Marketing to Your Entire Community

One of the key elements in the overall commercial success of a bank is its ability to market itself to its community.  It is through marketing that the bank lets their communities know that it is around and that it is open for business.   Putting a marketing plan together can sometimes be a daunting task indeed.  This is especially true in the current cost conscious environment.  As you put you marketing plans together we suggest that there are two other areas to consider-both Fair Lending and the Community Reinvestment Act.  Your banks’ overall effort at compliance in these two areas can be either greatly enhanced or harmed by the marketing that is done.   We suggest that marketing should always be directed at the client’s entire community.  Failure to include all potential customers in marketing can result in both missed opportunities and the potential for CRA and Fair Lending issues.

Just What IS Your Entire Community?

The first step in the process is to make a determination of just who is part of the entire community that that your bank serves!  When was the last time that you performed an assessment of the communities that make up your assessment area? There is a wealth of information available about the makeup of people who live in your assessment area.  For example, the US Census Bureau publishes information about the households in the tracts in your assessment area.  The inform information includes statistics on the median income, age and races on the people in your area.  There is also information on minority and business ownership that is available by county and MSA.  The FFIEC website has a link to the Census Bureau.[1]  Another good source of data is reports prepared by county and state Chambers of Commerce. In addition to public sources of information, there are several services that provide economic data about the economic status of counties and communities^[2]. However, it should be noted that these services tend to be expensive.

A much better source of information is personal contact with community groups in your area. Not all community organizers are anti-banks! In point of fact, many are doing all they can to get their clients actively involved in the banking community and away from the clutches of ‘’payday’’ lenders.

The goal here is to develop as much information as possible about just who your community is and how they fit into your business plan.  Oftentimes, this process results in discovering new and heretofore untapped opportunities. One of the main thrusts of CRA that often goes unmentioned is the push to get banks to find lending opportunities that would go completely unnoticed if not for requirements of the regulation.   Remember, CRA specifically states that the intention is not to get banks to make bad loans, just loans that would otherwise be overlooked[3]

 

Why Should a Bank Market to the Entire Community?

The obvious answer to this question is that failure to market to the whole community may result in a violation of CRA or Fair Lending.  The exclusion of one or more protected groups form marketing efforts can easily be interpreted as a form of “redlining” or discouragement, both of which would be seriously regulatory compliance problems.   

The less obvious answer is that by including the entire community of your field of customers, the Bank can become a significant part of the community.  Community banks are an indispensable part of any community. Though it may not seem this way, the trend is that the regulatory agencies are beginning to recognize that community banks are an indispensable part of small communities and should be treated that way.  [4] The more that the bank can show that it is truly serving the needs of its community, the stronger the argument becomes that it is indispensable.  An indispensable bank is one that communities will fight for in times of trouble. Moreover, regulators are more likely to give assistance to true community banks

Yet another consideration is the possibility of finding ‘’jewels in the rough’’ within underserved and under banked communities. This is the business model that has been pursued with a great deal of success by Magic Johnson Enterprises among others^[5]

How to Market

Today there are so many different venues for advertising that provide for effective low cost communication with customers that the bank opportunities are limitless. Social media has become a staple of the advertising for many banks. Good old fashion newspaper advertising works for others.  The idea is to make sure that you strive for inclusion and meet people where they are.  Do people speak different foreign languages in your assessment area? Make sure that you reach out to them in publications aimed at serving these communities. 

 

In the end, comprehensive marketing programs serve both compliance and the bottom line.

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[1] http://www.ffiec.gov/; http://www.econdata.net/content_datacollect.html

[2] Dun & Bradstreet provides one such service

[3] The Community Reinvestment Act of 1977 instructs federal financial supervisory agencies to encourage their regulated financial institutions to help meet credit needs of the communities in which they are chartered while also conforming to “safe and sound” lending standards.

[4] See Oklahoma Bankers association update June 3, 20123; 2011 Speech by  Ben Bernanke to federal Reserve Board

[5] From the website of MJ enterprises: Magic Johnson Enterprises serves as a catalyst for driving unparalleled business results for our partners and fostering community/economic empowerment by making available high-quality entertainment, products and services that answer the demands of ethnically diverse urban communities

Special Considerations for Freezing or Reducing HELOCs

 During the worst part of the great recession, one of the things that many of our clients did to reduce risk was to freeze or reduce credit lines on open-ended credit. Many credit providers too this unpopular stand as a risk avoidance strategy. More and more, consumers were shocked to find that their credit lines were reduced to an amount that was close to the outstanding balance even though the credit is in good standing. 

Home Equity Loans (HELOCs) are traditionally some of the largest open-end credits and, unfortunately, some of the most dramatically affected by market conditions. As the market values of homes all over the country continued to fall, many banks took the stand that the most prudent thing to do was to reduce credit lines to reflect the new, lower value of the home that is being used as collateral for the loan.

While establishing a program for reducing or freezing HELOCs may be a prudent business practice, banks should closely consider the Fair Lending and CRA implications of such a program, before aggressively pursuing it.  This is especially true in light of the ongoing emphasis that is being placed on Fair Lending in in 2013 and beyond. 

Regulatory Considerations  

While the trend of reducing credit is highly un-popular, banks are well within their rights to pursue this action. For example, Regulation Z allows a bank to alter a home equity loan program when the underlying property has experienced a “significant decrease in value”[1]. The regulation details the rules for determining whether a significant decrease in collateral value has occurred and specifies the means for reinstating credit once the collateral value returns. 

On the other hand, banks need to be careful to be aware that the decisions that they make may trigger further disclosures. For example, Regulation B requires that when an unfavorable change in an account occurs that does not affect an entire class of customers, an adverse action has occurred. [2] In other words, the decision to reduce or freeze individual accounts due to a reduction in collateral value is an adverse action and triggers a Regulation B adverse action notice.

 Fair Lending Considerations 

However, the places where foreclosures are taking place and where real estate values are declining can often be in places where large concentrations of protected groups reside. [3] In addition, the decision to reduce HELOCs can have a disproportionate impact on a certain segment of the customer base. 

For example, suppose a bank’s HELOC marketing program had been targeted at its woman owned business or the Hispanic segment of its customer base.  A decision to reduce or freeze these HELOCs could result in a large protected class of the customer base disproportionately impacted. This is the type of situation that was at the root of a lawsuit filed by the city of Baltimore, Maryland against Wells Fargo Bank where two thirds of the foreclosures in that city were in census tracts where African Americans represented 60 percent or more of the population.[4]    It is also current a cause celebre  in the current case of the city of Richmond, California, where the city is using the powers of imminent domain to take houses from the banks that are attempting to foreclose.  Regardless of the outcome of these cases, the overall reputation of the banks that are involved will be greatly diminished. 

It is critically important that the bank consider the consumer protection implications of a program to freeze or cancel products.  Fair lending is one of the areas of regulation where mere compliance with the letter of the law does not necessary reduce risk.  The impact of policies and procedures are widely considered as part of a comprehensive fair lending examination.  As a result, the impact that business decisions have on traditionally underserved communities can, and will be considered.  The business or economic reasons for the decision to proceed with or cease products should be well documented to protect against accusations of unfair or illegal lending practices.

Conclusion

Tough economic times often call for unusual measures. It is in these times that the goals of safety and soundness run headlong into consumer protections. While programs to reduce or freeze HELOCs can make perfect economic sense, the potential for reputation and or legal risk to the bank can outweigh the benefits.    

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[1] [1] Defined as 50% of the equity of the underlying property at Staff Commentary of Regulation Z  at 226.5b(f)(3)vi

[2] [2]This revision emphasized that the exception applies only when the creditor’s action is not based on the individual credit characteristics of the affected accountholders. For example, the exception would apply where a creditor terminates all secured credit accounts because it no longer offers that type of credit. Federal Register / Vol. 68, No. 52 / Tuesday, March 18, 2003 / Rules and Regulations

[3]  Declining Market Policies Have Disparate Impact On Minorities, Lower Income Neighborhoods, Reuters  Apr 1, 2008 6:30am EDT

 

[4] [4][4] Everyone's Feeling Economic Pain, But It's Hitting Minorities Worst of All. By Valeria Fernandez , ColorLines January 19, 2009

 

Assessing the Credit Needs of Your Community 

One of the basic tenants of compliance with the Community Reinvestment Act (“CRA”) is that a financial institution should strive to “meet the credit needs of its community”.  Despite this requirement, there has never been  clear definition or guidance on how Banks should systematically determine what those needs are.  We believe that the lack of a clear definition in this area presents both a problem and a an opportunity.  Ultimately, we believe that the Bank that can demonstrate that it has a clear understanding of credit needs vis- a-vis the products that it offers will present a strong case for compliance not only with CRA but also Fair Lending and UDAAP.  We suggest the following approach. 

Step One:    Develop Basic Economic Data.

There is a great deal of public economic data that is available for each and every census tract in the United States.  We suggest that at a minimum, that your economic research should include the following information:

·         The median Income for the assessment area

·         The median housing prices for the assessment area

·         The largest employers in the county that comprises the bulk of your assessment area

·         Information on the business and business owners in the county (in particular, women and minority ownership)

·         Information on whether or not there are economically distressed areas within your assessment area.   [1]

The idea here is to be able to tell a story about the economic conditions that exist in your assessment  area.  Using this information, you can make a generalization about what the typical potential borrower at your bank will look like in economic terms.  Local and county chambers of commerce generally will prepare economic predictions that can be used to analyze  trends in the area.  Finally, community groups in your area often have economic information that can be very useful for development of an economic picture.   With all of this information, you can start to tell a story about the potential borrowing needs in the community.    For example, the information can show that business is growing in certain sectors in the area, which will imply a need for SBA or asset-based lending.  It is important to be expansive in your description of the credit needs in the assessment area.  Remember, just because a certain type of lending is a need in the community, it does not create a requirement that your bank should offer these types of loans.  The point of this exercise is to show that your bank is aware of the credit needs of the community .  

Telling the Bank’s Story

The second step is to develop the economic story of the bank. It is critically important to reflect on the raison d’etre  for the bank.  Why is your bank in existence and who is the basic customer base?   Although the answer to this question may seem obvious to those who have been a part of your bank for some time, it is at all obvious to the outsiders who will be reviewing the CRA performance of your bank!    Moreover, this is a good starting point for the comparison that is necessary to do a strong assessment of the credit needs of the community.   How do the goals of the bank match up with the credit needs of the community?  In many cases, communities have changed significantly since banks opened.  Events that range from economic calamities and technological innovations have cause many communities to shift in overall makeup.   What was once a small agricultural community can quickly become a mecca for software development.   While the goals of the bank can remain steadfast, the way that those goals are met can change.  

Take a look at the list of products that are offered at the bank and start to see how they match up with the economic profile that you developed in phase one.  As part of this process, it is a best practice to compare the economic profiles used by the bank as minimum guidelines with the profiles of the assessment area.  For example, suppose your bank has set a minimum level of disposable income acceptable to make a loan.  Does that minimum reflect current economic conditions in your community.  We recently consulted with a bank that had set a minimum of $2,300 a month in disposable income for its consumer loans.  The standard was applied equally across all consumer applications.  However, because  this minimum level was set at a time when the economy in the assessment area was strong, it did not reflect the current conditions of a great deal of the population that immediately surrounded the bank.  As a result, the bank was not lending to the majority of its customers. 

In the above example, the fact that the banks standards resulted in few loans in the area surrounding its main office was not the actual problem,  remember, neither CRA or Fair Lending laws require banks to make bad loans or even loans that they don’t feel are desirable.  The problem was that the Bank could not present economic justification for the $2,300 disposable income limit.  It was more of a custom than an economic consideration.  If there had been some sort of research that showed that this was the considered business decision of the Board based upon the study of the community, there would have little to no concern on the part of the regulators.  In this case unfortunately, without the evidence they needed the bank was faced with potential enforcement action.  

The goal in telling the bank’s economic story is to compare economic conditions in the assessment area with the goals and the  economic realities at the bank.  A community may have a strong need for mortgages, but if your bank doesn’t have mortgage lending staff, or if the Board has determined that its risk appetite does not include mortgages, then there is a good business decision why this product is not offered.   The fact that mortgage loans have been identified and legitimately eliminated as a product is a very strong case for compliance with the CRA!. 

Dynamic Assessment is a Key

The area of greatest risk that we come across is the failure of banks to make their risk assessments a dynamic process.  We recommend for our clients that they make the risk assessment of the credit needs of the community an annual process.  By doing so, the current trends become part of the assessment can be updated with an eye towards making changes as is necessary.  We also strongly recommend that our banks include community groups and local trade organizations a part of the process.   This can easily be accomplished by the use of surveys and interviews.   The idea is to use the most current information available to establish a clear and accurate view of the community. 

Product develop should take place with an eye towards trends in the community.  While the bank does not have to meet all of the needs of its community, there should be an effort to determine how new and developing products fit in with the current and developing needs in a  community. 

The CRA does not require a bank to meet ALL of the credit needs of it community, but the prudent bank is aware of those needs so that in the future as products changes, these needs are considered. 

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[1] All of this information is available on the FFIEC website.