Community Outreach- Why Bother?
One of the many requirements of the Community Reinvestment
Act (“CRA”) is that all financial institutions that are subject to it make an
effort to do outreach to the community.
There are similar requirements in both state and federal fair lending
laws. We believe that the need to do
community outreach goes far beyond the regulatory requirements of fair lending
and the CRA.
Re-Visiting Your Approach to the CRA- Embracing the Needs
of Your Community
Since its inception, the Community Reinvestment Act (“CRA”)
has received a great deal of attention. From consumer’s advocacy groups, the
reception of the CRA has been positive, while many in the banking community are
either ambivalent or downright hostile towards this legislation. During the
financial crisis of 2008, the CRA enjoyed a special, albeit unfair place of
contempt from those who insisted that compliance with the CRA was somehow at
the root of the financial meltdown. But wait, what if the CRA had nothing to do
with the financial crisis? 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 outreach to your community.
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 end 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]http://www.blogger.com/blogger.g?blogID=3530472396892716457,
the reputation of the CRA has become one of 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. , the reputation of the CRA has become one of the regulations
that forces banks to make “bad loans”. However, the true emphasis of the
regulation is 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.
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 John
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.
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 from 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]
[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
Product Development
Anyone?
One of the best ways to determine whether your institution
is offering products that people actually want is to ask. Getting out into the community and talking to
customers allows senior management to get to know what mobile phone and
computer applications people are using so that when the time comes to invest in
new technology, the money can be well spent.
Can you Say KYC?
The heart and soul of a strong BSA/AML compliance program is
the ability of the staff at a financial institution to know its customers and
their individual business plans. By
reaching out to the community it is possible to obtain feedback on how some of
your customers are doing. Suppose it
turns out that one of your biggest customers has a terrible reputation in the
community; especially one for charging high fees for cashing checks. This could be particularly upsetting if you
were unaware that they were cashing checks at all.
Untapped Resources
Community outreach allows the senior management of your
institution to discover potential new and diverse staff members. There are many small private programs that
are designed to train young people for business and these programs can be a
strong source of future management candidates.
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 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. [5]
Another good source of data are 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[6].
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.[7]
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.
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.
[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] See
Oklahoma Bankers association update June 3, 20123; 2011 Speech by Ben
Bernanke to federal Reserve Board
[7] 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.
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