Black-owned banks are in the unexpected position of being undercut on their own turf.

Executives at the country's 35 black-owned banks say regional banks are increasingly dumping huge sums of money in their neighborhoods at below- market rates-ironic considering that mainstream financial institutions have often been accused of ignoring these areas.

"A lot of the bigger banks are pricing loans in such a way that the small banks have difficulty in competing," said Emma Chappell, president and chief executive officer of United Bank of Philadelphia.

"We try to give our customer the type of personalized service that they need," she said. "I'd hate to think that the big banks are pricing ... in a way that we can no longer service our marketing niche."

But longtime observers of minority banking say the new competition is much needed and is forcing the mostly tiny minority institutions to establish deeper customer relationships.

Despite their ownership and their stated interest in helping low-income communities, many minority institutions have been slammed by regulators, academic studies, and media reports as having poor community reinvestment records. One new study suggests that black-owned banks may be harder than mainstream banks on black loan applicants. (See article below.)

Meanwhile, there has been a well-documented surge in mainstream banks' lending to low-income and minority communities.

The effects are most visible in home mortgages, which are up 47.5% for blacks and 22% in low- and moderate-income areas since 1993, according to a February speech by Comptroller of the Currency Eugene A. Ludwig. But growth has also occurred in small-business and consumer credits, bankers say. Even deposit competition has tightened.

"It is clear that there has been a huge increase in large regional banks' lending in low- and moderate-income minority neighborhoods," said Malcolm Bush, president of the Chicago-based Woodstock Institute. "Small banks need to figure out new niches and probably get more aggressive in that lending themselves."

The larger regionals are responding to changes in the past few years to the Community Reinvestment Act and fair-lending regulations. The 1977 CRA has been strengthened, causing bank regulators and the Justice Department to exercise more authority while community groups have turned up political pressure.

Recent changes in the CRA are also widening the spotlight from home mortgages to include small-business loans. This year, banks with more than $250 million of assets must begin reporting their small-business and farm loans by census tract, just as they have been doing for mortgages.

After years of considering low-income loans risky and unprofitable, bankers have realized that in fact they can make money-as well as good will-on the credits.

"When you begin to publicly keep score, people tend to make a greater effort," said Donald A. Mullane, executive vice president and director of corporate community development at Bank of America in San Francisco.

Of the $140 billion in community development loan commitments since 1977, 70% came in the last three years, Mr. Ludwig said in his speech.

Black-owned banks have found themselves vying more and more with mainstream banks for new business, and even struggling to retain their longtime customers.

"CRA forced the banks to come into areas that they wouldn't have gone into otherwise," said Venerable F. Booker, chairman and CEO of Portland, Ore.-based American State Bank. "They've come into your area and taken your customer away from you. They're making loans that are hard for us to compete with."

In Chicago, for example, Northern Trust Co., Harris Trust and Savings Bank, and First Chicago NBD have been actively pursuing minority business in the past two years, said Walter E. Grady, president and CEO of Seaway National Bank, the nation's largest black-owned bank.

In one case, Mr. Grady said, a regional bank representative visited a dry-cleaning customer of Seaway and offered a $50,000 loan during the visit.

"We do know they've made some penetration into the area," Mr. Grady said. "Most of the small businesses in our community have been contacted."

Richard H. Washington Sr., a sign-painting customer of American State in Oregon for about 30 years, reluctantly switched his mortgage loan to Bank of America recently after it offered to cut his interest rate to just 7%, from 16% at the minority bank. He said even though his income has declined, he still gets two or three offers a week from other banks.

Mr. Booker "can't afford to compete like that. I've built up a rapport with him where figures don't mean anything. I understand that, and that's the only reason I've stuck with him for so long," Mr. Washington said. "But when I drop from 16% to 7%, I don't care if it's my grandmother, I have to do that."

Besides the lower rates that minority banks struggle to compete with, Mr. Grady said the larger banks also use massive advertising campaigns and larger staffs to reap an advantage.

"We probably could offer the same product at a similar price, but the public would definitely pick up on their product or service and assume that we don't offer it because they haven't seen it," he said.

In Memphis, National Bank of Commerce was advertising about a year ago that it wanted to be the "bank of choice" for blacks. The $3 billion-asset bank promoted a low introductory credit card rate in the city, which is 55% black, said Jesse H. Turner Jr., chairman and CEO of Tri-State Bank of Memphis.

Black-owned banks and their mainstream counterparts agree that the communities are benefiting from the extra lending. And minority bankers stress that they're ecstatic that larger banks are pitching in.

Even so, the aggressive lending "presents a dilemma for our banks," Mr. Turner said.

"You're dealing with the fundamentals of the cost of doing the business that we do," Bank of America's Mr. Mullane said. "The major institutions ... have scale economies that small banks don't have. The result is it's more difficult for them to be competitive."

Some black bankers would prefer that the regionals did more of their lending through participations with the minority banks. The larger institutions could even sell some of their other loans to the smaller minority banks to help them diversify their portfolios and balance credit risk.

"As long as it helps the community, we're not against it," said Louis Prezeau, president and CEO of City National Bank of New Jersey, Newark. But "we feel that these banks ... should be encouraged to do it through us.

"The way they're doing it now, it's hurting us."

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