars were held between April and August of 2002. As of November 2002, an estimated 250 individuals and organizations were certified as TSHEP providers.
Senate Bill 322, passed during the 2001 Texas Legislature, required the TDHCA to conduct a market study to determine the mortgage credit needs of underserved economic and geographic submarkets of Texas. The TDHCA’s Home Mortgage Credit Characteristics of Underserved Areas: A State of Texas Market Study analyzed rural counties and census tracts along the Texas-Mexico border and where the median family income is less than 80 percent of the median family income for the county where the census tract is located.
TDHCA found that multiple factors affect homeownership in Texas including housing affordability, loan availability, debt-to-income ratio, credit history, loan-to-value ratio and access to down payment funds.
The TDHCA study showed that:
- the homeownership rate in Texas was 63.9 percent in 2001 or about 4 percent below the national average;
- rural areas of Texas had the highest homeownership rates at 75 percent. The homeownership rate in colonia census tracts rates were 73 percent, followed by 67 percent in areas along the Texas-Mexico border. Urban low-income census tracts had the lowest homeownership rate at 48 percent;
- rural counties and colonia census tracts in Texas had the highest percentage of manufactured homes;
- financial and non-bank institutions that make prime, competitively priced, and subprime, i.e., high cost loans in Texas tend to lend in densely populated areas;[53]
- prime lenders direct most of their prime loans to urban areas; and
- border areas received the majority of the subprime loan volume per person from prime lenders followed by urban low-income areas with rural counties receiving the lowest number of subprime loans.
TDHCA will focus its services in 2003 and 2004 on geographic regions identified with high concentrations of subprime loans. These services will include homebuyer and credit education, subprime purchase loans and subprime refinancing loans.
The TDHCA promotes homebuyer and financial literacy education before the purchase of a home to help increase homeownership rates and improve prospects for successful homeownership. TDHCA will continue to market homebuyer education with its new mortgage loans and research ways to provide Texas low- and moderate-income consumers with educational materials specific to predatory and subprime lending. TDHCA will also continue to encourage the Housing Finance Corporations across the state to include homebuyer education counselors on staff who are trained through the TDHCA homebuyer education program.
TDHCA will allocate at least 10 percent of its total single-family mortgage revenue bond loan volume for subprime loans to meet the credit needs of borrowers in underserved economic and geographic submarkets in 2003 and 2004. TDHCA has chosen to make a cautious entrance into this subprime market with a minimum 10 percent offering of the total single-family mortgage revenue bond loan volume. TDHCA will target the loans to rural areas, urban low-income census tracts and the Texas-Mexico border.
TDHCA’s Bond Finance Division conducts ongoing research prior to issuing bonds two to three times each year. This includes researching credit-enhancement options and subprime loan products. TDHCA plans to structure subprime and purchase loans using Fannie Mae and Freddie Mac guarantees that assume the full risk of the loan.[54]
The Texas Department of Insurance (TDI) regulates insurance policies and rates in the State of Texas. It also provides consumer protection services and supervises an estimated 2,900 insurers, health maintenance organizations, third-party administrators and continuing-care retirement communities. As of December 2001, insurance companies licensed in Texas reported assets of $4.2 trillion, liabilities of $3.7 trillion, and capital and surplus of $509 billion.[55]
The Texas insurance industry continues to change, having experienced 20 years of mergers and acquisitions and the departure of various insurers from the Texas insurance market.
While the CRA does not apply directly to the insurance industry, several states have created programs to involve the insurance industry in community reinvestment activities.
- California was a forerunner in promoting insurance companies' investments in underserved urban and rural communities of that state. The California Department of Insurance created the California Organized Investment Network (COIN) in 1996 as a clearinghouse with the goal of matching the need for investment of insurance company capital to communities’ economic and affordable housing needs. Now a voluntary collaborative effort between the California Department of Insurance, the insurance industry, community advocates and economic development organizations, COIN has facilitated almost $740 million in community investments. The California Commissioner of Insurance has proposed developing an annual report card for the collection and evaluation of community investment amounts by insurance companies.
- Florida considered a proposal in 2002 that would combine the efforts of the governor, insurance commissioner, and housing and development advocacy groups to encourage Florida’s largest insurance companies to create a nonprofit voluntary community reinvestment program by 2003 using the California model. If the voluntary program is not created by 2003, the Florida Legislature could enact insurance reinvestment legislation that would encourage insurance companies to invest in Florida’s communities.
- Massachusetts eliminated its premium-income and investment-income taxes on the insurance industry in exchange for community investments provided by the Massachusetts Life Insurance Community Initiative & Property & Casualty Insurance Co. Economic Development Initiative. This arrangement allowed insurance companies to invest nearly $60 million to create jobs, an affordable inner-city 65-unit housing complex, health facilities, small storefront businesses and minority- and women-owned firms among other projects.
Several TDI programs indirectly affect community investment in Texas. Two Market Assistance Programs (MAPs) help consumers find and obtain personal automobile and homeowners insurance coverage. Assuming that availability of insurance for a geographic area generally facilitates investment opportunities there, one MAP links homeowners who have problems obtaining insurance to participating property insurance companies. The other program helps “good drivers” find affordable auto coverage. TDI originally focused these programs on underserved areas or low- and moderate-income communities. Recent availability shortages in the homeowner’s insurance market, however, prompted the insurance commissioner to declare all of Texas underserved for homeowners insurance, underscoring the need for these programs.
TDI’s Consumer Protection Division sponsors educational programs designed to help consumers determine their available insurance options. The division also provides instructions on how to file a complaint if specific products are not offered in a consumer’s area.
Other TDI programs are designed to help protect consumers from the loss of insurance even when an insurer becomes insolvent and is placed into receivership. Most insurance policies are covered by one of the state’s guaranty funds, which pay claims for insurers that become insolvent. The funds cover up to $100,000 for individual life insurance and annuity policies and up to $300,000 for property and casualty insurance policies. State tax revenue ultimately repays these funds after all claims are paid.
The 1997 Legislature required life and health insurance providers, but not property and casualty insurance companies, to report their investments in Texas. The first report, released in early 1999, found that insurers held more than $35.8 billion in Texas investments in 1997.[56] By 2001, that number grew to $37.8 billion. Almost 90 percent of these investments were in commercial mortgages, political subdivision/public utility bonds and corporate bonds.[57] Texas law does not require separate disclosure of investments in low- and moderate-income communities. The 1999 report noted that insurers voluntarily identified $1.3 billion invested in economically disadvantaged areas of Texas. This figure rose to $1.4 billion in the 2001 report before dropping to $1.13 billion in the 2002 report. Each report noted that the actual amounts invested by insurers in Texas’ economically disadvantaged areas were likely higher than the reported amounts.
CRA and the Insurance IndustrySome significant 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 do 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 any number of laws and regulations regulate insurers’ investments to ensure that insurers have funds available to pay claims. Insurers also are subject to Risk Based Capital (RBC) standards, set by the Texas Insurance Commissioner, which require 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.
An issue that has received increasing attention is insurers using an insured’s or applicant’s credit score in the underwriting and rating process. In a news release from TDI, Texas Insurance Commissioner Jose Montemayor said he “wants the market conduct examiners to determine the extent to which credit scoring may account for large increases that consumers have reported to TDI.”[58]
To the extent that the practice of credit scoring results in higher homeowners insurance premiums or even the outright denial of coverage, the practice may serve as an impediment to the ability of low-income individuals to purchase homes and invest in their own communities. TDI anticipates the 2003 Legislature to closely examine this issue.
Endnotes
[40] Email communication with Gayle Griffin, Deputy Commissioner, Texas Department of Banking, November 2002.
[41] Texas Department of Banking, Condition of the Texas State Banking System, Austin, Texas, September 30, 2002.
[42] Texas Department of Banking, 2001 Annual Report, Austin, Texas, p. 7.
[43] Telephone Interview with Bob Bacon, Director of Strategic Support, Texas Department of Banking, Austin, Texas, October 2002.
[44] Texas Department of Banking, http://www.banking.state.tx.us. (Last visited December 30, 2002.)
[45] Tex. Gov. Code Ann., Chapter 481, Subchapter BB. Capital Access Program §481.410(a) States Rights With Respect to Reserve Account.
[46] Telephone interview with Dan Martin, Director of Business Incentives, Texas Department of Economic Development, December 19, 2002; and Texas Administrative Code, Title 10, Part V, Chapter 187 Texas Capital Access Program Rules, Chapter 187.10 (c) Establishment of Reserve Account and Purpose.
[47] Tex. Administrative Code, Title 10, Part V, Chapter 182 Small Business Assistance, Subchapter B, Linked Deposit Program, §182.58 Program Limitations.
[48] Email communication with Bridget Holland, Program Specialist, Business Incentives Division, Texas Department of Economic Development, February 7, 2003.
[49] Tex. Gov. Code Ann., Chapter 481, Subchapter N. Linked Deposit Program §481.197 (a) Limitations in Program.
[50] National Association of Home Builders, “Housing’s Direct Economic Impact,” http://www.nahb.org/facts/economics/houdir.html. (Last visited December 19, 2002.)
[51] The definitions below came from Sarah Dale Anderson, Director, Center for Housing Research, Planning and Communications, Texas Department of Housing and Community Affairs, Austin, Texas; and Texas Department of Housing and Community Affairs, 2003 State of Texas Low Income and Housing Plan and Annual Report, Austin, Texas, January 2003.
[52] A CFD is a financing arrangement for the sale of property whereby land ownership remains with the seller until the total purchase price is paid. Because of the structure of the loan, buyers are at risk of losing any money they have put into the property if they violate any term of the contact at any time–all of the power is with the seller and has much potential for abuse. With the conversions, the note for the property is converted into a traditional mortgage, which protects the purchaser.
[53] Prime or conventional loans are those generally funded through a bank, depository or savings and loan that offer the lowest interest rates. Because the government does not guarantee these loans, there is a risk involved for the lender, which means that these loans have more strict underwriting requirements. Subprime lending may be described as the practice of lenders charging higher interest rates compared to prime loan interest rates in order to justify a greater risk in the transaction.
[54] Interview with Sarah Dale Anderson, Director, Center for Housing Research, Planning and Communications, Texas Department of Housing and Community Affairs, Austin, Texas, November 2002.
[55] Email communication with Kenneth Elliott, Director of Regulatory Affairs, Texas Department of Insurance, December 2002; and these figures are all nationwide; that is the only way they are reported.
[56] Texas Department of Insurance, Community Investment Report (Austin, Texas, February 1999,) p. 1.
[57] Texas Department of Insurance, Community Investment Report (Austin, Texas, January 2001,) p. 1.
[58] Texas Department of Insurance, Homeowners Rate Increases Prompt Special Exams, January 16, 2002, http://www.tdi.state.tx.us/commish/nr01162a.html. (Last visited January 3, 2003.)
An Update on Community Reinvestment in Texas
March, 2003
March, 2003