The Challenge of Lending Disparities
NCNB Corp., among others, has released data under the Home Mortgage Disclosure Act showing disparities in lending patterns according to race and income.
In addition to pointing out the need for remedial action by the bank, the report ought to prompt some national soul-searching about the social and economic conditions that give rise to such patterns.
The NCNB data showed that blacks and Hispanics who applied for home mortgage loans were rejected at twice the rate of white applicants. According to bank records, 41% of loan applications received from blacks were denied, compared with a denial rate of 18% for white applicants. NCNB also said 37% of the loan applications by Hispanics were turned down.
NCNB, because of its pending merger with C&S/Sovran, was among the first to report these lending figures; the rest of the nation's 12,000 banks are expected to disclose their performance by the end of the year.
But most banking experts predict that the pattern at NCNB, based in Charlotte, N.C., will be typical in the industry.
Who Is to Blame?
The figures reveal a disturbing societal problem many of us thought might have disappeared over the past two decades.
They clearly point out the need for banks to do a better job of affirmatively providing credit in minority and low-income communities.
But the data also make clear that the fault does not lie with banks alone. Complex and far-reaching socioeconomic factors must also be addressed if we are going to remedy the situation.
The banking industry faces clear but challenging options.
First, it must examine its underwriting standards to ensure they are responsive to lifestyles and economic conditions in minority and low-income communities.
For instance, NCNB reported that a significant percentage of its loan denials were made because of an unsuitable employment history. This, roughly translated, means that the applicants changed jobs too often.
Banks need to recognize that in certain communities and at certain income levels, job history is not necessarily an accurate barometer of creditworthiness.
An even higher percentage of loans was denied because of poor or nonexistent credit history. Certainly, banks can't be expected to make loans to poor credit risks. But perhaps they can be more flexible.
If a young black family has trouble qualifying for a loan because of relatively minor credit problems the husband experienced in his youth, a loan officer should take the time to see if the problem can be resolved. Personal financial circumstances can change dramatically in seven years, the period bad credit stays on an individual's record.
(Many banks sell their real estate loans on the secondary market, and thus adopt underwriting criteria set by other parties, such as the Federal Housing Administration, Fannie Mae, and Freddie Mac. These, too, may need to make their underwriting more responsive to minority and low-income applicants.)
Secondly, banks need to focus some marketing on low-income and minority customers.
Finding the Customers
A key challenge to serving the Hispanic market is bilingual marketing and advertising.
The black community may be more effectively reached through community newspapers and real estate organizations than through mainstream media.
Finally, banks ought to train their lending officers to be more sensitive to the specific credit needs and unique characteristics of different ethnic groups.
The idea of the melting pot is a myth. In fact, this country is a mosaic of different ethnic groups and cultures. The sooner that banks - and all businesses - reflect this, the more productive and profitable they'll become.
What About Nonbanks?
A significant percentage of the deposits in this country - $1.4 trillion as of 1989 - is held by such nonbank financial giants as American Telephone and Telegraph, General Motors, and Sears, Roebuck and Co.
Yet these companies, which make billions of dollars in consumer loans every year, are exempt from the kind of public disclosure required of banks and thrifts. And they are exempt from the Community Reinvestment Act, which set guidelines for lending in low-income neighborhoods by banks and thrifts.
If these companies act like banks and do business like banks, they ought to be held to the same standard.
Financial institutions, however, can't solve the problem alone. In many ways, they are struggling with embedded patterns in our culture that are extremely difficult to change.
The median income of black and Hispanic families lags significantly behind that of white families. In California, according to 1989 state census figures, the median income for a black family was $27,500, compared with $39,000 for a white family; for Hispanics it was $24,100.
These disparities exist even among groups with similar backgrounds. Census figures from 1990, for example, show college-educated white men earning nearly a third a year more than college-educated black men.
These differences account for a lot in lending disparities.
Banks have a fiduciary responsibility to take prudent credit risks, so applicants with lower incomes will logically qualify for less credit - or none. Our challenge as a society is to end these income disparities.
The fact that a high percentage of NCNB's loans were denied because of poor credit histories raises a corollary issue: disparities in wealth.
Minorities have only about one-third the liquid assets of nonminorities - even at the same income level. That may help explain why credit histories are more problematic among minorities - they lack the liquid assets that can be used during the personal financial crises.
"It means that minorities have much less of a private safety net to fall back on during hard times," says Isabel Sawhill, an economist with the Urban Institute.
A Challenge to the Nation
Problematic credit histories also have more to do with the quality of education than with cultural characteristics. Study after study shows high school graduates ill-prepared to maintain basic personal finances - even to balance a checkbook.
A recent study by the Joint Center for Political and Economic Studies in Washington concluded that during the 1980s poverty was more widespread, severe, and long-lasting in the United States than in any other Western democracy.
It also found that though poverty increased during the past decade in most of the seven countries studied, the United States did the least to help its poor. Essentially, U.S. tax and transfer programs lifted no poor households out of poverty, according to the study, while programs in Britain, the Netherlands, and France pulled more than half of their poor households above the poverty line.
Banks must do more to reverse these trends, but banks are not a panacea. Our entire society must rise to the challenge.
Mr. Charles H. Grice is the founder of the San Francisco-based Community Reinvestment Institute.