A couple of weeks ago, I found a compelling request for qualifications from a very active housing finance corporation in a large Texas city. The request asked for “Asset Management and Underwriting Services” to support several housing finance corporations run mostly by the city.  

If you are a banker staring down the barrel of a recession and another long low-interest environment, the title should read more like “Low-Risk, Non-Interest Income for My Bank Where I Can Earn Community Reinvestment Act Credit”.

This would be a fantastic niche banking activity. Banks have been outsourcing functions to other vendors for years. So much so, that many banks really only retain a few important competencies in house. Many banks pay vendors to provide resources for every other function. Why not turn the tables and provide core underwriting knowledge and expertise as a vendor of investment advisory and counseling services?

The underlying request here is for needed expertise in vetting proposals for the financing and construction of housing resources. This is for a city that has a strong demand for affordable housing. The housing finance corporations are very active in providing financing and housing. The asset management and underwriting services would be compensated by a government entity without requiring any change to the bank’s balance sheet. Banks are well positioned to provide this sort of service since most banks retain substantial expertise in investment and loan underwriting. In an environment where interest rate margins are compressed, why not consider providing underwriting advisory services for a fee?

Assisting housing finance corporations in providing affordable housing is a service that directly benefits low to moderate income persons. This is a community development activity that would garner CRA credit for most banks. This also means CRA credit without taking on credit risk. Even without CRA credit, furthering the construction of affordable also fills an increasingly critical need in cities nationwide. This niche banking services opportunity could probably be extended to other areas with similar needs.

Obviously, investing in the bonds produced by these housing finance corporations is the traditional move for most banks. For many banks, investing in the bonds will better fit their strategic needs. However, thinking outside the box a little here, for some banks it may make a lot more sense to earn reasonable fee income in an outstanding niche banking activity without putting additional assets and risk on their balance sheet.  

Can Banks Provide Underwriting Services to a Third Party for a Fee?

Yes, national banks can engage in providing underwriting services or counseling to government entities and instrumentalities, like housing corporations. National banks are authorized to:

“[act] as investment adviser (including an adviser with investment discretion) or financial adviser or counselor to governmental entities or instrumentalities, businesses, or individuals, including advising registered investment companies and mortgage or real estate investment trusts, furnishing economic forecasts or other economic information, providing investment advice related to futures and options on futures, and providing consumer financial counseling….” 12 CFR 5.34(e)(5)(v)(I).

National banks are also authorized to:

“[provide] financial and transactional advice and assistance, including advice and assistance for customers in structuring, arranging, and executing mergers and acquisitions, divestitures, joint ventures, leveraged buyouts, swaps, foreign exchange, derivative transactions, coin and bullion, and capital restructurings….” 12 CFR 5.34(e)(5)(v)(K);

This portion of the federal regulation focuses on new activities in which a national bank operating subsidiary is authorized to engage. Bank operating subsidiaries may engage in activities in which a bank could engage directly. The activities described in (e)(5)(v) are permissible for national banks and national bank operating subsidiaries.

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