By Richard Neiman
These are stressful times -- and not just for the major banks that have been undergoing supervisory “stress tests.” Consumers, nonprofits, and, yes -- even us regulators – are feeling the stress, too. In these tough times, partnerships between the public, private and nonprofit sector can simultaneously help consumers and stabilize the financial system.
Nonprofit community groups are important partners for us at the state level for implementing housing initiatives and in foreclosure prevention. We are constantly finding new ways in which their neighborhood connections bring value and help our public programs succeed. Banks should see nonprofit partners in a new light, beyond the traditional lens of Community Reinvestment Act compliance.
The CRA record over the past 30 years is impressive, however. Banks’ CRA activities have leveraged infusions of public capital into low and moderate-income communities, perhaps by as much as 10 to 25 times, attracting additional private capital in the process. In the last 10 years alone, CRA has lent small businesses and farms in excess of $2.6 trillion, exactly the stimulus we need in these challenging economic times.
Even so, it is sobering to consider that we now have communities, often communities of color, that are being ravaged, not by the lack of credit opportunities, but by foreclosures due to an abundance of irresponsible and often predatory credit. This fact is not a reflection on CRA, as only a tiny fraction of higher-cost or subprime loans were either originated or purchased by banks for CRA credit. But it is a real phenomenon that credit access is now threatened in communities where it is most needed due to tightened underwriting standards, foreclosures and declining property values.
The New York Times recently reported that defaults occur three times as often in mostly minority census tracts as in mostly white ones, and that 85 percent of the hardest-hit neighborhoods have a majority of black and hispanic homeowners. These disturbing facts match with the banking department’s own foreclosure research, which confirms that minority communities are being disproportionately affected. For example, approximately 90 percent of foreclosure filings in the Bronx, 78 percent in Brooklyn, and 87 percent in Queens are in minority areas.
There are neighborhoods that were historically redlined, that became targets for steering or “reverse redlining” by predatory lenders. Now, these communities are understandably concerned that the pendulum will swing back too far in the opposite direction, leaving them shut out of credit choices and victimized once again. This yo-yo treatment leaves many people understandably skeptical of financial institutions, and could lead to a reversion to the kind of credit vacuum that existed in the 1970s before CRA was adopted.
Banks should not respond to the current market uncertainty by going back to a credit contraction in these neighborhoods. That is why nonprofit groups can be such important partners to banks. There are good business opportunities that financial institutions might otherwise miss without nonprofits’ involvement.
As soon as I mention expansion of lending in low and moderate-income areas, some of you might question whether this is the right time due to the current stress and uncertainty in the financial system. And others might even suggest that CRA actually contributed to the financial crisis and encouraged banks to bend prudential standards to approve loans in low and moderate-income areas. I would like to dispel both myths. Banks can creatively and prudently grow their business, and lending in underserved areas can be a positive part of that plan.
I understand that this is a period of deleveraging, for lenders as well as households. And we need to return to responsible, sustainable underwriting standards after some lenders abandoned prudent behavior during the height of the housing boom.
But the business expansion I envision is the sustainable kind – lending that is fair, as well as prudent and profitable. This goes beyond a “check-the-box” approach to CRA. Nonprofits are more than a resource for compliance purposes. They can be business partners to responsibly deploy capital in a world of increasing risk.
There are two main ways that I see this nonprofit support to business: risk mitigation and building trust with potential new customers.
Risk mitigation. First, nonprofits can play an important role in risk mitigation, to help banks realize expanded opportunities within the context of safe and sound lending. Nonprofits can transform the borrower through financial education and counseling, to prepare them for successful homeownership. They can also perform the detailed, time-consuming underwriting that is necessary to differentiate a good, but nontraditional, application from a poor credit risk.
Building trust. Second, nonprofits have the trust of the communities they serve, at a time when public confidence in banks and their management is at an all-time low. If bankers do not do something soon, they will risk being associated with politicians, or even worse, lawyers. In the 2008 Gallup Honesty and Ethics Poll, still only 23 percent of Americans rated bankers as having high ethical standards. In this environment, the partnership of a trusted intermediary can make all the difference for financial institutions in winning trust and developing customary loyalty.
That is why CRA remains so relevant. But we cannot just look at CRA solely as a compliance obligation or merely a charitable or philanthropic effort. Lending in low and moderate-income communities needs to make good business sense and the nonprofits are a way to bridge that gap.
In the wreckage of the mortgage market, CRA has been one of the few examples of what has worked. With this model for responsible lending, we can go back to the roots of CRA as a way to build creative partnerships between the public, private, and nonprofit sectors to preserve credit access and homeownership.
Richard H. Neiman, superintendent of the New York State Banking Department, writes on regulatory issues for Banking New York. This column was adapted from remarks Superintendent Neiman gave at the Neighborhood Housing Services of New York City, Inc. Regional Interagency Committee (RIAC) Annual Breakfast on May 19, 2009.