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HomeMy WebLinkAboutAgenda Statement 1986/02/25 Item 14 COUNCIL AGENDA STATEMENT Item 14 Meeting Date 2/25/86 ITEM TITLE: Resolution 1;Z361/ Approving Agreement with Bank of America for lending services associated with the Housing Rehabilitation and Commercial Rehabilitation Programs SUBMITTED BY: Community Development Director`; 5ths Vote: Yes No X ) REVIEWED BY: City Manager' In September of 1985, the City informally requested proposals from banks and savings and loan institutions to provide lending services in support of the City' s Housing Rehabilitation and Commercial Rehabilitation Programs. Two institutions responded with written proposals, and a staff Proposal Review Committee evaluated those proposals and additional information obtained from those institutions. Bank of America has been recommended by the Proposal Review Committee, and an agreement with Bank of America is attached. An additional agreement with Bank of America is being brought forward to the Redevelopment Agency. RECOMMENDATION: That the City Council adopt the resolution approving the lending services contract with Bank of America. BOARDS/COMMISSIONS RECOMMENDATION: Not applicable. DISCUSSION: Because housing rehabilitation and commercial rehabilitation are funded with both recycled Community Development Block Grant funds and Redevelopment Agency funds, similar agreements need to be executed with the Bank by both the City Council and the Redevelopment Agency. Therefore, an agreement is also going forward to the upcoming Redevelopment Agency meeting. Lending Services: The City uses a private lending institution to leverage funds for housing and commercial rehabilitation. Block Grant or Redevelopment Agency Low- and Moderate-Income Housing funds are deposited in lump sum in an interest-bearing account. Households or businesses approved by the City are sent to the but bank to apply for a bank loan. Bank funds are used to make the loan, a percentage of the loan, which varies with the effective interest rate, is removed from the lump sum account and placed in a non-interest-bearing account, which in some cases guarantees or collateralizes the loan and could be drawn on by the bank in the case of default. The combination of interest- free money and loan guarantee allows the bank to lower the effective interest rate to the customer substantially below the market interest rate. As a loan is paid back, the City funds in the collateralizing account are proportionally paid back to the interest-bearing lump sum account. All lending services, such as title search, documentation, recordation, and delinquency actions, are provided by the bank. The ultimate result is that the City uses public dollars to generate investment of private dollars and avoids staffing requirements for loan servicing. Page 2, Item 14 Meeting Date 2/25/86 Selection Process: Proposals were solicited by letter from all lending institutions operating in the City of Chula Vista and from any other major lending institutions known to participate in community reinvestment activities. Proposals were received only from Bank of America and from Security Pacific National Bank. The Proposal Review Committee, made up of the Assistant Director of Finance, the Community Development Department's Administrative Analyst, and the Assistant Director of Community Development, evaluated the two proposals using the following criteria and maximum point values: 1 . Leveraging factor for public dollars to private dollars 30 points 2. Risk factors associated with loans 20 points 3. Underwriting standards used by institutions 20 points 4. Lending services provided 20 points 5. Lender experience with public programs 10 points The evaluation process was a lengthy one due to ambiguities in both proposals which were difficult to clarify. The loss of the key regional staff person by one of the institutions was a particular hindrance to completing the evaluation. Evaluation Result: Bank of America is recommended by the Review Committee, receiving an average score of 90 points as compared to 70 points for Security Pacific. In general , scoring was based on the following comparisons: 1 . Leveraging: Both banks were quite similar in the leveraging of private dollars with public dollars. 2. Risk factors associated with loans: Security Pacific scored higher here due to the fact that no City money was at risk: the non-interest-bearing account put up by the City for a loan would not be drawn down by the bank in case of loan default. Bank of America would take our funds to pay off a defaulted loan. However, in this case, risk was considered low in both cases, as program history indicates only two defaults over a history of hundreds of loans. 3. Underwriting standards: Underwriting standards were judged relatively equal for both banks. Underwriting standards are considered important in that loans refused by the bank are often funded and guaranteed 100% by the City, and, as a result, no leveraging is accomplished. 4. Lending services provided: Bank of America scored much higher in this category for two reasons. First, Security Pacific would not do loans under the City' s Mobilehome Rehabilitation Program, while Bank of America Page 3, Item 14 Meeting Date 2/25/86 has and will . If Security Pacific was selected, another bank would have to be used for mobilehome loans. Second, Bank of America provides their services to us from the local branch. Customers are referred by the City directly to the bank, where one-on-one lender-borrower interaction occurs. Security Pacific, on the other hand, operates totally from a regional center in Downey, California. Bank staff never meet the borrower, all documents must be conveyed for signature to the borrower by City staff, and interbranch mail must be used to circulate loan documents. 5. Lender experience in public programs: Both banks scored high in this category, having been providing the public sector with program lending services for years. Contract Negotiations with Bank of America: After the Committee identified Bank of America as the leading proposer, specific contracts were negotiated with Bank of America. The most significant change was in the leveraging relationship of public to private dollars. The City Council had expressed the expectation that a more favorable leverage be accomplished with the bank due to the fact that prevailing interest rate levels have gone down since the execution of the previous agreement with Bank of America. Better leveraging was requested of Bank of America; however, the bank initially responded that the leverage rates in the previous agreement were too low and that whatever changes have occurred in interest rates just provided a marginal level of profitability for the bank. Further negotiations did yield a more favorable, if modest, response from the bank. The new contract reduces the required City collateralizing account on 5% loans (elderly, very low income family, and landlord investor loans) from 50% of the loan amount to 45% of the loan amount. Correspondingly, the collateralizing accounts on 8.25% loans (low income family loans) have been reduced from 78% to 73%. The result is that the City can generate more private investment per commitment of public funds. FISCAL IMPACT: If the Agreement is executed with Bank of America, Community Development Block Grant funds recycling from repayments of previous loans will continue on deposit with Bank of America and will be reloaned under the new agreement. Approximately $250,000 of such recycled funds have been loaned under a month-to-month extension of the expired contract with Bank of America in FY 1985-86. This level of activity represents an unanticipated high level of deferred loan repayments due to property transfers upon death of owners. The funds appropriated for FY 1985-86 housing and commercial rehabilitation activity nd rity from Inge Services Agreement will be deposited the a Redevelopment under the Lending Agency. WPC 1332X Aty ' !� y: ►�R.,„ C`:'; of Chula Vita, C- iifornia Dated