Lenders start to place more emphasis on inclusion
More than five decades ago, the U.S. government began to overturn policies that made it more difficult for people of color to borrow money to buy homes, fund businesses and make other life improvements that would grow their wealth. Accessing loans remains more challenging for these borrowers, but much-needed measures addressing diversity, equity and inclusion (DEI) are finally gaining traction in the lending industry.
Steve O’Connor, senior vice president of affordable housing initiatives for the Mortgage Bankers Association (MBA), says lenders are more focused on the disparities in their loan portfolios and their need to make a significant change. Part of that need is just to keep up with a changing market — nearly 45 percent of millennials, a generation of 75 million U.S. consumers, are from racial minorities, according to the Brookings Institution.
“This is a tidal wave reshaping our country,” O’Connor says. “We [lenders] need to better mirror the market through transactions, underwriters, the board, the executive team, everything.” For the past four years, the MBA has been awarding lender-members that have made an effort to embrace more inclusive policies or strategies.
Julie Thurlow, president and CEO of Reading Cooperative Bank, based in Reading, Mass., says her bank is actively reaching out to bilingual customers by adding branch staff and marketing signage in Spanish. The bank has also altered mobile, online and ATM cues and options to accommodate these customers.
The bank, with $600 million in assets, is planning to break ground on its ninth branch late this year in the city of Lawrence, a heavily Spanish-speaking area where she says staff noticed that all the Main Street businesses currently post signage in Spanish — except for the banks.
“This is a community with plenty of good customers,” she says. But they may not have previously had a strong connection with financial institutions because lenders typically don’t offer complex loan forms in their native language, and were not willing to take risks with potentially non-conforming or first-time borrowers.
National and super-regional lenders often have an even worse track record when it comes to diversity in their loan portfolios, according to recent statistics. But several big banks are making big moves to address lending inequity. For example, MUFG Union Bank, which has $135 billion in assets and more than 370 branches, announced in June that it was launching a major initiative aimed at addressing social and racial injustices. This will include a $5 million loan and accelerator program for minority-owned small businesses.
“Union Bank has a long history of leveling the playing field to provide access to capital to diverse business enterprises,” says Frank Robinson, managing director for diverse markets and community-based programs at Union Bank.
He adds that the bank also began offering a business diversity loan to SMBs. “Banks need to build trust with diverse communities by raising awareness and providing more resources and tools on all the loan products available to potential homebuyers, and by offering more down payment assistance programs.”
Beyond social pressures and the changing makeup of borrowers, lenders are also finding that the ongoing effects of the COVID-19 pandemic are forcing them to rethink their entire loan process, which until recently relied heavily on in-person engagement, according to Rohit Arora, CEO and co-founder of Biz2Credit, a digital small-business lender.
“As banks digitize more of their lending operations, they’ll see there was a certain bias built in when everything is manual,” he contends.
In order to turn the tide on decades of systemic disparity, bank lenders may need to reconsider not only how they approach and review potential borrowers, but how they adjust their own internal processes, says Joel Pruis, senior director for Cornerstone Advisors.
“There needs to be more awareness of these markets,” says Pruis. “Most loan officers are not intentionally avoiding lending [to minority customers]—they’re just not getting the prompting to get into those markets. They’ve got to figure out how to do that.”
Working with partners from the community can go a long way toward rebuilding customer trust, which is often lacking among groups who were disproportionately affected by the 2008 financial crash and the legacy of redlining in mortgage lending, O’Connor notes.
Industry experts and research agree that even today, Black and Latinx borrowers face significant financial barriers.
Reporters in Chicago with the civic media organization City Bureau and NPR affiliate WBEZ researched mortgage trends in Chicago from 2012 to 2019. They found that more than 68 percent of the dollars loaned for housing purchases went to predominantly white neighborhoods, compared with 8 percent to Black neighborhoods and nearly 9 percent to Latinx neighborhoods over the same period.
That means that for every $1 recently loaned in white areas, only 12 cents was loaned in Black areas and 13 cents in Latinx areas, even though there are similar numbers of majority-white, Black, and Latinx neighborhoods in the Windy City. The reporting found that gap was even more pronounced for the city’s largest bank lenders, who pumped 20 to 40 times more mortgage dollars into majority white areas.
“That history of redlining, which went on for decades, is still having a relatively recent effect,” says Andrew Fan, summer reporting fellowship lead for the City Bureau during the research. As O’Connor points out, “It’s a long legacy of challenges to overcome. This [gap] has been structurally built and perpetuated for decades. We need to break it down.”
Karen Epper Hoffman has been writing about banking and technology issues for nearly a quarter of a century for publications including Bloomberg Businessweek, Financial Times’ The Banker and others.