Opportunities and Challenges in Low- to Moderate-Income Communities: A Trialogue among Stakeholders - November 13, 2013
The recent event assembled lenders, regulators, and representatives of community-based nonprofit organizations to discuss housing finance, general financial services, and small business lending, with a focus on low- to moderate-income (LMI) households.
A business opportunity beyond CRA
Several themes emerged from the discussions, including:
- Serving LMI communities is a business opportunity, not philanthropy. More than 30 million Americans have no banking relationship, and surveys show many consumers would prefer dealing with a bank rather than payday lenders and other nonbanks. Those "unbanked" are potential customers who could consume numerous bank products and services, several panelists said.
- Financial education is critical, especially for LMI home buyers and their lenders. For lenders, educating customers is a cost of doing business, but it is a cost that can be recouped from long-term customer relationships, said Hugh Rowden, senior vice president and regional director of Wells Fargo. And Marshall Crawford of the housing nonprofit NeighborWorks America pointed out that mortgage borrowers who take home buyer education classes—compared with those who do not take such classes—are nearly 50 percent less likely to end up in foreclosure.
- Financial institutions should rethink approaches to this demographic, and design products that suit customer needs rather than the banks' needs. Based on survey data, Birmingham-based Regions Bank introduced a package of services for low- to moderate-income households in 2012. Services include expedited bill payments and money transfers, prepaid debit cards that can be loaded with a smartphone, and short-term liquidity, said John Owen, Regions senior executive vice president and head of business groups.
Phillip Baldwin, president and CEO of the nonprofit CredAbility, suggested that banks tailor offerings to particular groups within the broad LMI category, as not all LMI individuals are alike financially.
In a more general sense, the home mortgage industry needs to discuss what is acceptable as a rate of delinquencies, stated Robert Couch, former general counsel of the U.S. Department of Housing and Urban Development. Some residential mortgage defaults are inevitable in the face of unforeseen events like divorce and long hospitalizations, said Couch, now an attorney in Birmingham with the firm Bradley Arant Boult Cummings. Some industry standard delinquency rate would make it easier for more people to secure mortgages, Couch said, noting that the current stricter lending standards are making it especially tough for African-Americans, Hispanics, and young people to get mortgages.
- Regulators on the panels expressed a desire to see the banking system serve communities. Paul Nash, senior deputy comptroller and chief of staff of the Office of the Comptroller of the Currency (OCC), said the OCC tries to be ever mindful of the impact regulations will have on community banks. One reason is that community banks are important lenders to small businesses, particularly in inner cities and rural areas, Nash said.
- Lenders might consider new ways of evaluating borrowers' creditworthiness. LMI households often do not keep the sort of traditional, detailed financial records that lenders typically require, said David Batlle, area financial manager with the Florida Office of Financial Regulation. In many cases, for example, one spouse works and is paid in cash without traditional tax withholdings and accompanying records, Batlle noted. Also, banks could take a more expansive view of what constitutes credit, such as considering long-term, consistent payment of insurance premiums when judging credit history, said John Hope Bryant, founder and CEO of the nonprofit Operation HOPE Inc.
Balancing concerns about creditworthiness with opportunities in LMI communities is an old conundrum. But the "trialogue" generated a sense of optimism for Atlanta Fed President and CEO Dennis Lockhart. "Maybe there are some new answers that will come out of this," Lockhart remarked. "I think that's inspirational."