Lenders who do CRA homework could gain an edge in marketing.

Fair lending and community reinvestment have become a long and winding road for much of the banking industry, and a tortured path for many lenders.

Despite its best efforts to strike a balance between community reinvestment and safety and soundness, the industry has lost the battle against credit allocation. Moreover, it has suffered severe penalties for discriminatory lending patterns and practices, and exhausted much of its political good will.

Nevertheless, lenders now have opportunities to dramatically improve their business processes within the more rigorous regulatory environment. By adopting new technological tools and taking a fresh look at the way they serve their communities, lenders can develop more effective marketing strategies, increase small-business lending and regain their once favorable position with their customers and communities. Credit Allocation Is Here There is no longer a debate about whether credit allocation is a good idea, or whether it is appropriate for the government to dictate. It exists. It is dressed up and paraded around with fancy titles like market share analysis, the lending test, geographic distribution,. demographic distribution, economic distribution, and loan-to-deposit ratios.

The Community Reinvestment Act has become what its legislative history said it would not be - credit allocation, pure and simple.

The CRA battle was lost for several reasons: credit allocation became the quid pro quo price tag for the 1987, 1989, and 1991 bills to bail out the savings and loans and beef up the Federal Deposit Insurance Corp.; the industry never could win the battle of what was called "lies, damned lies, and statistics," regarding Home Mortgage Disclosure Act data and the fair-lending tests; and the banking industry was overtaken by the accelerating pace of the changes during the "re-regulatory" cycle that began in 1987.

Public Utility Concept

Beginning in the fall of 1992, the final pieces of the fair-lending drama fell into place. In September of that year, Decatur Federal Savings and Loan, a metropolitan Atlanta thrift, entered into a roughly $1 million settlement with the Justice Department on fair-lending claims.

Later that fall, Bill Clinton won the 1992 presidential election. Arriving on the scene with a clear agenda, but not enough public money to spend, the new administration chose activists who clearly believe in the public utility concept of banking regulation, including credit allocation.

With the encouragement of the activist chairs of the House and Senate Banking Committees, numerous fair lending initiatives have been launched in the last two years by Congress and federal enforcement agencies.

Spillover Effect

Moreover, there has been an amazing spillover of these initiatives into the federal banking agencies. Formerly accused of inactivity in the fair-lending and community investment areas, the regulators have become hyperkinetic as they expanded examination staff, initiated testing, made a number of referrals to the Justice Department, and took additional steps to detect possible fair-lending violations.

Not surprisingly, public enforcement activities increased, with highly publicized prosecutions of Shawmut National Corp., First National Bank of Vicksburg, Miss., and Blackpipe Bank of South Dakota.

At the same time, private litigation also has flourished, with plaintiffs winning a number of multimillion-dollar private fairlending actions.

Nothing Is Too Trivial

In the new regulatory environment, no bank is too small to be a target of enforcement actions and no loan is too small or insignificant for scrutiny. Enforcement initiatives are not limited to real estate loans, but extend to unsecured credit, commercial credit, and transactions secured by personal property as well.

Moreover, private litigation also is focusing on multifamily and commercial lending activity and does not require a pattern or practice - a single act of discrimination will do.

The new activist agenda is clearly to make new law, which is in sharp contrast to the desire of the traditional banking agencies to interpret existing law.

Old rules and old procedures, stressing adherence to policies and procedures that were neutral as to prohibited bases, have been replaced by statistics and formulas. In some respects, the brave new world of statistical compliance assumes that lending is a. mechanical science, not an art, and that by strict adherence to the formulas and the numbers, we can achieve a more perfect world.

New Set of Tools

Financial institutions must now develop data bases and use sufficient technological tools to analyze data. As the fair-lending enforcement initiatives continue, and as CRA reform progresses, lenders will have to tread new ground. They must be able to:

* Geocode and map loans, applications, deposits, and other products and services in order to track and compare geographic distribution.

* Gather and test HMDA data for accuracy before reporting to agencies.

* Collect and analyze additional consumer and small-business data to determine their contribution to the community.

* Generate regular and continuous reports on lending and deposit account activity in order to monitor performance and trends.

* Produce at any time the 33 HMDA reports currently generated once a year by the government to more quickly develop proactive solutions to lending problems.

* Identify loan applications on which to perform second reviews to ensure that underwriting decisions are consistent with policy or identify applicants eligible for alternate programs.

* Perform statistical analyses on loan portfolios of the type now performed by the government.

* Maintain statistical information to demonstrate to regulators and the public the lender's performance and proactive activities.

* Identify new markets and underserved areas in order to develop outreach efforts.

* Collect and analyze demographic, consumer, and small business data to analyze needs and opportunities within communities.

Role for Technology

Meeting these needs will require lenders to use technology to dramatically change their business processes. Success at fair lending and CRA will occur only to the extent that people within financial institutions, such as those responsible for compliance, marketing, and lending, are able to work together on this problem.

To avoid discriminatory lending penalties and gain a competitive edge in the market place, each of these departments must contribute their piece of the data base required to measure and track lending, deposit, and community reinvestment activities. The information can then be charted and mapped to point the direction toward more safe and prosperous business practices.

With common access to accurate and timely data, loan officers will have the statistical knowledge they need to make better credit risk decisions.

Compliance officers will be able to establish programs of continual self-testing and correct business processes before they become fair-lending problems.

And marketing professionals will be able to dissect and analyze their existing and potential customer base to more effectively develop and distribute products. At that point, lenders may come to realize that the long and winding road of fair lending has become the yellow brick road of opportunity.

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