The banking industry stands at the threshold of a new era for CRA enforcement. It is no longer going to be a show-and-tell paperwork exercise - actual loan results will be the deciding criteria.

What has happened with the Community Reinvestment Act since the beginning of the year has been more volatile than what occured during the previous 12 years of Republicans in the White House. Back in January, th independent banking lobbyists mounted an attempt to repeal CRA.

The challenge failed as the bankers were unabl to gauge the shift within the power bas of the House Banking Committee and the Clinton administration's commitment to community-based banking.

Populist Trend

The attempted repeal went against the grain of populism in both the legislative and executive branches.

Over the past several months, the industry has witnessed and will probably continue to see more stringent CRA enforcement. A satisfactory rating will be based increasingly on actual loan results. Going through the motions will not be good enough any more.

After the regulators announced a few months ago that only three of nearly 5,300 acquisitions, mergers, and branch applications were blocked last year because of inadequat complicance with CRA, the screws began to tighten.

The most notabl recent example was the proposd acquisition of two suburban Chicago banks by First Colonial Bankshares.

The Main Watchdogs

The sources of this pressure includ Rep. Joseph Kennedy's Hous subcommittee on consumer lending, the Boston Federal Reserve Bank, Comptroller of the Currency Eugene Ludwig, and increasingly the Justice Department.

The net result is that the banks quite possibly will receive a greater number of Ds and Fs instead of gentlemen;s Cs this year for CRA compliance.

But hope is on the horizon, and new tools are available to not only meet compliance needs, but to find profits from CRA. Unfortunatly for bankers trying to market their products (especially first or second home loans), they start out with a Catch-22.

Gauging Markets Better

A bank has to avoid broad-basd communications with loan offers, which is traditionally an efficient way of marketing. Banks cannot affor under CRA/HMDA rules to encourage loan applications, and then have to reject a larg percentage of them.

The challenge, thereforee, is to find out mor about individuals within a market area, and target relevant products for them.

This can now be done with several informational tools.

First, we can ascertain basic demographic information: age, income, number of children, cars owned, home ownership, home equity, etc. Next, we couple it with psychographic data (e.g., we want to know what hobbies these individuals have, if they're savers or spenders).

Data Are Plentiful

Third, we actually know financial products ownership or we can infer it from numerous outside date sources.

Taking all of these information sources and then doing mathematical modls, we can align a bank's financial products with an individual's needs, even within low-to moderate-income communities.

The objective is to deliver the full range of bank products and services to a community and ensure that the appropriate mix is made available to each individual.

Techniques Rarely Used

By doing this, a bank can realize greater marketing efficiencies, and at the same time minimize the rejection rate. However, the industry has a long way to go to embrace these technological changes.

Less that 5% of all banks utilize any microsegmentation techniques and even fewer have had the level of targeting sophistication previously mentioned.

There is no question that CRA enforcement will be more stringent in the months ahead. Technology and the use of information will play an ever more important role for banks to not only meet compliance, but do so profitably.

Tom Peters wrote in his latest best seller, "Liberation Management," that "no industry has been - or will be - more affected by information technology than financial services. Banks were all things to all people. Profits were pretty much assured. Then came deregulation in the early 1980s. Next, new technologies."

What Peters is driving at is that the utilization of technology for marketing purposes will determine the winners and losers in the 1990s. For CRA compliance it could determine which banks will be on the leading edge of change, versus those left on the bleeding edge.

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