Americans of color, particularly Black Americans, face significant, interconnected barriers that have led to persistent financial and economic inequality and unacceptable outcomes across quality of life indicators, particularly regarding health care, education and wealth accumulation. While economic exclusion is a persistent problem for all marginalized communities, this document focuses primarily on the Black community. The Federal Reserve’s most recent statistics show that Blacks experience adverse credit outcomes across all income levels, with Black adults with incomes over $40,000 a year more than twice as likely as Whites to have credit applications denied. Nearly one in five Black adults making over $100,000 a year reports being denied credit, more than twice the rate of White adults. And the rate of Black adults who are unbanked is more than double the rate of adults overall. 1
The banking sector is the primary source of financial intermediation, providing credit and channeling savings into productive use. There is, undoubtedly, a complex historical element to acknowledge, from the use of Black American slaves as collateral2 to the establishment of “plantation banks” that leveraged plantation and slave asset values as the basis for the expansion of bank operations.3 In slavery’s aftermath, the mainstream banking system remained largely closed to Black Americans, and so large-scale benefits of financial inclusion were denied to the community as a whole. 4
Even deep into the 20th century, there was little economic advancement and financial inclusion for most Black Americans. 5 This disparity persists to the modern day, driven by the shortcomings of past policy, neglect and intentional exclusion. 6 The Social Security Act initially excluded domestic and farm workers, who were disproportionately Black, at the time of its passage, 7 and the federal government’s Home Owners’ Loan Corporation’s8 red-lined community maps led to private-sector financial exclusion of Black communities for decades and ensured that economic growth tied to homeownership was elusive for Black Americans. 9 These disparities persisted despite the passage of federal legislation in the latter part of the 20thcentury, such as the Equal Credit Opportunity Act, the Fair Housing Act and the Community Reinvestment Act. Into the early 2000s, Black borrowers paid more for subprime loans than their White counterparts, even controlling for credit profile.10 Even in recent times, there has been a growing gap between White and Black homeownership rates, in part tied to higher unemployment and longer duration of unemployment experienced by Black workers. 11 Today, the Black unemployment rate is nearly double that of the White unemployment rate. 12 With the recent public debate about systemic racism and the reality of Blacks’ position in modern American society, many are exploring what can be done to improve conditions in Black communities. As a part of these discussions, it makes sense to explore how to prioritize economic inclusion. 13
Banks must be a part of the solution if there is to be meaningful change in improving outcomes for Black Americans. Many banks have worked to develop and implement strategies that seek to address racial equity concerns within their organizations and in their communities for many years, but the events of 2020–the disproportionate impact of the pandemic on Black communities and the global response to the murder of George Floyd–have spurred fresh thinking, engagement and action. These strategies have involved deep internal and external stakeholder engagement coupled with significant investments and innovative strategies. These areas of focus include increased small business lending, increased affordable housing lending or development financing and exploring methods to significantly increase omnichannel access to banking services.
After consultation with our member banks, BPI has catalogued below a number of best practices that banks may consider to help reduce economic difficulties facing Black Americans and advance the cause of equality. BPI banks are already pursuing many of these innovative strategies, and we hope that profiling these approaches will give all banks the opportunity to consider which practices are most appropriate to their engagement strategy.
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Diversity, Inclusion, Philanthropy and Partnerships
Banks are working to promote progress in their own organizations and externally as well. These efforts have manifested themselves in disparate strategies as banks are selecting tactics that are best suited to their resources and the needs of their communities. Internally, BPI banks have been optimizing their diversity, equity and inclusion practices and programming. Externally, banks are looking at ways to immediately expand their philanthropic activities and boost their partnerships with other entities in ways that will benefit impacted communities and maximize the desired effects.
BPI member banks have been working with their teams to identify concrete next steps to ensure that their diversity, equity and inclusion efforts are meaningful and impactful. They have been engaging with employee resource groups, performing personnel check-ins, holding diversity dialogues around racial injustice and observing Juneteenth. Some firms have held “How to Be an Active Ally” discussions, while others have tied senior executive pay to diversity data improvements. Some programs have been underway for several years, but there is increased recognition that to move the needle on these seemingly intractable issues, new approaches and greater resources will be needed. BPI banks are aware that their racial equity strategy to recruit, retain and advance Black talent will make significant contributions to the broader cause of racial justice. They are also mindful that much more work needs to be done to ensure that diverse representation exists at the highest levels of the firm and that more accountability is needed to ensure that meaningful gains occur. BPI CEOs are also aware that leadership matters, and the tone for this set of issues must be set at the top to ensure proper resourcing and execution, particularly given the cross-functional nature of the work.
With regard to external engagement, BPI banks know that their philanthropy, partnerships and procurement actions should be driven by consultation with a diverse internal set of stakeholders with an eye towards constantly assessing the positive impact on the communities they serve. This year has been an inflection point, and banks are working to ensure that planned programming is executed quickly to speed resources to areas of great need and are doing the work of long-term strategic planning with these issues at the forefront of executives’ minds as resource allocation and work plans are determined. This has resulted in tactical pivots to speed up the delivery of resources as well as expanded consultations as organizations do the important work of refining the opportunity sets for engagement to ensure that they are meeting areas of highest need. This has meant reinvigorating existing partnerships, seeking out new partners and exploring new areas of focus.
Best Practice 1: Continue listening to diverse voices on your team. Firms should continue to focus on elevating diverse voices on their teams and providing resources necessary to resolve latent concerns throughout the organization. This work is well underway at most BPI banks, while for some, this is a new effort. Most firms are ramping up engagements between firm leadership and their employee resource groups and holding internal town halls across business units in order to identify action items.
Best Practice 2: Ensure that D+I personnel report to the C-suite, CEO. Banks could consider elevating the function of Diversity and Inclusion at the firm ensuring that top diversity and inclusion officers serve at a senior level and report directly to the CEO or to the top of the house. 14
Best Practice 3: Establish and invest in a cross-functional task force that will focus on executing needed changes that are identified by diverse personnel after robust consultation. Banks should consider establishing a permanent task force responsible for shepherding internal change addressing issues relevant to promoting diversity, equity and inclusion at the firm, from ideation to fruition. This task force should include personnel across business units and functions and should be properly resourced with requisite and continual access to the CEO or a designee, such as the D+I officer or a senior executive who reports directly to the CEO. This task force should be directed to leverage quantitative and qualitative approaches to improving the internal environment for underrepresented minorities. BPI banks that have pursued this tactic have leveraged existing metrics to observe trends and created dashboards for executive teams to identify areas for action using the metrics. This task force could also be responsible for working with other personnel at the firm to identify targeted external actions or philanthropic initiatives in addition to the work it is doing to execute internal change.
Best Practice 4: Publish diversity, equity and inclusion data. Define the metrics that matter related to the diversity of the bank workforce, equity in the relevant work outcomes for similarly situated personnel and the fostering of an inclusive workplace that welcomes and retains diverse talent. Firms should devote resources to tracking these data over time and publish the progress (or regress) for review by all stakeholders. This will help hold the bank accountable to the mission while also building credibility with external stakeholders. If the data do not improve meaningfully over a specifically articulated timeline, hold senior management accountable by, for example, tying executive pay to improved outcomes.
Best Practice 5: Establish robust policies focused on retention and promotion and invest in the pipeline. Tactics pursued by BPI banks include establishing or expanding mentoring programs, improving internal job opportunity communications, including flagging new opportunities for Black staff and creating a continual dialogue between Black employees and senior management, and establishing or expanding minority leadership development programs. Additionally, banks must work to ensure that the diversity of the applicant talent pool is deep and consider multiple diverse candidates for open roles, especially at the senior management or board level. Every open position should be filled after the consideration of a slate of candidates that should include minorities, especially underrepresented minorities in banking like Black Americans. Going further, banks should endow scholarships for finance, legal, computer science and engineering students and tie those to internships; tie the internships to permanent positions. They can achieve some of this by deepening their relationships with Historically Black Colleges and Universities (HBCUs). Additionally, they could identify high schools and junior high schools to “adopt” to execute programming related to banking to boost relationships and awareness.
Only intentionality can turn the pipeline into a truly diverse, equitable and inclusive workforce. Make it a priority to hire Black people and do it. Make them feel valued when they arrive and work to promote them and invest in their development. Make sure that your firm is not tolerating disparate outcomes for personnel of the same or substantially similar experience or skill.
The pandemic and renewed focus on improving outcomes for Black Americans has created an important moment for philanthropy, with a surge in contributions. This could be an inflection point for a tailored delivery and injection of grants to diverse efforts, addressing pockets of need across the United States. To optimize this opportunity, banks should ensure that planning, communication and execution of philanthropic strategies are seamless and involve the whole organization, leveraging efforts across banking units as well as philanthropic operations.
Best Practice 6: Ensure that philanthropy works closely with business units, particularly those committed to community development and external outreach. To optimize delivery of funds for recipients, a “whole of organization” approach is necessary to leverage existing efforts across the bank. Senior management should ensure that this cross-functional collaboration occurs continuously. Absent senior leadership, bank units and the philanthropic arm can operate in silos which will hamper the scale of the impact that the bank could be having in its local and national footprints.
Best Practice 7: Empower bank personnel to assist in selection of philanthropic giving and spur personal involvement by matching your team members’ generosity, tying efforts to workplace giving initiatives. Banks are listening to their employees’ recommendations about new potential recipients of grant funding, with new types of organizations and new leaders emerging as potent partners for change. Some banks have chosen to match their employees’ personal giving to causes of their choice, which can serve as a powerful incentive for personnel to develop a more outward-facing and charitable orientation.
Best Practice 8: Remove barriers to quick deployment of grant funds during the pandemic and broaden the permissible uses of funds. Several BPI banks are reassessing their grantmaking schedules and procedures to streamline the process and expedite payments to meet the massive social demands called for by the pandemic and the racial justice moment. Banks should also permit grantees to leverage the funding in more diverse ways, including for administrative expenses, given the significant revenue declines currently facing organizations.
Best Practice 9: As an industry, consider a massive joint investment in a particular sector or a fund. One possible model is the National Basketball Association team owners who have pledged to invest $300 million into a fund that addresses racial injustice. 15 (Since this would represent a collective industry action with potential market implications, banks should confer with legal counsel and potentially with relevant antitrust advisers to ensure that such a structure would comport with current law and regulation.) Joining forces would allow for larger-scale investments to be a powerful indication that the banking industry is committed to addressing pervasive inequality.
Best Practice 10: Bank foundations should explore partnerships with each other as well as with philanthropic operations in other sectors to scale up grants for diverse purposes even beyond banking. Banks could work with other corporations to help fill funding gaps for organizations with diverse missions, like education and healthcare. Several banks are already executing on this model with great success, partnering with foundations across their local geographic footprint to address racial and economic inequality. This combination of resources could leverage differing capabilities and areas of expertise and magnify the impact of the grant funding.
Best Practice 11: Never consider philanthropy a substitute for refining business practices to better serve overlooked communities or for emphasizing diversity and inclusion across the organization and its business processes. Firms should not be satisfied to give money to Black causes, as important as that giving can be. For significant economic change to occur, banks as lenders and employers need to do much more, as those dollars dwarf any philanthropic commitment.
Meaningful Partnerships that Scale
As the work of racial equity continues, banks have a diverse set of organizations to consider supporting. To maximize their engagement, banks should consider their desired spheres of influence, goals and resources as well as their customers, employees, shareholders and potential partners’ values and goals. After identifying partners engaged in work that aligns with their vision, banks should explore how to align national and local delivery of these services.
Best Practice 12: Focus on strategic partnerships with long-term impact and a scale appropriate to goals and reach. The most effective strategies for change require coordination at both the local and national level. Banks can partner with any number of entities and do great work with local organizations making an impact in their geographic footprints, but in addition should consider ways to optimize positive outcomes in Black communities by pursuing partnerships that have a local presence and a national reach. These organizations can help to build broader coalitions and are well-positioned to help banks refine their learnings, which can inform service delivery and improve outcomes.
Best Practice 13: Devise metrics to track partnerships, monitor goals and execution. “If you can’t measure it, you can’t improve it.” Banks should closely monitor relevant metrics specific to their philanthropic engagements and partnerships to hold themselves and their partners accountable to specified goals and to address any areas that need improvement. Metrics would be specific to the engagement (e.g., loans disbursed to underserved borrowers, jobs created, houses built, lives saved, students educated).
Calibrating Banking Business Models to Expand Product Offerings and Drive Change
Best Practice 14: Work with regulators to keep customers in the banking system. Current banking agency guidance requires that banks charge off unpaid overdraft fees within 60 days of being incurred. 16 Often, in meeting this requirement, banks are forced to close the account. Beyond this, the charge-off is generally reported to a specialized reporting agency that impairs the customer’s ability to open transaction accounts at other banks. This unnecessary result can and should be avoided to ensure that banks are not driving customers away from formal banking relationships but rather promoting deeper and safer engagements with the banking system. Banks should work with regulators to assess and deploy options for addressing this harm, by for example establishing special accounts that could help the customer address the shortfall responsibly without being involuntarily removed from the system entirely.
Best Practice 15: Expand small-dollar lending products as safer, more consumer-friendly alternatives to non-bank payday products. Too large a portion of American consumers face financial fragility; 65 percent of American households face hardship with a decrease in income and an expenditure spike. 17 As noted, Black Americans are especially vulnerable to an income shock. BPI banks should consider offering small-dollar loan and card products with consumer-friendly features that are also affordable and transparent. These products would serve as a viable alternative to payday loans while concurrently serving the borrowers’ needs and helping them boost their credit profile. BPI recently secured CFPB approval for a Small Dollar Loan No-Action Letter template that banks should leverage to fashion their own iteration of small-dollar loan products. 18 BPI small-dollar lending research has demonstrated that these products could be highly useful in helping households deal with unexpected expenses. 19 These products, in conjunction with low-fee transaction accounts, could deepen banking system interactions by the unbanked and underbanked.
Best Practice 16: Consider offering low-fee transaction accounts with features that are attractive to unbanked and underbanked consumers.According to the FDIC, 17 percent of Black households are unbanked, meaning they do not have access to a bank account. The same FDIC study noted a correlation between being unbanked and turning to “alternative financial services.”20 Many BPI member banks have designed and offered low-fee or no-fee transaction accounts with features that are attractive to unbanked or underbanked consumers, and this could be a viable option to help more Black households engage with the banking system to develop deeper customer relationships and to access more affordable and consumer-friendly financial products than those available in the non-bank marketplace. 21
One option for banks to attract underbanked and unbanked consumers is the Bank On program, which centers on low-cost deposit accounts and appears to be achieving major success in reaching its target population. Bank On certified accounts disproportionately associate with areas that are predominantly minority-populated, according to St. Louis Fed data analyzed by BPI – nearly 60 percent of accounts opened in 2017 were in ZIP codes that are more than 50 percent minority-populated. Likewise, Bank On accounts are disproportionately in areas that are predominantly low- or moderate-income.
CDFIs, MDIs, NMTC, LIHTC and CRA
BPI member banks are actively engaged in supporting the work of expanded community development finance across the United States. BPI members’ efforts have boosted mission-driven lending that is transforming households and small firms while investing in neighborhood renewal and refurbishment across the United States. The difficulties presented by the COVID-19 virus have made worse already perilous conditions in many communities and left households, small businesses and entities of all kinds reeling. Banks are continuing to take these developments into account as they execute previous plans of action, renew their commitments and explore ways to expand their activities in this space.
CDFI and MDI Opportunities
Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs) are excellent delivery systems for financial resources in underserved communities. CDFIs are mission-driven organizations that provide a high-touch customer experience as well as culturally appropriate marketing and customer service. MDIs are depository institutions that are majority-owned by minority individuals. They help customers who may not engage with larger depository institutions or who do not feel valued by “mainstream” financial institutions. Most of the Black-owned MDIs are also certified CDFIs and their community development missions are built into their DNA, predating the creation of the U.S. Treasury’s CDFI Fund, which was established in 1994 to certify CDFIs and support them with resources. The CDFI Fund has been historically underfunded relative to the demand in the marketplace. In short, CDFIs and MDIs often serve as a bridge for customers as they improve their financial health en route to deeper engagement with the broader financial system.
These institutions play a critical role, but due to the chronic economic challenges faced by their customers and their stakeholders in general, these institutions could benefit from increased support. Black-owned MDIs have experienced challenges in recent years; declines in the past decade have left only 20 of these MDIs that primarily serve Black American customer bases. 22 Unfortunately the need for their services has not declined, as Black Americans remain far more likely to be underbanked compared to their White counterparts. Fifty percent of Black American households are unbanked or underbanked. 23
CDFIs are an especially important delivery mechanism of capital to Black-owned small businesses that have been decimated during the pandemic; reports indicate that nearly half of the United States’ Black-owned small firms have had to shut their doors. 24 A benefit to partnering banks, which must always be cognizant of the risks in their capital allocation, is that CDFIs have specialized risk management knowledge about their customers and how to ensure timely and fair repayment, which can promote risk-managed lending. With more support from banks, these institutions could significantly improve their reach, a significant benefit to the communities they serve.
Best Practice 17: Banks should consider bold partnerships, anchored by CDFIs and MDIs, which will result in significantly more lending directly to Black American consumers and businesses. Banks could work with CDFIs and MDIs to build more formal partnerships focused on providing different kinds of resources but sharing a singular focus of dramatically addressing pervasive economic inequality in American Black communities. Diverse stakeholders such as state, local and federal governments, the foundation sector, the non-profit sector, universities, high net worth individuals and corporate entities could all participate. There are different roles that can be played, including:
- Corporations, banks, foundations and high net worth individuals could work together to:
- Provide large grants to or invest in preferred equity of MDIs/CDFIs
- Partner with MDIs/CDFIs on various revenue-generating business opportunities as appropriate
- Partner in providing deposits as needed for liquidity
- Support operational improvements and efficiencies at MDIs/CDFIs by:
- Helping to build and scale improved data science and analytics capabilities
- Helping invest in superior technological capabilities
- Leveraging their own personnel to provide relevant technical assistance to MDIs/CDFIs
- Government entities could work with the other coalition members to explore how to augment appropriate levels of subsidy or other means to support risk sharing across the deployment of various products or across various specific projects in partnership with MDIs/CDFIs. Forms of subsidy exist in various iterations but now is a time to explore how to optimize these policy tools given the high levels of interest by the private and non-profit sectors in increased investment in financially underserved communities.
For these partnerships to be successful, they will need coordination between bank partners and other stakeholders. These partnerships can take various forms. Banks should lead these conversations given their financial strength, technical expertise, varied customer networks, government and non-profit relationships and convening abilities. Establishing such a coalition and exploring ways to scale such a model to communities in need across the U.S. could have a powerful, sustainable and transformative impact for decades to come. BPI staff has engaged various relevant stakeholders in conversations about similar models and can help direct your personnel to these contacts accordingly.
Best Practice 18: Banks should help CDFIs and MDIs invest in compliance and customer-facing technologies. Banks have been investing in technology to drive efficiencies and better serve their customers for some time, but more must be done to help build and scale these solutions for MDIs and CDFIs which historically have not had the extra resources to invest in new technologies. If banks were to provide grants to help them transition away from legacy systems and customer-facing technologies, MDIs and CDFIs could benefit from improved customer acquisition and increased revenues. At a minimum, banks could leverage their significant technology talent to provide technical assistance to MDIs and CDFIs as they pursue these sorely needed investments. This could be done on a volunteer basis or through programmatic delivery systems such as endowed internships/fellowships for this express purpose.
Best Practice 19: Banks should support financial resilience in the MDI and CDFI sectors by investing in their equity and providing guarantees or credit facilities as appropriate. MDIs, which are more like traditionally regulated depositories than CDFIs, could be strengthened through more capital, and there is an opportunity for larger banks to provide it. The majority of CDFIs are loan funds and therefore not subject to capital regulation, but there are other mechanisms to help bolster their financial stability as well. Investing in the resilience of these institutions is currently a bipartisan policy priority in Congress, and banks’ involvement in providing lifelines to these entities would be a significant benefit to the communities that they serve.
Best Practice 20: Expand project-specific investment partnerships with MDIs and refer rejected loan applicants to CDFIs and MDIs. What deals can be worked on in tandem with MDIs that will help increase their cash flow and ultimately return on equity? Banks should consider where MDIs could fit into various aspects of their business and decide if there is room to engage an MDI or several as potential partners in the provision of products, services or processes such as payments transactions, loan participations or Community Reinvestment Act projects. This approach would be especially powerful when paired with capital injections into these MDIs. Additionally, banks could also help credit applicants they have rejected seek out other options to meet their needs. A customer may not yet be prepared to borrow from a more mainstream bank, but banks could earn goodwill (and a potential future customer relationship) by referring a rejected applicant to MDIs or CDFIs. Banks have reported that this model is an effective one for making connections with new customers while helping them meet their needs.
New Markets Tax Credits and Low-income Housing Tax Credits
The New Markets Tax Credit (NMTC) program helps transform underserved and challenged neighborhoods in low-income communities by leveraging the private capital of corporate and high net worth investors via a tax credit against those investors’ federal income tax liabilities. Those investors make equity investments in NMTC intermediaries called Community Development Entities (CDEs) in return for the tax credit allocation and those monies are invested in low-income communities in development projects and small business lending. These tax credits can also be combined with other federal state or local incentives such as the Low-Income Housing Tax Credit (LIHTC) to finance needed projects. Many banks have affiliated CDEs, as do MDIs and CDFIs. MDIs in particular have faced challenges competing for NMTC allocations in the recent past.
Best Practice 21: Banks could help expand opportunities for CDEs affiliated with MDIs by partnering with these CDEs through mentorship opportunities, deal partnerships and sub-allocations of tax credits. Banks should consider how they can work with CDEs affiliated with MDIs to ensure that those CDEs are participating more effectively in the NMTC program. This will benefit the communities served as well as the affiliate of the CDE, bolstering their NMTC track records and including these organizations in complex NMTC transactions, giving them a better chance to compete for NMTC allocations on their own. Such relationships which will create a virtuous cycle, positively affecting the financial resilience and performance of the affiliated MDI, which can help further the cause of increased investments in those underserved communities. This is a positive feedback loop and banks already working with MDIs or supporting them in some fashion should ideate about how to best structure a supportive partnership.
Community Reinvestment Act Opportunities
COVID-19 and the global calls for racial justice have overlapped with potential Community Reinvestment Act (CRA) reform. CRA is an incredibly useful framework with significant room for improvement. Banks are exploring ways to maximize the benefits of their CRA engagements while concurrently assessing how the CRA requirements are evolving in an environment of increasing need and complexity. Banks are increasing engagement with CDFIs, MDIs and expanding NMTC participation as CRA eligible activities that also improve outcomes in disadvantaged communities.
Best Practice 22: Banks should explore expanding their CRA product sets as well as the relationships they have “on the ground” in underserved communities. Banks are increasing their outreach to new partners and providers to deliver CRA-related value. They should also consider including in this more diverse set of partners entities that focus on micro-businesses, particularly given the significant challenges associated with COVID-19 for these businesses. They should also consider exploring innovative approaches to providing capital through venture capital investments in funds that focus on supporting minority entrepreneurs. Banks should also explore how deeper engagements with minority chambers of commerce and other intermediaries to bolster their CRA ground game. Lastly, banks are refining how their CRA responsibilities can be optimized with social justice partnerships by expanding current activities into new subject matter and impact areas such as addressing equity in policing, health care, educational or job training outcomes. These outcomes can be achieved via non-traditional partnerships with social justice-focused non-profits and social enterprises that are focused on these particular issues.
Best Practice 23: Expand investments in Small Business Investment Companies (SBICs) initiatives. Banks should explore participation in the SBIC program if they are not doing so already. 25 This program is particularly relevant now, due to the devastating impact of COVID-19 on small businesses in Black communities. SBICs allow small businesses to access debt and equity capital and banks could build engagements with SBICs managed by Black Americans or those focused on expanding Black entrepreneurship.
Best Practice 24: Banks should leverage technology to expand their online financial literacy offerings. With a greater percentage of Americans becoming more comfortable with online learning as a result of the pandemic, banks have an opportunity to leverage online communications and outreach tools. In-person financial literacy programs could be replaced with expanded digital offerings and tools, potentially in partnership with community groups, businesses or other established organizations with scaled networks that focus on the delivery of these tools. Some banks have already partnered with firms that are building and deploying these tools. One bank has already partnered with a firm to deliver engaging and age-appropriate online financial education courses for K-12 students.
Asset Management and Sustainable Wealth Creation for All
Banks with investment advisory services could play an important role in helping more Black Americans acquire and maintain intergenerational wealth and helping social justice-minded investors identify investments and allocate resources accordingly.
Best Practice 25: With more clients asking for ESG investment options, banks should help identify “S” opportunities. While to date banks have largely focused on the environmental aspects of the growing ESG (Environmental, Social and Governance) investment asset class, many banks are now in the early stages of building investment strategies around the social dimension, readying tactics related to racial justice investing. Banks could help clients explore investing in companies with diverse management or workforces, firms that work to advance the cause of racial justice and divesting from firms that hinder it. 26 Some banks have internal ESG committees that are focused on meeting this emerging set of client demands in their investment management approaches, and this work should proceed expeditiously to meet the needs of this historic moment.
Best Practice 26: To reach more Black customers, banks should diversify the ranks of private bankers, financial advisors and salespeople. Banks should also target investments in funds run by firms with a diverse leadership workforce. Many banks’ investment management operations are working with human resources’ diversity recruiting teams to boost diversity in these key roles. Banks should bolster these efforts by forging deeper relationships with Historically Black Colleges and Universities and Minority Serving Institutions as well as national professional, fraternal and other diverse organizations. Banks should prioritize working with and investing in funds that are managed by diverse teams which will create a virtuous cycle by increasing the ranks of Black professionals as funds respond to the incentives provided by banks’ interest in working with more diverse teams.
Best Practice 27: Banks should resource targeted marketing spending to reach new Black clients and retain the relationship for the long run. Like all customer segments, Black customers should be prioritized and made to feel important. Given the history of financial exclusion faced by Black communities, it stands to reason that more could be done to restore trust and make Black customers feel more valued and that Banks desire sustained business relationships with them. 27 Black Americans are well aware of the challenging nature of the relationship with banks and of the disparities that Black borrowers face. Bridging this gap will take targeted messages and sustained outreach because the lack of trust persists and is informed by events and data in the distant and recent past. 28 Banks should make it a priority to include Black Americans in their outreach effortswhen seeking out new wealth management clients.
Regulatory Hurdles and Opportunities for Policy Advocacy
As previously noted, Black Americans continue to face impediments to capital access and, relatedly, have lower property values, 29 lower wealth levels, 30 lower incomes31 and lower credit scores than their White American counterparts. 32 These conditions create tensions among competing regulatory goals of safety and soundness, fair lending, community development and financial inclusion. These tensions are exacerbated by the complexity of the regulatory regime that executes enforcement of laws and regulations across a number of agencies and supervisory teams, leading to significant challenges in expanding capital access at scale. Banks should engage Congress and their regulators in conversations about striking the proper balances to ensure that these frictions do not create unnecessary impediments to the appropriate deployment of capital.
Best Practice 28: Advocate for reconsideration of the role real estate appraisals play in community development lending. Banks face challenges supporting commercial neighborhood renewal efforts due, in part, to current regulatory standards that may be making it prohibitively difficult to lend to community developers that face low appraisal values for the properties they seek to use as collateral for loans. 33 As a result, large-scale renewal and reinvestment efforts are hampered, as the costs of improvements exceed the appraised value. 34 This situation also creates a disconnect and tension between potential expanded CRA activity and safety and soundness requirements. Banks should advocate for policymakers and regulators to resolve this in a way that addresses risk but permits needed investment in communities that have been left behind.
Best Practice 29: Consider the tensions related to a bank’s lending activity qualifying for CRA credit while also complying with fair lending statutes and regs and advocate for clarification of the Equal Credit Opportunity Act (ECOA) Regulation B’s “special purpose credit program.” Banks need clearer regulatory guidance on how best to design special purpose credit programs, both to enable banks to increase use of these programs and to ensure that banks can design their programs to be ECOA compliant. Currently, while special purpose credit programs are permitted, clearer guidelines for how they may be used (including incorporating innovative technology, such as the use of alternative data to inform credit decisions) would be helpful. Further, streamlining how these programs are viewed by examiners across regulating agencies would be useful to mitigate varying views and interpretations regarding safety and soundness and consumer protection considerations. It may also be useful to have regulators align CRA lending and Fair Lending obligations to ensure that banks are better able to support expanded economic development in these communities. Banks should remind policymakers of these tensions to ensure that targeted and meaningful programs (such as the special credit programs) optimize access to capital for Black Americans, businesses and communities.
Best Practice 30: Banks should ask regulators to clarify rules regarding AI and machine learning tools in credit underwriting. Currently, banks generally are required to base credit decisions on a FICO score, which comes with significant disparate impact, as FICO scores reward those who have already obtained credit and managed it well. Millions of Black Americans, including immigrants, don’t even have a credit score, much less a good one. Considering other factors such as deposit behavior offers the opportunity to expand credit availability significantly, but the current regulatory and examination regime, and fear of enforcement action, has significantly deterred banks from adopting new technology. Meanwhile, non-bank financial technology firms that are not subject to regular examination are already leveraging powerful data science and machine learning tools to analyze non-traditional data inputs to refine underwriting decisions expanding the universe of potential borrowers, including low-income and minority borrowers.35 Banks should engage regulators, particularly the CFPB, in a conversation about these issues to explore how clarity could help drive improved outcomes for Black borrowers.
1 Report on the Economic Well-Being of U.S. Households in 2019, Featuring Supplemental Data from April 2020
2 Sven Beckert and Seth Rockman, Slavery’s Capital, at 17. (2016).
3 S.A. Murphy, Banking on Slavery in the Antebellum South, at 2. (2017).
4 After the Civil War, in 1865, Congress established the Freedman’s Bank as part of the Freedman’s Bureau in an attempt to expand credit availability to newly freed slaves. However, due in large part to self-dealing by a corrupt businessman who served on the board, it ultimately failed. See: http://freedmansbank.org/
8 Congress established the Home Owners’ Loan Corporation to refinance American mortgages during the Great Depression in 1933. See: https://www.mckinsey.com/industries/financial-services/our-insights/how-covid-19-has-impacted-black-white-financial-inequality?cid=eml-app . As a part of its duties the HOLC drew maps for more than 200 American cities to “document the relative riskiness of lending across neighborhoods.” These maps became the foundation for private sector red-lining.
9 Federal Reserve Bank of Chicago, The Effects of the 1930s HOLC “Redlining” Maps. 2019.
10 Federal Reserve Bank of St. Louis, Differences in Subprime Loan Pricing Across Races and Neighborhoods. 2011.
16 See: See OCC, Federal Reserve, FDIC and NCUA, Joint Guidance on Overdraft Protection Programs, 70 Federal Register 9127, 9129 (Feb. 24, 2005).