In the early days of the pandemic, two African American pastors told me during financial conversations that they didn’t plan on applying for the Paycheck Protection Program (PPP) relief loans from the government to help their churches survive.
They said they didn’t want to get saddled with debt. But when I asked how they’d feel if the loans were 100 percent forgivable, which they are if certain conditions are met, their ears perked up. One of the pastors is a client and he went on to get a PPP loan that has been a big help to his church.
In the wake of George Floyd’s death and the Black Lives Matter protests, financial institutions are under pressure to do their part in reducing racial inequalities, some of which they have perpetuated historically.
The most effective step banks can take is to increase their engagement with minority communities through better communication and sustained educational efforts.
Minorities often miss out on opportunities because they aren’t sufficiently aware of them or are wary about engaging with banks and the financial system as a whole.
That reflects a sad legacy of discrimination, including the banking sector’s past practice of redlining in which mortgage loans were purposefully denied to residents in certain areas. Studies have found that minorities are still more likely to have mortgage applications rejected and to pay higher rates when they do get loans.
So clearly banks need to look hard at themselves and resolve to treat minority customers fairly. To accomplish this, banks must do better outreach to find and target qualified borrowers in these underserved communities as well as promote financial literacy and other education programs.
Another reason for these disparities is the relatively low levels of trust in the financial sector. And on that score banks have to take some responsibility for not engaging as much with minority communities as they do elsewhere.
Since 1977, banks have been pushed by the Community Reinvestment Act (CRA) to do more to meet the credit needs of their communities that included home ownership. Instead, there’s been a tendency to treat CRA requirements as a box-checking exercise rather than as a genuine, proactive commitment to deeper community engagement.
Banks should be thinking outside that box by implementing sustained engagement programs that support minority clients throughout their financial journey.
It’s not enough to hold a home-buying seminar if the audience is not being provided lending. Also, it isn’t enough to just help someone get a mortgage. Banks should be taking an active role in making sure their home buying clients understand all of the obligations that can surprise first-time buyers, such as maintenance, taxes and connection fees for utilities.
These items can be overlooked by people who’ve been renting for years, damaging their ability to make the right decisions about home ownership and mortgage loans.
Banks should also be looking beyond a community’s immediate needs and taking steps to encourage long-term financial sustainability. It goes back to the old saying about teaching someone to fish rather than just giving them a fish.
In practical terms that means providing ongoing education about managing finances, such as how to protect credit scores and how to accumulate wealth. That means understanding how to use credit, what bills need to be paid to maintain a great credit score, and how investing even small amounts can pay dividends.
Banks need to play a bigger role in encouraging entrepreneurial ambitions as well. That means educating people about what it takes to start a business and helping them to develop thorough business plans, including how to finance, market and run the enterprise, or referring them to a microloan company that can provide initial help. The goal should be to help people understand how they get to the point where they can be bankable.
To increase the effectiveness of their engagement efforts, banks have to address the diversity in their own ranks.
People who aren’t confident about approaching banks are naturally going to feel more comfortable and less intimidated if they see more people who look and speak like them on the other side of the table. For many Latinos, that may mean having bankers who can talk to them in their native Spanish even if they are English speakers.
The rub for banks is that this expanded outreach represents an investment that has no guarantee of generating a return, at least not in the short-term. It may take years for that person who received education about starting a business to apply for a loan to get it started, if it ever happens.
Nevertheless, banks should seize this moment. Over the long-term, a higher level of outreach, engagement and communication with minority communities is likely to grow banks’ business and their reputation.
Patrick Sobers is head of NBH Business and Consumer Banking and president of Community Banks of Colorado.