Are You Meeting
the Credit Needs of Your Community?
For many, the Community Reinvestment Act, (“CRA”) represents
yet another compliance task without merit.
What if instead of being an administrative burden, compliance with the
CRA resulted in greater marketing opportunities and greater opportunities for
overall profitability? These opportunities exist if you embrace the concept of
meeting the needs of your community.
One of the main tenants of the Community Reinvestment Act is
that banks should strive to meet the credit needs of the communities in which
they take deposits. The reason that
this is one of the main parts of the regulation and for that matter, the reason
that the CRA exists at all is a story for a different time. Suffice to say that for years, banks engaged
in the practice of “redlining” which meant that they directly ignored the credit
needs of many communities. Redlining was
the process of drawing a red line around certain neighborhoods on a map and
making a deliberate decision that no loans would be granted within the
boundaries of the red line. The deposits of communities that had been
red-lined, became the source of lending funds for other communities. Red-lining then, was one of the main
practices that the CRA was designed to stop.
When
the CRA was first enacted, it was designed to get financial institutions to
take a second look at communities that had been historically overlooked for
credit by financial institutions. Though these communities tended to be
populated with low to moderate income borrowers, these borrowers represent
significant opportunities for good credit. The CRA was a means to an ends to
get banks and financial institutions to “meet the credit needs of the
communities in which they operate, including low- and moderate-income
neighborhoods, consistent with safe and sound banking operations” [1]
Over
the years, even though billions of dollars of investments have been made in
communities that were being overlooked[2], the
reputation of the CRA has become the regulation that forces banks to make “bad
loans”. However, the true emphasis of the regulation has been and always will
be to encourage banks to assess the credit needs of the communities they serve.
In other words, one of the main goals of the regulations was to get banks to
find credit “diamonds in the rough” in areas that had traditionally been
written off.
Opportunities Abound
The
strategy of serving communities that have been overlooked has been successfully
and very profitably employed by none other than hall of fame basketball star
Earvin “Magic” Johnson. His Magic Johnson Enterprises has partnered with all
manner of fortune 500 companies to invest over $500 million in communities that
had been overlooked. Using the approach of finding the “diamonds in the
rough” Johnson’s companies continue to grow and show amazing profits by
investing in low to moderate income communities. So how does he find
these opportunities? “Magic Johnson Enterprises is known for successfully
staying rooted in communities because they understand those communities’ unique
needs and personalities[3]. In
other words, he knows the needs of his communities and provides services that
meet those needs.
In
its report, entitled “The 2015 State of Women Owned Business Report” American
Express’ Open, detailed the tremendous growth of women owned businesses from
1997 through 2015:
Between 1997 and 2015, when the number of
businesses in the United States increased by 51%, the number of women-owned
firms increased by 74% – a rate 1-1/2 times the national average. Indeed, the
growth in the number (up 74%), employment (up 12%) and revenues (up 79%) of
women-owned firms over the past 18 years exceeds the growth rates of all but
the largest, publicly-traded firms – topping growth rates among all other
privately-held businesses over this period.[4]
The
report also points out that women owned firms tend to be smaller than average. Women owned firms are the fastest growing in
number and economic clout. These firms
also tend to have specific credit needs.
Is your bank considering these needs and developing products to address
them? If not a huge opportunity is
passing you by.
Micro Lending
Though
micro lending has been very popular in several foreign countries, the industry
is fairly new in the United States. Micro businesses are defined as
“a business with five or fewer employees that requires no more than $35,000 in
start-up capital.” [5] There is a
surprisingly large number of businesses in the United States that meet this
definition. In 2011, there were approximately 26 million micro
businesses. [6] Each of these
businesses represents a group of people that working towards self-sufficiency,
greater wealth and ultimately, the potential to be significant customers at
commercial banks.
In
the United States, the Small Business Administration defines a microloan as one
at or below $50,000. Data as of 2012 showed that the average loan for a
microenterprise was $14,000. [7] Currently there are several
sources for obtaining microloans, including nonprofit organizations, community
development financial institutions and private equity funds
A
formal micro lending program would be the ultimate in innovation. Such a
program would greatly enhance the reputation of a bank within its
community. It is worth nothing that micro lending programs have
been very profitable both internationally and in the United States.
The
FFIEC’s proposed Interagency Questions and Answers Regarding
Community Reinvestment make it clear that the focus in the future will
be on innovation in lending and creativity in delivering banking
services. Credit will be given to lenders for innovation in lending. [8]
Embracing Credit Needs
For
banks, embracing the concept of determining and meeting the credit needs of the
community can yield very positive results. The list of factors that make up the
consideration of credit needs from the Federal Reserve Bank of Atlanta’s
publication “Community Reinvestment – Does Your Bank Measure Up?” includes the
following;
- The
makeup of the community;
- What
the local and regional economic conditions are;
- What
kind of opportunities exist for serving the community through lending and
investments;
- What
your banks business strategy and products are; how is your bank doing
financially;
- What
your bank sees as the credit needs of the community; and
- What
individuals, community and civic organizations, and business-as well as
state, local, and tribal government-think about your banks efforts toward
meeting the community credit needs.
By
placing a heavy emphasis on the determination of the credit needs of the
community, banks can not only meet the requirements of the CRA, but also
discover profit opportunities in communities that have been overlooked. This
process does not have to involve a great deal of expense or effort.
Contacting civic groups, getting out into the community, talking with local
businesses is painless and inexpensive. The credit needs of your community will
continue to grow and change. Make sure
you are ready to be a full participant
[1]
Don't Blame Subprime Mortgage Crisis or Financial Meltdown on CRA Stable
Communities.com 2008
[2]
See The Community Reinvestment Act: 30 Years of Wealth Building and
What We Must Do to Finish the Job John Taylor and Josh Silver National
Community Reinvestment Coalition
[3]
Magic Johnson Enterprises Helps Major Corporations Better Serve the
Multicultural Consumer Business Wire 2008
[4] “The
2015 State of Women Owned Business Report” American Express’ Open page 1
[5] Elaine L. Edgcomb and Joyce A. Klein,
“Opening Opportunities, Building Ownership: Fulfilling the Promise of
Microenterprises in the United States,” FIELD, February 2005,
http://www.fieldus.org/ publications/FulfillingthePromise.pdf.
[6] Microenterprise Development: A Primer,” FDIC
Quarterly 5, No. 1 (2011):
[8] Community Reinvestment Act;
Interagency Questions and Answers Regarding Community Reinvestment;
Notice September 3, 2014
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