Analysis of loan data indicates weakness in your institution’s lending activity in low-to-moderate income (LMI) and minority-majority geographies – now what?
As do most things in life, the emphasis of regulatory compliance tends to move in cycles. This is no more true than in the arena of fair lending.
Redlining in a Focus
In the current environment, redlining has become a significant focus. There are a number of ways to evaluate redlining, and we will save that topic for another day. Here we address what to do when lending penetration in LMI and minority majority geographies is determined to be weak. This obviously raises both fair lending and CRA concerns. The question then becomes what to do about it.
Exams Require a Response
The first thing to understand is that if examiners have expressed concerns during an exam, a response will be expected from the institution. Second, depending on the level of deficiency, there may also be an expectation of measurable progress. In other words, effective methods to address any concerns should be designed to actually improve the institution’s performance in a way that can be quantified.
This is obviously straightforward in terms of the objective but can be more difficult than it may sound. It can also be a minefield without a well thought-out approach.
Keys to Bear in Mind
A fundamental component of any strategy is that improvement to penetration must be sustainable. Lending is measured typically in terms of what is done annually; thus, measurement is not cumulative. Therefore, any strategy on which an institution embarks must generate ongoing activity.
Another key is that the rule of unintentional consequences must be considered. The list of possibilities here are almost endless, and this is why a well thought-out approach is critical. Just as an example, often marketing efforts include special rates or terms and conditions. This can create other risks with regard to fair lending.
Having consulted with numerous institutions over the years in regard to such efforts, these are challenging and can be treacherous waters. Often institutions spend a great deal of money with no return and/or create unintended issues by not having a sound strategy.
In general, the approach should be to build a lasting market share in the critical communities and geographies. This requires a multi-faceted approach and a long term commitment.
One of the first things to consider before embarking on any program is product needs; that is, what products are the best fit for the target market. At this point it may be determined that new products are needed or that existing products should be modified as to be a better fit.
What a Sustainable Approach Entails
In many LMI and minority communities, there exists an underlying distrust of financial institutions, particular in those where economic conditions are very weak. This is evidenced in the FDIC National Survey of Unbanked and Underbanked Households. A sustainable approach, therefore, will require relationship building to overcome these physiological barriers.
A sustainable approach must also be a profit-driven strategy. Again, in our experience, too often institutions throw money at regulatory issues rather than approach it from a business standpoint. Serving the LMI and minority communities must be a priority and part and parcel of the institution’s overall strategies and corporate goals.
Lastly, a market-segmented approach is essential. In order to do this, an institution must understand the demographics and socio-economic composition of the areas. There are likely multiple segments, each of which should have its own individual strategy.
In terms of implementing marketing efforts, there are many different methods including digital strategies that can help reach the target audience. Again, an integrated, holistic approach is best and one that is centered around sustainability and a long term commitment.
How to cite this blog post (APA Style):
Premier Insights. (2017, November 7). Improving Lending Performance in LMI and Minority-Majority Geographies [Blog post]. Retrieved from https://www.premierinsights.com/blog/improving-lending-performance-in-lmi-and-minority-majority-geographies