Top Tier Banks invade poor communities

[becnc at igc.org]

ll:

There is an interesting article in the Monday Jan. 18 New York Times (on the
front page no less!) about unscupulous lending practices committed by
agressive lenders particularly in low income areas of Brooklyn. The basic
strategy is to identify owners of homes with significant equity and then
persuade them to take out high interest loans they can't repay. Old news.
The new news is that much of this lending is being done by Delta Funding,
which is selling its mortgages as securities and that Bankers Trust is the
broker for these securities. Bankers Trust is the eighth largest bank in
the US and about to be acquired by Deutshe Bank. The article identifies
numerous other top tier commercial banks also engaged in similar strategies.

Much of the blame for the spread of this type of pernicious lending can be
laid at the feet of regulators, who not only permit notorious lenders of no
doc/low doc products such as those used by Delta to exist, but actually give
them outstanding CRA ratings!

As traditional credit markets dry up, as the lenders find fewer and fewer
customers can qualify for, or are interested in tradiational "A" credit
products, "B" and "C" products such as those that Delta specializes in will
become more and more prevalent. And stories like those in today's NYT will
become more and more common place.

Can the regulators regulate? Time will tell.

Greg Todd

################################################## ##########################
############

BEC New Communities HDFC, Inc.
541 Atlantic Avenue Brooklyn NY 11217
tel. (718-)858-8803
becnc@igc.org
"Housing That Helps"



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[GKnappAtty at aol.com]

A reply to Mssrs. Todd, Taylor and Silver,

The issue you bring up has been the source of one of my pet thoughts for
years. Small communities are at the mercy of large institutions because they
have no local alternative. Community banking has been succeeding in small
rural towns for a century. Why couldn't it work in an urban neighborhood? Make
no mistake, starting a local bank is not easy. It requires loads of financial
commitment, expertise, and local investors who are willing to take a risk for
the long haul. However, if properly capitalized and run, it is invariably
profitable for the investors. It also provides local lending decisionmaking,
and an institution that is under constant scrutiny by the local community. If
you don't like Big Brother, start your own bank. The word is (at least here in
Illinois) that there is a resurgance of applications to start local banks in
response to the acquisition mania which, over the last decade, has left many
communities with no local alternative to large banks. I'm not busy this
afternoon. Anyone want to start a bank?

Greg Knapp


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[jsilver at essential.org]

Dear Greg:

You raise an improtant point. Some small banks do enter markets affected
by megamergers looking for disgruntled customers. NCRC supports those
endeavors. A local bank opended up in DC this week that will specialize in
lending to minority neighborhoods.

However, the small banks can't often make up for lost volume if megamergers
result in major lenders abandoning CRA efforts in some markets. That's why
we need vigorous enforcement of CRA, and scrutiny of merger applications,
participation by the public, etc.

Josh Silver
Vice President of Research
NCRC


>A reply to Mssrs. Todd, Taylor and Silver,
>
>The issue you bring up has been the source of one of my pet thoughts for
>years. Small communities are at the mercy of large institutions because they
>have no local alternative. Community banking has been succeeding in small
>rural towns for a century. Why couldn't it work in an urban neighborhood? Make
>no mistake, starting a local bank is not easy. It requires loads of financial
>commitment, expertise, and local investors who are willing to take a risk for
>the long haul. However, if properly capitalized and run, it is invariably
>profitable for the investors. It also provides local lending decisionmaking,
>and an institution that is under constant scrutiny by the local community. If
>you don't like Big Brother, start your own bank. The word is (at least here in
>Illinois) that there is a resurgance of applications to start local banks in
>response to the acquisition mania which, over the last decade, has left many
>communities with no local alternative to large banks. I'm not busy this
>afternoon. Anyone want to start a bank?
>
>Greg Knapp





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[danimmer at wwa.com]

My strong sense is that de novos in the Chicago area market have been
almost exclusively set up in middle- and high-income neighborhoods and
communities. Of the many in the region, I know of one latino-owned de
novo set up in a moderate-income latino neighborhood, but it is very
small. The others are seeking out primarily affluent markets. One
recent example located in such markets has been less than bashful about
revealing its target market by calling itself Success National Bank.

The problem is that regulators continue to let banks define their own
assessment areas and to allow such areas be based on branch locations
only, even though the link between deposits and lending has become less
and less significant. The result is that banks have an incentive to
establish branches only in higher-income areas - and then they can be
evaluated only on how well they serve a relatively non existent low-mod
market!

The large banks have generally moved their centers of gravity farther
from low-mod areas, leaving SOME remaining community banks to become
increasingly important for small business lending in low-mod areas, and
have left mortgage companies -- often subprime ones -- to serve low-mod
areas. In some low-mod communities in Chicago, individual subprime
lenders have 20% or more of the home improvement market (in a metro area
with hundreds of lenders). We have essentually have dual markets. In
mortgage lending, MANY banks and mortgage companies serve the middle and
upper income portion, and a relatively small number of high priced
subprime lenders serve low-mod folks. The result is competition for
customers with ample resources and monopoly power and predatory
practices for those without.

I'd recommend reading NCRC's analysis of suprime lending from their
worst lenders report, and you might want to look at our analysis of
small business lending in the Chicago market (Getting Down to Business -
more info at http://www.nonprofit.net/woodstock/).

Dan Immergluck
Woodstock Institute
Chicago
>
> A reply to Mssrs. Todd, Taylor and Silver,
>
> The issue you bring up has been the source of one of my pet thoughts for
> years. Small communities are at the mercy of large institutions because they
> have no local alternative. Community banking has been succeeding in small
> rural towns for a century. Why couldn't it work in an urban neighborhood? Make
> no mistake, starting a local bank is not easy. It requires loads of financial
> commitment, expertise, and local investors who are willing to take a risk for
> the long haul. However, if properly capitalized and run, it is invariably
> profitable for the investors. It also provides local lending decisionmaking,
> and an institution that is under constant scrutiny by the local community. If
> you don't like Big Brother, start your own bank. The word is (at least here in
> Illinois) that there is a resurgance of applications to start local banks in
> response to the acquisition mania which, over the last decade, has left many
> communities with no local alternative to large banks. I'm not busy this
> afternoon. Anyone want to start a bank?
>
> Greg Knapp


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[Holland6 at aol.com]

Dan,
Don't communities have a say in how banks define their assessment areas?
Assessment areas that exclude low- and moderate-income geographies was the
context behind the Chevy Chase bank settlement a few years ago. CBOs need to
have a greater voice in this process.

Also, for a local examination of how much of the market subprime lenders have
in low-mod. areas, contact Nancy Schaefer at the Pittsburgh Community
Reinvestment Group in Pittsburgh at 412.322.6053. The recently did a study
that shows the large market share of loans to low-mod. areas in Pittsburgh.
-Dan Holland
National Community Capital Association, Philadelphia
holland6@aol.com


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[GKnappAtty at aol.com]

Dan Immergluck seems to have identified the basic dichotomy. The de novo bank
charter ventures target moderate to high income markets. Obviously, these are
private commercial ventures, and therefore premised upon a profit motive. From
the standpoint of the private investor who contributes capital to the venture,
the motivation is to is to seek the most profitable market available. Of
course, this aggravates, rather than relieves, the comparative lack of credit
alternatives in the low income communities. Again, that makes it easier for
the predatory lenders to have their way.

The conundrum is whether the low income community can muster the initial
capital investment, expertise , and profit potential to make the local venture
mathmatically viable for the assumed local investors. In any neighborhood,
low, moderate, or high income, it is probably not reasonable to expect
individuals to invest in something which is not intended to provide a
reasonable return on the investment. Also, I suspect if a profit cannot be
demonstrated in pro forma fashion prior to chartering, the banking regulators
will not grant the charter in the first place.

Is there seed money available in the form of grants (rather then loans) to
boost the investment vaibility? For example, will any agency provide some of
the up front capital and never ask for repayment? If you need a minimum of $5
million to capitalize a de novo bank in an urban neighborhood, can you find
$1 million in grant money, and try to raise the other $4 million from local
investors? The investors would hold the ownership of all of the stock, thus
receiving a 25 % investment return if the bank only breaks even. Maybe that is
wishful thinking, but if the numbers don't work in a purely private scenario,
what is the alternative?

Greg Knapp


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[danimmer at wwa.com]

Dan Holland and others:

(I hope this topic doesnt bore too many folks -- but I guess that's what the
delete button is for. My own thinking is that CRA assessment areas, while a
seemingly arcane issue, drive a lot of bank activity and inactivity and should be
of interest to many folks, including CDFIs, who may be cut out of many banks
assessment areas and who, as Dan Holland suggests, should let regulators know
that their own markets should be included in the assessment areas of banks
significantly active anywhere in their metro area or rural community.)

Dan, I believe you are right in that the assessment area and branch locations
were the thrust of the action by the Justice Department a few years back against
Chevy Chanse. That, however, was a fair lending action, not a CRA action (by
bank regulators). I think it was prompted by the inability or inaction of bank
regulators to deal with the branch distribution and assessment area "donut"
problem, where large banks leave central city (and often older suburban)
neighborhoods as the hole of the donut in their branch patterns.

I certainly agree that community groups, CDCs, CDFIs and others should give
banks and regulators their input on assessment areas. Unfortunately, the
regulators do not seem to seek much comment on this aspect of the regulation, and
often seem to passively accept whatever the bank proposes as its assessment
area. There are other issues, like when large bank holding companies are
comprised of many smaller banks and the *cumulative* pattern of the individual
assessment areas are never even examined because the banks each receive separate
CRA exams!

It takes proactive attention to this issue to make a difference, and even then,
advocacy may not always be effective. We were recently able, as part of a CRA
negotiation, to encourage a large (but not very large) bank to not exclude a
small portion of Cook County (IL) from its assessment area in its proposed
acquisition of another institution. The part of the county was essentially
comprimes African American and modest income city neighborhoods and suburbs to
the southeast. This was despite the bank acquiring an institution that had been
serving this area. The bank had certainly expected that -- without any external
attention -- the regulators would have approved their initial proposal.

Other times, however, we have had much less success. Especially with the largest
banks, who yield somewhat more political power.

-Dan Immergluck
Woodstock Institute

Holland6@aol.com wrote:

> Dan,
> Don't communities have a say in how banks define their assessment areas?
> Assessment areas that exclude low- and moderate-income geographies was the
> context behind the Chevy Chase bank settlement a few years ago. CBOs need to
> have a greater voice in this process.
>
> Also, for a local examination of how much of the market subprime lenders have
> in low-mod. areas, contact Nancy Schaefer at the Pittsburgh Community
> Reinvestment Group in Pittsburgh at 412.322.6053. The recently did a study
> that shows the large market share of loans to low-mod. areas in Pittsburgh.
> -Dan Holland
> National Community Capital Association, Philadelphia
> holland6@aol.com



--
Dan Immergluck
danimmer@wwa.com
Vice President
Woodstock Institute
407 S. Dearborn, Suite 550
Chicago, IL 60605
312-427-8070




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[ddurett at oncon.com]

This is unfortunately, old news. Anyone out there remember the 60s and 70s?
Anyone remember reading The Political Economy of the Ghetto? Anyone
remember the economic empowerment (today's terms) concepts of Black Power?
These areas in Bklyn, where incidentally I grew up, are the same areas
targeted by Malcolm and other Black and working class leaders, in their
calls for liberation. The key is not to be surprised but to understand the
links between national and international banks and finance and the
political, economic, and social oppression that still exists around the
world and yes, even here in America, right around the corner. Indeed:
"What is Past is Prologue!" I am most pleased to see this discussion and
hope to be able to contribute positively.
-----Original Message-----
From: Gregory D. Todd <becnc@igc.org>
To: communitydevelopmentbanking-l@cornell.edu
<communitydevelopmentbanking-l@cornell.edu>
Date: Wednesday, January 20, 1999 9:59 AM
Subject: Top Tier Banks invade poor communities


>ll:
>
>There is an interesting article in the Monday Jan. 18 New York Times (on
the
>front page no less!) about unscupulous lending practices committed by
>agressive lenders particularly in low income areas of Brooklyn. The basic
>strategy is to identify owners of homes with significant equity and then
>persuade them to take out high interest loans they can't repay. Old news.
>The new news is that much of this lending is being done by Delta Funding,
>which is selling its mortgages as securities and that Bankers Trust is the
>broker for these securities. Bankers Trust is the eighth largest bank in
>the US and about to be acquired by Deutshe Bank. The article identifies
>numerous other top tier commercial banks also engaged in similar
strategies.
>
>Much of the blame for the spread of this type of pernicious lending can be
>laid at the feet of regulators, who not only permit notorious lenders of no
>doc/low doc products such as those used by Delta to exist, but actually
give
>them outstanding CRA ratings!
>
>As traditional credit markets dry up, as the lenders find fewer and fewer
>customers can qualify for, or are interested in tradiational "A" credit
>products, "B" and "C" products such as those that Delta specializes in will
>become more and more prevalent. And stories like those in today's NYT will
>become more and more common place.
>
>Can the regulators regulate? Time will tell.
>
>Greg Todd
>
>################################################## #########################
#
>############
>
> BEC New Communities HDFC, Inc.
> 541 Atlantic Avenue Brooklyn NY 11217
> tel. (718-)858-8803
> becnc@igc.org
> "Housing That Helps"
>



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