Most community banks have some type of program or programs in which they attempt to cater to the more affluent market. Since the number of people fitting this category is somewhat limited, many banks have instituted or are attempting to institute efforts to gain market share among this segment of potential bank customers.
These efforts include both loan and deposit products as well as a litany of different perks to attract high-income and wealthy individuals who are deemed as highly profitable to the institution.
Looking At The Why
The sluggish economy of the last decade combined with extremely low rates has placed downward pressure on bank earnings, especially for community banks. Consequently, the competition for market share among this segment is considerable.
Programs or efforts designed to attract this business however raises (2) specters of regulatory risk. The first is related to the Community Reinvestment Act (CRA) and the second fair lending risk. The degree of risk associated with these varies based on the level of effort and how much a focus it is for the institution relative to its other activities.
Commercial banks are required under the Community Reinvestment Act (CRA) to serve all segments of the communities in which they operate. This includes making loans to areas and individuals of all income levels, and particularly low and moderate-income communities and persons. Even though there are no firm thresholds in terms of volume, a bank’s activity must be adequate to pass its periodic CRA examinations.
Unlike other fair lending regulations, the CRA focuses on income levels of areas and persons rather than protected class status such as race, gender, or ethnicity. If an institution places a great deal of emphasis on high-income customers, and is successful at gaining market share but does not engage in practices that generate lending activity among low and moderate-income segments, CRA performance will suffer over time.
What About Discrimination?
Policies also play a role here in that if underwriting standards are designed with wealthy individuals in mind, this can have an adverse effect. These tend to be cumulative; and when market share deteriorates in low-mod communities, it can be difficult to gain back.
With respect to fair lending, the regulatory and enforcement agencies generally recognize (3) forms of discrimination:
- Overt Discrimination
- Disparate Treatment
- Disparate Impact
The one applicable here is (3) disparate impact. Disparate impact refers to an otherwise neutral and consistently applied policy that results in an adverse effect on a protected class. In cases where an adverse impact occurs due to a consistently applied policy or practice that is on its face non-discriminatory, an institution may be required to demonstrate business-necessity.
This remains a gray area with no hard and fast rules about what “business necessity” really means. The lack of objectivity in this regard, therefore, serves to magnify the danger because it is difficult to quantify and measure the actual risk.
The level of risk created again is commensurate with the level of emphasis that the institution places on these efforts. This includes what concessions and special treatments are employed to attract business. The obvious are loan pricing underwriting standards, but they can be wide ranging.
In community banking, marketing to the affluent customer tends to be focused on longevity. Accordingly, the initial transaction may not be any more beneficial for the bank than any other transaction, but the hope is to engender loyalty and a long-term business relationship that will pay dividends over time.
As an example, many banks have special loan programs for new physicians and attorneys that have been recently licensed. Although this is rational and seems to be a reasonable strategy, there is typically no real quantification or tracking that could be used to justify the approach. Hence, it all remains highly speculative with little justification tied directly to the individual transactions.
Although such programs are talked about a great deal in the compliance space as harboring significant regulatory risk, there is little guidance concerning it. It is also somewhat hazy as to how much attention these types of programs actually receive in a CRA/Fair Lending Compliance Examination. Commercial banks in particular, however, should give thought as to how such practices may impact their CRA performance in the long run as well the disparate impact implications.
How to cite this blog post (APA Style):
Premier Insights. (2017, October 24). Targeting the Affluent Banking Customer and Managing Fair Lending Risk [Blog post]. Retrieved from https://www.premierinsights.com/blog/targeting-the-affluent-banking-customer-and-managing-fair-lending-risk