Li Pei Wu, chairman and chief executive of General Bank, Los Angeles, enjoyed 10 years of satisfactory ratings on his CRA exams until the day the ax fell.

On that day, in the fall of 1991, a Federal Deposit Insurance Corp. examiner found a host of alleged wrongs, from the bank's all-Chinese advertising to its "prequalifying" interview of customers, aimed at maintaining the racial purity of its customer base.

In so doing, the FDIC put General Bank in the thick of a debate that has pitted decades of Asian-American history and culture against the modern application of community reinvestment laws.

Special Role

"We were founded to help a part of the community that wasn't being served by the major banks," said Mr. Wu, a pillar of the Taiwanese community in Los Angeles. "We stuck with the part of the community we knew best, and the regulators told us, and we thought, we were doing a great job. Now, they say you are required to serve every minority community. There are so many different minorities here you don't know how to serve them."

Minority banks are under fire for their performance under the Community Reinvestment Act. As they attain size and success, the way that the CRA is applied to them has become an ironic twist of the law's lofty intentions.

Regulators are now pushing the banks to break down the cultural and behavioral barriers that separate minorities in today's inner cities.

Poor Grades Abound

Using CRA records between July 1990 and March 1993, the American Banker found that the 43 Asian banks in California are four times as likely to receive a poor CRA rating (defined as "needs to improve" or "substantial noncompliance") as all banks in the state.

Of the 42 poor CRA ratings given to banks in California during this period, 16, or 38%, were given to Asian-oriented banks. About 10% of all banks in California received poor ratings.

Asian banks are not alone. In recent months several Hispanic-controlled banks in California have been criticized for the same thing. And a study earlier this year by a Washington banking consultant found that 24% of all minority banks have poor CRA ratings, compared with 10% of all banks in the country. Asian banks fared the worst of all minority banks in the survey.

|Asian Image' Criticized

Nowhere has this conflict been played out as starkly as it has with California's Asian-controlled commercial banks. Dozens of Asian banks in California, where the bulk of such institutions reside, have been criticized under CRA for their "Asian image."

CRA examiners from the Office of the Comptroller of the Currency and the FDIC have repeatedly criticized some of California's best-performing financial institutions for their marketing efforts and their cultural ties, which, the agencies argue, focus on Asian groups to the exclusion of other underserved ethnic individuals, particularly African-Americans and Latinos.

And as the debate on the reform of CRA unfolds in Washington, Asian bankers are beginning to go public with their argument that Asian banking - its history and its role in society - is under attack from a majority that has always shunned it.

Yet, the spirit of CRA as it now stands - equal access to credit by all socioeconomic strata, regardless of race - appears at odds with the way these banks have conducted their affairs for decades.

CRA Seen as Asking Too Much

"There's a sense that Chinese-American banking is asked to do more than it should at its present stage of development," said Dunson Cheng, president of Cathay Bank, an $845 million-asset bank in Los Angeles.

"CRA is supposed to be color blind and ethnic blind," said Kenneth Thomas, a Miami consultant who has studies CRA compliance. "The record shows that minority banks discriminate, either overtly or subtly, against groups that aren't a member of that minority.

"I don't think we should provide exceptions for minority banks simply because they claim to be |special purpose' banks. In fact, they are banks that all too often just serve one race" Mr. Thomas said.

|Double Burden'

Asian bankers look at it differently.

"We have a double burden," said David Bow Woo, legal counsel to the National Association of Chinese-American Bankers, a tight-knit group of bankers in Southern California. "We have the burden of our mission to serve an underserved community and the burden of adhering to the regulations of the majority."

"I know that CRA is supposed to be color blind," said Irwin Wong, a senior vice president at Cathay Bank, which was founded 30 years ago by Chinese-Americans in Los Angeles. "But the regulators are using color as an issue. And Asian bankers feel that they are using color as a derogatory measuring stick."

In essence, Asian bankers feel they are being singled out because of their ethnic practice of helping their own - help that no majority bank is able or willing to provide.

Fast-Growing Communities

Asian banking in America began in San Francisco in 1937, with the founding of Bank of Canton. Asian banks mushroomed in the late '70s and early '80s around fast-growing immigrant communities in Los Angeles and San Francisco. Each was founded to meet a definable need: serving the fast-growing population of Asian immigrants in California, most of whom have little or no credit history.

Indeed, these banks are an integral part of a complex of business and community groups in places like Los Angeles' Korea-town and San Francisco's Chinatown that provides a key cultural and linguistic bond to newcomers from Asia.

"The theme of Chinese-American banks is one of self-help and community involvement," Mr. Cheng said. "Cathay Bank was doing its part in CRA, before CRA was even a concept."

A Job Well Done

And, by all accounts, these banks serve those needs exceptionally well and profitably. A review of CRA examinations f Asian-oriented banks in California showed that these banks bend over backward to serve their markets.

Even Asian banks that receive poor CRA ratings have been lauded for their board's close ties to Asian community groups and for shepherding recent, sometimes destitute immigrants into the financial infrastructure.

Hundreds of Chinese and Korean small businesses in San Francisco and Los Angeles, some of which operate in the most economically blighted areas of these cities, would not be there without these banks.

A prime example is General Bank. Founded in 1980 by a group of successful Taiwanese-American business people, General Bank carved out a niche dealing with recent immigrants, both wealthy and poor, from China and Taiwan.

Healthy ROA Maintained

In just 13 years, it has grown to almost $1 billion in assets and eight branches throughout Southern California. Despite the economic troubles of the region, General Bank maintains a healthy 1%-plus return on assets.

But the text of a 1991 FDIC examination lays out succinctly why banks like General Bank have been hammered for CRA performance.

First, and in language echoed in every other evaluation of a criticized Asian bank, the FDIC found that General Bank's ads excluded a large portion of the population in its service area - Latinos and African-Americans - in that it was written almost exclusively in Chinese and aired only in Asian media.

In its evaluation, the FDIC noted that almost total lack of loan denial records and other adverse action records of existing credits.

"Management advised that the bank only accepts credit applications, subsequent to a |pre-qualifying' interview, from those whom it feels will qualify for a loan," the examiner wrote in justifying General Bank's "needs to improve" rating. On a scale of one to four, with one being the best, "needs to improve" is a three.

The examiner called this practice "prescreening," and suggested that it might illegally discourage loan applicants.

Mr. Wu said General Bank earlier this year received a "satisfactory" rating from the FDIC for its new advertising campaign, which features Spanish-language ads, and its efforts to establish formal ties with other ethnic community groups. However Mr. Wu said, these efforts have yielded precious little results in terms of new business.

Other Minorities Stay Away

"We hired consultants; we increased our advertising," he said. "But through our normal course of banking we have not been very successful in getting other minorities to bank with us. We ended up buying loans from other minority institutions. The fact cannot be ignored that people like to bank with their own kind. We cannot grab them off the street."

To be sure, the majority of Asian banks in California do not ignore other ethnic groups. Several, according to CRA records, were praised for their meaningful programs to reach out to Hispanics and African-Americans.

Also, most of the criticized banks are trying to improve their CRA programs.

Cathay Bank's Mr. Wong said that after the FDIC gave the bank a "needs to improve" rating last last year, Cathay Bank increased its advertising to other minority groups and began looking for Hispanic and African-American loan officers.

But General Bank's case and the CRA evaluations of other criticized Asian banks illustrate how much of a cultural gulf must be crossed, and how difficult it can be for an Asian bank to upgrade its CRA rating.

In April 1991, United Citizens National Bank, after receiving a "substantial noncompliance" rating from the FDIC on its CRA exam, initiated a number of marketing efforts designed to make the bank more approachable to the Hispanic members of its Los Angeles community. In a subsequent CRA examination, the FDIC examiner said those efforts fell short, and gave United only a slightly better "needs to improve" rating.

"Management shows a willingness to follow the requirements of CRA," the examiner wrote of the $48 million-asset bank. "However, it has not been successful in getting non-Asian customers. A language barrier exists. Most signs in the community are in Korean. Officers and employees are more fluent in Korean than English and only one teller can speak Spanish."

Mr. Wong said the cultural barriers go beyond language, stretching into mannerisms and Eastern business behavior.

Off-Putting Behavior

"In Chinese culture it's not polite to look someone in the eye and smile at them when you don't know them well," he said. "Part of what we have to do to comply with CRA is practice Western ways of behavior."

Sumitomo Bank in San Francisco, a $5 billion-asset Japanese-controlled bank, launched perhaps the most aggressive program to cater to non-Asian minorities after a poor CRA rating in 1990. In its January 1992 evaluation, the FDIC said the loans geared toward low-income individuals in non-Asian communities enjoyed "the most aggressive product development effort at the bank in 199l."

But it was all for naught. The FDIC reiterated its "needs to improve" rating. in a 15-page report, an exhaustive length for CRA evaluations, the examiner seems almost to be holding a running debate with Sumitomo's management.

"The data suggests that the emphasized advertising to the Asian market reinforces that the bank is an Asian bank for Asian people."

The examiner went on about how management reacted to this assessment. "During the final discussion the point was made that it is impossible to coerce individuals to approach the bank for credit, and no advertising program can force the issue. The point that needs to be understood is that advertising is a very powerful tool and it may currently be the fuel that reinforces the Asian image, which has been prevalent and promoted for several decades."

CRA at Odds with Their Mission, Minority Banks Say

The Asian image the bank conveys is of regulatory concern.

A Federal Deposit Insurance Corp. examiner in January 1992 used this sentence to crystallize community reinvestment criticisms of Sumitomo Bank of California, a $5 billion-asset institution owned by Japanese interests in San Francisco.

For none of the white-controlled banks in California that received a similarly poor rating under the Community Reinvestment Act in the last three years did an FDIC examiner write: The WASP image the bank conveys is of regulatory concern.

Blame Instead of Praise

Instead of lauding and encouraging the ethnic diversity minority banks have brought to the banking industry, the CRA rules are in many cases condemning it, claiming that their very ethnicity is shutting out individuals with different ancestry and language.

But minority bankers in California, especially Asians, argue that their history and their needs are diametrically at odds with CRA as its written.

"The intention of CRA was to help disadvantaged people, including minorities," said Li Pei Wu, chairman of General Bank, which is one of many California Asian banks that have received substandard CRA evaluations. "But the way it's being applied to minority banks, it's hurting minorities."

Lobbying the Regulators

General Bank, which earlier this year received a "satisfactory" CRA rating after initiating a multilingual advertising campaign and initiating a dialogue with other minority groups, still can't seem to garner customers outside its core Taiwanese community, Mr. Wu said.

Mr. Wu, the National Association of Chinese-American Bankers and other minority banks in California are beginning to aggressively lobby the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. to tailor CRA reform to take their niche banks into account.

Mr. Wu's proposal is based on the assumption that a bank controlled by a certain minority is best able to serve individuals of that same minority.

First, Mr. Wu said, minority banks should be able to define their community along ethnic lines, instead of the current geographical requirement. Second, CRA should require a minority bank to allocate a specific percentage of it resources to promote low-and moderate-income credit relationships. And, third, the government should institute a formal program to encourage the formation of

more minority banks, each able to serve its own ethnic group.

Fear of Polarization

Some regulatory officials and industry observers think such an approach would be dangerous, in effect leading to the racialization of community banking.

"Someone could use such a rule to justify forming |The WASP Bank of Beverly Hills,'" said Federal Reserve Bank Governor Lawrence Lindsey when he heard Mr. Wu's proposal at a hearing in Los Angeles in September.

Most participants in the debate, however, agree that there is a need to take the circumstances of small and ethnic banks into account in CRA application.

"We aren't the only ones frustrated by the CRA laws," Mr. Wu said. "I'm not that optimistic for a change for minority banks unless bankers of all ethnic groups can let our feelings be known."

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