The Federal Reserve Board rocked the banking world last month with its decision to reject a bid by Hartford's Shawmut National Bank to acquire the New Dartmouth Bank of Manchester, NH, because of Shawmut's allegedly poor fair lending record. The decision put real teeth in community reinvestment regulations by linking fair lending to the ability to expand at a time when the banking industry is in acquisition mode.
Shawmut is one of four banks being investigated by the Justice Department for possible discriminatory lending, but many others have received low ratings from regulatory bodies or come under fire from consumer activist groups. The pressure on banks to both introduce more enlightened policies and communicate more openly with their communities has been mounting.
Shawmut vp of external communications, Robert Gunther, defended the company's record in minority communities, saying it has initiated a five point program in January that permitted lower down payments for certain low income applicants, expanded home-buyer seminars in minority neighborhoods, and employed a service whereby "testers" randomly apply for mortgages in various branches.
Shawmut also intends to open a new branch in a predominantly black neighborhood of Boston and has committed $25 million towards mortgages for applicants with limited credit history and those who cannot demonstrate income stability even though they may hold stable employment. Many of these moves came as a result of the company's recent settlement with the Massachusetts attorney general over high-interest mortgages to low-income borrowers.
One of the major problems for lending institutions is that the Federal Reserve's rules are far from clear. Even in the wake of the Shawmut case, banks do not know whether similar restrictions will apply only to banks under justice Department investigation or to all banks with poor records in the fair lending arena.
One thing does appear to be certain, however. Regulatory guidelines will continue to grow more demanding.
Regulators are using new analytical techniques to spot patterns that suggest bias, President Clinton has ordered the rewriting of the Community Reinvestment Act to produce more lending in currently underserved areas, and Congress is considering legislation that would begin to apply the same standards to insurance companies.
For this reason, banks need to consider the legal, operational and reputational implications of their lending policies more carefully than ever.
"From a mergers and acquisitions planning standpoint, institutions on both ends of the transactions have to make sure they have not just good CRA records, but exemplary antidiscrimination records," Washington bank consultant Karen Shaw
told The Wall Street Journal recently. "It's hard for institutions that for a century or more have been the bastions of white male culture to look at themselves and say `Yeah, we've got a problem."'
But while the possibility of blocked mergers and acquisitions adds a new dimension to the issue, there is ample evidence that negative publicity for banks that are found to have poor lending records have already caused many institutions to examine their policies, reach out to their communities, and ensure that key audiences—including employees, investors, regulators and customers—are communicated with on this issue.
"The need is for companies to look at their community relations practices and their lending practices and make sure they are both effective," says Janice Conklin, vp at New York PR firm Makovsky & Co., and a specialist in financial services clients. "Having a good community outreach program is not going to help if a company does not meet regulatory standards and public expectations, while good policies are not going to be enough if a company does not communicate them."
Conklin emphasizes the importance of employee relations in the mix. It is important, she says, that employees who are the bank's ambassadors in the community, understand what it is doing to improve its minority lending record, particularly if the bank has been criticized in the past.
The first real improvements in fair lending practices came after banks were publicly embarrassed by Federal Reserve data released late in 1991. At that time, the Fed reported that Blacks, Asian Americans and Hispanics were twice as likely to be rejected for home loans as whites with the same income. Community groups seized upon the data, generating adverse publicity and creating obstacles to bank expansion.
Needless to say, Ralph Nader has been at the forefront of the public debate, with his group Essential Information identifying and publicizing 49 mortgage lenders in 16 big cities that the group says engaged in "redlining"—in effect, drawing a red line around areas with a minority population of 75% or more and choosing not to make loans there.
And in Boston, Union Neighborhood Assistance Corp. executive director Bruce Marks has described himself as a "bank terrorist" and declared his intention to become "the banks' worst nightmare." UNAC has targeted Fleet Financial, failing to block its takeover of Bank of New England two years ago but winning settlements totalling $23 million, Shawmut and BayBanks.
"The data have been our wake-up call," says Catherine Bessant, chief of community investment at NationsBank. "For the first time we had a way to assess our penetration in minority communities and to devise ways to improve it."
Bank of America, for example, hired minority and white "testers"—a technique long employed by public interest groups and regulators—to apply for loans offering identical qualifications in an effort to determine whether loan officers were making decisions based purely on ethnic background.
Chemical Banking Corp., meanwhile, has introduced an internal review procedure that requires loans to be reviewed five times before they can be denied. Any mortgage loan that a Chemical underwriter wants to deny must be screened by a senior loan officer. If this second look confirms the denial, and it is for a minority or low-income applicant, it is sent to a special affordable-lending team that searches for a way to make the loan.
If an application is rejected by this team, it goes before a fair lending committee of senior bank officers meets that meets once a month . And finally, the application is bumped to an interbank mortgage review board, where it is examined by representatives of a dozen banks to see if one of them can approve it.
"We have really covered our bases," says Michael Burke, vp of Chemical's affordable mortgage program. "We have an absolute safety net, so if you are declined it is for perfectly good reasons." He says that about 50% of the loans originally denied are eventually approved somewhere in the system.
In New York, 12 banks have formed the New York Mortgage Coalition, in conjunction with ten not-for-profit community organizations, to counsel low income and minority applicants on their home mortgage applications and guide them through the entire homebuying process, from looking for a house (the New York Urban Coalition, a partner in the Mortgage Coalition, has an affordable homes clearinghouse) to financing and post-purchase follow-up.
"The process is very affirmative in providing outreach to everyone," says Phyllis Rosenblum, community affairs officer at Republic National Bank of New York and Coalition chairperson. "In its first year, the New York Mortgage Coalition hopes to help at least 1,000 potential homebuyers."
Republic is a bank that demonstrates the importance of combining a commitment to fair lending with a proactive community relations program. The company recently made a $100,000 deposit at zero interest in the Central Brooklyn Credit Union, founded to provide low income people in the borough with banking services and the financial clout that comes with access to credit.
Even more impressively, the manager of one of the bank's midtown branches has become a kind of "personal banker" to residents of the Times Square Hotel, many of whom are mentally challenged or previously indigent. Most banks were unwilling to deposit or cash social security, public assistance and salary checks, until Republic stepped in.
"I'm not on Madison Avenue or Park Avenue," says manager Lyn Leader. "This is my community. I'm trying to help satisfy the banking needs of my community. Hopefully, these people won't be like this forever. When they make their millions, they may say, I remember Lyn."