This article, excerpted from a talk, originally appeared in Community Investments, a publication of the Federal Reserve Bank of San Francisco.

Lending in the inner city takes desire, commitment, focus, resources, and an affirmative lending program, which is designed around the diversity in the customs of the cultures you will serve. Believe me, this is much more than merely having a "fair lending policy."

Just having a desire to lend to a diverse group will accomplish nothing. When the new American Savings Bank was formed in 1989, we had plenty of desire and a board of directors that was committed to fair lending, or more correctly put, lending to minorities. We learned over a few months that having the desire and preaching the word got very little results.

The first step to our future success was the establishment of a Community Outreach department staffed entirely with outreach coordinators representing the minorities we hoped to serve. Their first job was to assess the needs of the various communities...

Even after doing that, we noticed that we were still not significantly increasing our volume of loans to minorities.

We tried all kinds of things, including paying higher commissions to loan agents in certain areas.

The obvious problem wasn't as clear as it should have been. We were asking our agents to call on territories that overlapped the inner city, but were not exclusively in the inner city. Needless to say, most of the business from these agents came from outside the perimeter.

So we applied for permission to open two inner city branches, one in East Los Angeles and one in South Central Los Angeles. These two communities had experienced an exodus of financial institutions and no new institutions in over 10 years.

We hired loan agents who were familiar with the areas and the cultures we were about to serve. We then discovered the second impediment to successful lending in these areas. Most of our underwriters had been trained in underwriting loans to Fannie or Freddie standards. Guess what? Most loans were being denied.

We didn't get a handle on the problem until we created a special underwriting unit that would be responsible for figuring out what we had to do to make good loans to people who don't come close to filling the mold we are accustomed to using.

Everything had to be looked at in a different way. Credit. Some had none. Some had poor credit with vendors but not bad credit with respect to their rent or former mortgage payments.

Source of down payment was a problem. Oftentimes cash could be mattress money -- it could come from a foreign country, or it could be the sum of several families going together to buy a home, or some combination of the above. Many have no banking relationship of any kind.

Source of income was another problem. There could be several incomes of several families. Some of it could be cash income with no W-2 to back it up. Reasonableness becomes a determining factor.

Payment ratios were another stumbling block. For this group, it's not uncommon to have higher ratios than secondary market standards, including the more recently relaxed standards for this market.

We had to take into consideration how these groups spent their money, and not how [other] Americans spent theirs.

Opening a facility in the central city is, in my opinion, extremely important not only because you become more convenient to the customers you hope to serve, but because it puts you closer to the neighborhoods in which you will be making an investment.

To be successful will require staffing your facilities with personnel who can speak the language of the customer base.

Are we taking unusual risks? Of course we are, but portfolio lenders are risk takers and as I indicated before, successful ones are those who know how to measure and control these risks.

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