Minority Banks and Minority Communities: Are Minority Banks Good Neighbors? ANN B. MATASAR AND DEBORAH D. PAVELKA*

Abstract The lagging development of many minority communities has had an adverse effect on economic growth in the United States. One factor historically associated with creating or exacerbating this minority problem is the unwillingness of banks to service minority communities adequately. The federal government used two initiatives to address banks' reluctance to aid minorities: the Community Reinvestment Act (CRA) that ended the practice of redIining and required all federally regulated banks to demonstrate that they served the convenience and credit needs of their local communities, particularly minorities, women, and other underserved groups, and the establishment and preservation of minority owned banks that were expected to be more sympathetic to the needs of their communities. This paper evaluates the extent to which minority banks have met the needs of minority communities. The assessment is conducted in the context of the ratings received by minority banks on their Community Reinvestment Act (CRA) audits. Through the use of CRA audits, the performance of minority banks is also compared to the performance of the general banking community to determine the validity and success of the government's minority banking initiative. Analysis of CRA audit ratings also compares the performance of minority banks among different ethnicities. (G20)

Introduction Economic growth in the United States has historically bypassed many minority communities. This economic inequality, in part, was created or exacerbated by the unwillingness of banks, particularly local ones, to service minority communities adequately. Enactment of the Community Reinvestment Act (CRA) and federal regulatory support for minority banks were two of the most important governmental initiatives aimed at rectifying this situation. The extent to which these two actions succeed in accomplishing their goal, namely the increased economic well being of minority communities, is the focus of this paper.

The Community Reinvestment Act (CRA) Title VII of the Housing and Community Development Act of 1977, better known as the Community Reinvestment Act (CRA), sought to alter the relationship of commercial banks to the communities in which they were located. Specifically, it attempted to increase credit availability to economically disadvantaged areas and persons by eliminating the practice of redlining and the concomitant disinvestment that occurred when banks exported deposits from one area in order to provide credit in another area [Traiger, 1991]. Ordinarily, redlining caused funds to flow from poorer, older, racially transitional areas to richer, more stable *Roosevelt University--U.S.A. 43

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ones. Little consideration was given to an individual's credit worthiness or income level or a community's general viability if it was viewed as declining. The banks' analysis, therefore, became a self-fulfilling prophecy despite their contention that redlining was not a discriminatory practice but rather a prudent investment policy intended to protect stockholders and depositors [The Background..., p. 8]. CRA required federal supervisory agencies to encourage institutions they examined to help meet the credit needs of the communities from which they drew their deposits in a manner consistent with safe and sound business practice. Provision of credit was seen as a public service owed by financial institutions to the communities in which the government had granted them the privilege of conducting business. Additionally, the banks were expected to be good citizens in return for an assured environment of limited, local competition because of chartering limitations and lower costs created by deposit insurance, no interest on demand deposits, and Regulation Q imposition of interest rate ceilings on savings [The Background..., 11-2]. Since its original passage, CRA has been revised several times. In August 1989, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) amended the Home Mortgage Disclosure Act to require public release of CRA evaluations and ratings for examinations conducted after July i, 1990 [Barefoot, 1990]. Later revisions involved the methods and criteria for evaluating a bank's CRA compliance. In keeping with the dual banking system, an outgrowth of federalism, there are three distinct federal authorities that serve as primary federal regulators in the application of national banking laws that include conducting CRA audits. The Office of the Comptroller of the Currency (OCC) audits banks to which it has issued a national charter. The Federal Reserve Board (Fed) audits state chartered banks that have chosen to join the Federal Reserve System. All other banks, namely state chartered institutions that have not joined the Federal Reserve System, are audited by the Federal Deposit Insurance Corporation (FDIC) that provides banks with deposit insurance, a prerequisite for conducting retail banking in the U.S. At one time, some banks were able to avoid most federal oversight including a CRA audit if they were state chartered and remained both federally uninsured and outside of the Federal Reserve System. However, no domestic banks fit this category any longer. The federal regulatory authority assigns one of four ratings to a bank at the conclusion of a CRA audit. These categories are outstanding, satisfactory, needs to improve, and substantial non-compliance. Only the first two of these categories reflects the adequate servicing of the community by the bank. CRA audit ratings, therefore, can be used as a proxy for socially responsible practices within a bank's designated community. The criteria used in the audits differs for banks on the basis of asset size with the demarcation point being set at $250 million for individual banks and $I billion for bank holding companies. Small banks with assets under $250 million can select among two types of CRA audits: the Streamlined Option that includes 5 criteria (loan to deposit ratio, local lending, lending diversity, geographic distribution within the assessment area, and how well complaints are handled) or the Strategic Option that evahiates the bank's performance in comparison to the bank's own strategic plan. In this option, the considerations include the goals that the bank sets for itself and the accomplishment levels or benchmarks that it established for itself to qualify for each rating category. Large banks that exceed the $250 million cut-off have only one option, a three-part exam that looks in detail at their patterns of lending, service, and investment within their community.

MATASAR AND PAVELKA: M I N O R I T Y BANKS

45

Minority Banks Changes in CRA were not the only banking impact of FIRREA on minority communities. Congress clearly believed that minority banks were needed to service and promote the economic viability of minority and under-served communities. Section 308 of the law also included the following goals: preserve the number of minority depository institutions, preserve the minority character in cases of merger or acquisition, and promote and encourage creation of new minority depository institutions. Section 308 of FIRREA specifically defined the term minority to mean Americans who were Black, Asian, Hispanic, or Native. In turn, minority depository institutions were defined as any federally insured depository institution where 51 percent or more of the voting stock is owned by one or more socially and economically disadvantaged individuals. In order to eliminate the ambiguousness of this definition, the FDIC provides the following requirements for a depository institution to qualify as a minority depository institution. It must have 51 percent or more of the voting stock owned by minority individuals or a group of minority individuals who are all U.S. citizens or permanent legal residents. Institutions that do not qualify by virtue of their ownership also can qualify if a majority of the Board of Directors is minority and the community that the institution serves is predominantly minority [Feldman, p. 2]. There are currently 125 commercial banks that qualify as minority banks under these federal guidelines. Of these 83 banks, 2/3 have been established since 1976, a timeframe consistent with the original passage of CRA. Among this group, 1/2 or 42 minority banks were established after 1991, the era of FIRREA. Appendix A lists in alphabetical order the 125 commercial banks in the 50 states of the United States currently designated as having minority status by the FDIC. This number, therefore, excludes all minority thrift institutions (7 savings and loans and 25 savings banks) within the 50 states as well as all depository institutions within the American territories (Guam, Puerto Rico and Washington, D.C.). Table 1 provides a breakdown of these 125 minority banks by state and ethnicity. It reveals that the distribution of minority banks is extremely uneven throughout the nation. Minority banks are found in only 29 states. Distribution within these states, in turn, is skewed toward 8 states that have 82 or approximately 2/3 of all of the nation's minority commercial banks, namely California (22), Texas (19), Illinois (12), New York (9), Oklahoma (8), Georgia (7), Florida (4), and North Carolina (4). Although all minority groups are represented among the 125 commercial banks having FDIC minority designation, Table 1 also shows that the various ethnicities have distinctly different levels of representation, not necessarily paralleling the representation of their ethnic group within the general population. The national distribution of the 125 domestic commercial banks with minority status according to ethnicity are 53 Asian or Pacific Islander (42.40 percent), 33 Black or African (26.40 percent), 22 Hispanic (17.60 percent), and 16 Native Indian or Alaskan Native American (12.80 percent). Only 1 minority bank is categorized as multi-ethnic. The inconsistencies found in the geographic and ethnic distribution of minority banks does not extend to their asset size as shown in Table 2. With few exceptions, most minority banks (99 or 79.20 percent) are categorized by the federal government as small because their asset size is less than $250 million. Only 26 minority banks (20.80 percent) have assets exceeding $250 million. If one were to use the FDIC's asset size categories rather than the designation associated with CRA audits, the 26 large minority banks would be divided further so that 21 (16.80 percent) of them would be viewed as intermediate in size with assets between $250 million and $1 billion. Only 5 minority banks (4.00 percent), therefore, would qualify as truly

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large banks by FDIC standards because their asset size exceeded $1 billion. The issue of asset size is significant because it has been shown that there is a correlation between asset size and profitability. Although a complete analysis of the effects oil minority banks of asset size is beyond the scope of this paper, some commentary regarding minority banks' asset size based on the $250 million standard is of concern here because it is the determinant of the method by which minority banks are audited for purposes of their C R A rating. TABLE 1 Minority Banks by State and Ethnicity State

AL CA

Black American

Asian or Pacific Islander American

Hispanic American

Native Indian or Alaskan American

2 -

16

4

2

CO CT FL

-

1

3

GA

3

3

1

Multi-racial American

2 22

1 1

HI 4

KS

-

LA MD

2 2

MA MI

1 1

3

8

12

1

1 2 2

1

2 1

MN

1

MS

1

MO

2

MT

1 i 4 7

3

ID

Total

1 1

1 -

NJ NM NY

1

1

NC

3

OK PA SC TN

1 1 1 3

1 -

TX

I

I0

VA VV'A

2

WI Total

2 33

53

26.40%

42.40%

6

3

I

1

1 2 3

-

3 2 9 1

4

8

9 2 t 3

8

-

19

2 2

2 22

1 16

1

3 125

17.60%

12.80%

0.80%

t00~

Source: http://www.FFIEC..gov. *Excludes states that have minority commercial banks, U. S. Territories, Washington, D. C, and FDIC insured depository institutions other than commercial banks.

MATASAR

AND PAVELKA:

MINORITY

BANKS

47

TABLE 2 M i n o r i t y B a n k s b y S t a t e a n d Asset Size* (in t h o u s a n d s ) State

AL CA CO CT FL GA HI IL KS LA MD MA MI MN MS MO MT NJ NM .NY NC OK PA SC TN TX

VA %VA WI Total

less than 25,000 1 1 1 3 1 1 8 6.4%

25,000 to 49,999 1 2

1 5 1 1 1

50,000 to 99,999 t 8 1 1 5

i00,000 to 249,999 5 1

250,000 to 499,999

500,000 to 999,999

2

3

1 -

1 1 2 3

3 1 1

1

1 1

less than 1,000,000 2 1 -

1 1 2 1 2 1 2 1 1 2 1 1 26 20.8%

I 1 2 2 1 4 1

4

2 35 28%

4 2

1 7 1 1 30 24%

1

4

16 12.8%

2 5 4%

1

1

5 4%

Total

2 22 1 1 4 7 3 12 1 2 2 2 1 1 1 3 1 3 2 9 4 9 2 1 3 19 2 2 3 125 100%

Source: http://www.FFIEC.gov. Asset categories are not those used by the FDIC that only demarcates less than $250 million, between $250 million and $1 billion, and greater than $1 billion. Table 3 reflects the i m p a c t of asset size o n the t y p e of C R A a u d i t i n g m e t h o d used for the 116 m i n o r i t y b a n k s for which C R A i n f o r m a t i o n is available. It shows t h a t of t h e 116 banks, 96 (82.8 p e r c e n t ) received the more lenient, small b a n k t r e a t m e n t , t t is likely, however, t h a t the p e r c e n t a g e is even higher b e c a u s e most, if n o t all, of t h e 9 b a n k s n o t r e p o r t i n g their C R A e x a m i n a t i o n m e t h o d will be t r e a t e d as s m a l l b a n k s for p u r p o s e s of t h e i r C R A audit. U n f o r t u n a t e l y , the specific form of C R A a u d i t applied to the s m a l l b a n k s (i.e., strategic or s t r e a m l i n e d ) is n o t k n o w n from t h e p u b l i s h e d data. T a b l e 4 presents t h e m i n o r i t y b a n k s according to the federal r e g u l a t o r t h a t has p r i m a r y s u p e r v i s o r y r e s p o n s i b i l i t y for their C R A audit. T h e table, in t u r n , s u b d i v i d e s t h e b a n k s fu-

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TABLE 3 The CRA Audit Method Used by Minority Banks by State Exam Method Large Banks Small Banks Not Reported 2 5 16 1 I

State AL CA CO CT FL 3 GA 5 HI 3 IL II 1 KS 1 LA 2 MD 1 MA 2 MI 1 MN 1 MS i MO 2 MT NJ 2 1 NM 2 NY 1 7 I NC 4 OK 3 6 PA 2 SC 1 TN 3 TX 3 14 VA 2 WA 1 WI 3 Total 15 96 5 Source: http://www.FFIEC.gov. *Only 116 of the 125 minority banks are included because 6 minority banks were established too recently to have been audited and 3 others did not have their information published. rther by the FDIC supervisory region in which they are located. It shows that the vast majority of minority banks have chosen state rather than federal charters. Only 31 minority banks (24.80 percent) have national charters that give the OCC primary regulatory authority over their activities. Among the 84 (75.20 percent) minority banks that have chosen state charters, only 18 (14.40 percent) have chosen to join the Federal Reserve System and, thus, the Fed has the fewest minority banks under its supervision. By process of elimination, therefore, the FDIC has become the primary, federal regulator of 76 (60.80 percent) of the nation's minority banks. In light of the competition that exists among the various federal banking regulators to attain dominance by expanding their office's supervisory realm over an ever larger percentage of the nation's banks, the FDIC is the clear winner when reviewing the number of minority banks. Whether this would remain true if

MATASAR

AND

PAVELKA:

MINORITY

BANKS

49

one were to evaluate the cumulative assets held by the individual minority banks is not as apparent. It should be noted in this regard that ordinarily, nationally chartered banks and state chartered banks that are Fed members tend to be larger institutions. TABLE 4 Minority Banks by Primary Federal Regulator and Region FDIC FED Atlanta 13 3 17.11 16.67 % in Category % in Reglon 65.00% 15.00% Boston 3 0 % in Category 3.95% 0 % in Region 100.00% 0 Chicago 10 3 % in Category 13.16% 16.67% 62.50% 18.75% % in Reglon Dallas 15 7 % in Category 19.74% 38.89% 46.88% 21.88% % in Reglon Kansas City 0 1 % in Category 0 5.56% % in Reglon 0 20.00% Memphis 6 0 % in Category 7.89% 0 % in Reglon 100.00% 0 New York 8 3 in Category 10.53% 16.67% % in Region 50.00% 18.75% 21 1 San Fransisco % in Category 27.63% 5.56% % in Region 77.78% 3.70% Total % in Category 100.01% 100.02% % in Region 60.80% 14.40% Source: http://www.FFIEC.gov. Any total in excess 100 percent are

FDIC Region OCC 4 12.90 20.00% 0 0 0 3 9.68% 18.75% 10 32.26% 31.25% 4 12.90% 80.00% 0 0 0 5

Total 20 100.00% 3 100.00% 16 100.00% 32 100.01% 5 100.00% 6 100.00% 16

16.13% 31.25% 5 16.13% 18.52%

100.00% 27 100.00% • 125

100.00% 24.80% 100.00% caused by rounding. ........

In considering the 8 FDIC supervisory regions, distribution of the minority banks is seen to fall disproportionately (79 banks or 63.2 percent) on three offices: Dallas (32 banks or 25.6 percent), San Francisco (27 banks or 21.6 percent), and Atlanta (20 banks or 16 percent). Table 5 reflects the correlation of FDIC supervisory districts with the asset size of minority banks. All districts with the exception of Kansas City and Memphis have both small and large banks for CRA audit purposes. However, only Dallas, New York, and San Francisco have truly large banks under the FDIC's designation. CRA

Ratings

Prior to reviewing the CRA performance of minority banks, it is useful to look at the CRA performance of the entire banking community in order to obtain a context for the analysis of minority banks. Table 6 reflects the CRA ratings for all banks audited between 1990 and 2001, the years in which CRA ratings were publicized and for which they are cuzrently available. There are several points of interest within this table.

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Table 5 The Minority Banks by FDIC Region

Atlanta Boston Chicago Dallas Kansas City

Memphis New York San Francisco Total

Percentage

I0~ NO.

1

Region and Asset Size

less

25,000

50,000

100,000

250,000

500,000

less

than 25,000 2 0 0 4 0 1 0 t 8 6.40%

to

to

to

to

to

than

49,999 9

99,999 3

249,999 4

499,999 2

999,999 0

1,000,000 0

20

0

2

0

1

0

0

3

2.40%

2 3

7 t0

4 8

3 4

0 2

0 1

16 32

12.80% 25.60%

3 3

2 0

0 2

0 0

0 0

0 0

5 6

4.00%

2 4 16 12.80%

0 3 5 4.00%

1 3 125 4.00%

16 27 125 100.00%

4 3 6 2 8 6 26 35 30 20.80% 28.00% 24.00%

Total

%

16.00%

4.80% 12.80% 21.60% I00.00%

Source: http://www.FDIC.gov.

CRA P-~fJng

Outstanding

Table 6 Audit Ratings Received by All Commercial Banks: 1990-2001 %

Satisfactory

%

Year 2001

110

9.96%

1047

67.62%

2000 1999

218 679

17.40% 18.58%

998 2914

79.65% 79.73%

1996

680

18,84%

2916

1997

829

22.37%

2807

1996

1212

26.47%

3276

1995 1994

1363 1000

24.28% 18,05%

1993 1992

941 653

1991 1990 TOts[

Needs to Improve 23

% 1.92%

30 55

2.39% 1.50%

80.78%

7

0.19%

76.74%

59

1.59%

71.54%

60

1.75%

4105 4249

73.13% 76.71%

138 275

14.75% 12.67%

5058 4067

79.28% 78.8~/o

407 340

8.27% 10.92%

4015 2474

8441

17.33%

37926

Subtantiat

%

Non-compliance 6 0.50% 7 7

Numberof

Numberof

Banks Audited Banksin USA 1195 8080

% of Banks Audited 14.79%

0.56% 0.19%

1253 3655

8315 8581

15.07% 42,59%

7

0,19%

3610

8774

41.14%

11

0,30%

3706

9143

40.53%

11

0.24%

4579

~m30

47.55%

2.46% 4.96%

7 15

0.12% 0,27%

5613 5539

9942 10452

56.46%° 52.99%

356 395

6.56% 7.66%

26 40

0,41% 0.78=/o

6380 5155

10960 11466

58.21% 44.96°/=

81.59°/= 79,47%

453 280

9,21% 8.99%

46 19

0.93% 0,61%

4912 3113

11927 12347

41.26% 25.21%

77.85%

2150

4.41%

262

0,41%

48719

Source: Table 6 is a summary of the data found in Tables 1-5 and the two internet sites: http://www2.fdic.gov.crapes and http://www.~ee.gov/cracf/crarating/main.cfm. The first which ultimately will be a subject worthy of its own study relates to the precipitous decline in the number of audits conducted in 2000 and 2001 from all prior years. With the exception of 1990 when many audited banks still did not have to publicize their ratings, the decade of the 1990% had at least 40 percent of commercial banks audited annually for CRA compliance. The change in the auditing pattern commencing in the year 2000 when only 14.79 percent of all commercial banks were audited for CRA compliance and the continuation of that new situation into 2001 when only 15.07 percent of all commercial banks received CRA audits is the less well documented result of Olass-Leach-Bliley. This law passed in 1999 went into effect in 2000. It is best known for its repeal of the portions of Glass-Stega]l (the Banking Act of 1933) that separated commercial and investment banking. Less well known is the fact that this legislation no longer required all banks regardless of size to be audited every 18 months. It allowed small banks that received a CRA rating of outstanding to be audited after 5 years and those receiving a satisfactory rating to be audited after 4 years. The 18-month rule remained in effect only for small banks receiving a less than satisfactory CRA rating (i.e., needs to improve or substantial non-compliance) and for all large banks. Thus, given the overwhelming issuance of these two highest ratings, a substantially smaller number of banks received CRA audits in 2000 and will do so in years to come.

MATASAR

AND PAVELKA: MINORITY

BANKS

51

Throughout the 12 years under consideration, the vast majority of commercial banks received either outstanding (17.33 percent) or satisfactory (77.85 percent) ratings. Nonetheless, it is discouraging to note that in 2001, the percentage of banks obtaining an outstanding ranking was only 9.96 percent, the smallest percentage in a decade. Equally problematic was the large relative, if not absolute, increase in the number of banks receiving the lowest ranking, substantial non-compliance. To what extent Gramm-Leach-Bliley ushered in a new era of CRA neglect by banks is beyond the scope of this paper but certainly worth pursuing. CRA

Compliance

Of Minority

Banks

Table 7 reflects the most recent CRA ratings received by the 116 minority banks for which this information is available. As noted in the table, 6 of the minority banks have been estaTABLE 7 Minority Banks by State and CRA Rating State

Outstanding

CRA Rating Satisfactory Needs to Improve

AL

1

1

CA

2

20

CO

Sustantial Noncomliance

-

1

-

3 3

-

CT

FL GA

2

HI IL

2

KS

3

-

I0

-

1

LA

1

MD

2

MA

1 2

MI

1

MN

1

MS MO

-

1 1

1

MT

NJ NM NY NC

I

OK

2

3 1 6 3 7

PA

I

1

1 2

1

-

SC 1 TN 3 TX 17 VA 1 1 WA 1 WI 3 Total 22 93 1 Source: http://www.FFtEC.gov. *Only 116 of the 125 minori@ Banks are included because 6 were established too recently to have been audited and 3 others did not have their information published.

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IAER: FEBRUARY 2004, VOL. 10, NO. 1

btished too recently to have been required to subn-dt to a CRA audit. Of the additional 3 for which no information was found, it is possible that their most recent audit allowed them to take advantage of the new Gramm-Leach-Bliley timetable and thus, they too, have not been audited recently. Several things are striking about the CRA ratings of minority banks. The first is the fact that no minority bank received a rating of Substantial Non-Compliance and that only 1 minority bank was given a rating of Needs to Improve. Equally notable is the 22 minority banks (19.67 percent) of the total that received a rating of Outstanding and their dispersion throughout the nation. Table 8 provides information regarding the CRA performance of minority banks distinguished according to ethnicity. It reveals that Black or African American banks serviced their communities more effectively than any other ethnic group. These banks represented 59.09 percent of all the outstanding ratings accorded to minority banks. Additionally; not, only were all of their ratings outstanding or satisfactory, but the likelihood of an outstanding rating (40.63 percent) was the highest of any ethnic group. By contrast Asian or Pacific Islander banks comprised the single largest bloc of minority banks but had the least impressive outstanding performance (2 percent). Although most banks in this ethnic group did perform satisfactorily (96 percent), the sole minority bank receiving a rating of Needs to Improve also was a member of this minority. One would have to conclude that Asian and Pacific Islander banks were not addressing the needs of their communities in a manner that would distinguish them from non-minority banks and were less impressive than their Black or African American counterparts. Hispanic banks and Native American or Alaskan native banks each accounted for 18.18 percent of the total for the outstanding category. Thus they also outperformed the Asian and Pacific Islander banks in servicing their communities. Additionally, 21.05 percent of all Hispanic banks and 26.67 percent of all Native American and Alaskan banks were accorded an outstanding rating. With the exception of Asian and Pacific Islander banks, minority banks appear to be outperforming non-minority banks in meeting the criteria for CRA compliance.

Black or African Am.

TABLE 8 Minority Banks by Ethnicity and CRA Rating CRA Ratings Outstanding Satisfactory Needs to Improve 13 40.63% 19 59.38% 59.09% 20.43% -

Asian or Pac. Islander Am.

1 4.55%

Hispanic Am.

4 18.18%

Native Indian or Alaskan Native Am.

4 18.18%

Ethnicity

2.00%

48 51.61%

96.00%

21.05%

15 16.13%

78.95%

26.67%

II 11.83%

73.33%

Total

% TotM

32

100%

1 100%

2.00%

50

100%

-

-

19

100%

16

100%

Total 22 93 1 % of Total 100% 100% 100% Source: http://www.FFIEC4ov and h{%p://ww~:FDIC.gov.

116

M A T A S A R A N D PAVELKA~ M I N O R I T Y B A N K S

53

It is possible to interpret the overall CRA results for minority banks shown in Table 7 as being similar in nature to the results for all commercial banks shown on Table 6. Griswold et al. [1999] compared minority banks with other banks witt~in the same census tract by demographics, asset size and charter type and concluded that: "Minority owned banks hired nonminority employees in roughly the same proportion that nonminority banks hired minority employees. In addition, the racial makeup of the customer base closely corresponds to that of the employee base for both minority and nonminority owned banks. Finally characteristics of loan applicants and their loan requests are very similar, with the exception of the race or national origin of the applicant. Minority owned banks have a significantly higher percent of minority applicants and nonminority owned banks have a significantly higher percent of nomninority applicants." Griswold et aI. [1999] also noted that this phenomenon might be the result of self-selection on the part of employees and customers rather than discrimination. If customers are choosing where to apply for a loan based on the race of the owners or employees, the self selection pattern may be influencing the lending patterns of the institution. However, the authors fail to note that self-selection may not be based upon race or ethnicity p e r s e but rather on anticipated reception and treatment whether or not these assumptions are accurate. This is borne out by the fact that although "Minority owned banks denied a significantly higher percent of applicants than nonminority banks [and]... also tended to have higher denial rates to customers of the same race," they nonetheless make more loans to minorities than do non-minority owned banks [Griswold et al., 1999]. A study conducted by the Lusk Center of the University of Southern California by Raphael Bostic [2002] provides some explanation for the earlier findings. This study found that "bank underwriting standards are consistent across lenders and are not influenced by the lender's ethnic background," [Allison, 2002, Sec. 5, p. 2]. The higher rejection rate at minority owned banks v e r s u s non-minority banks was attributed to two facts: minorities steer their loan or mortgage applications to same-ethnicity banks and minority applicants are denied loans or mortgages at a higher rate than Caucasian applicants [Allison, 2002, Sec. 5, p. 2]. Using the CRA requirements for the maintenance of safe and sound banking practices, therefore, does not mean that minority loan applicants are going to receive favorable treatment in terms of receipt of the loan at a minority bank as noted by the higher rejection rate. Minority banks, however, by also having a higher acceptance rate reflect a more favorable consideration of loan applicants, a fact reflected in these banks' generally high CRA ratings. Additionally, it should be noted that "many large banks 'cream skim,' that is, make loans to the better credit risks in central cities and to minorities to meet CRA requirements. This practice takes business from smaller, often minority-owned banks that have traditionally served communities and clients," [Benston, 1999]. Therefore, the higher rejection rate of minority banks is understandable because they receive apphcations from less credit-worthy apphcants. The higher acceptance rate of minority loan applications by minority banks, therefore, becomes even more impressive in assisting in the economic development of minority communities. Conclusion Passage of CRA as well as the encouragement of minority banks was insufficient to eliminate the racial gap in loan denial rates or to alter completely the economic differential among ethnic groups. Nonetheless, as noted by one author, "the headlines alleging lending bias

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leave a false impression about the nature of the discrimination," [Kim, 1997, p. 1]. Because banks using sound business practices "determine an individual's risk for loan default based upon prior record of default found in the economic, geographic, and raciM group to which the individual belongs," [Kim, 1997, p. 1] some of the gap is rational rather than racial and remains in conformity with CRA. Given the fact that the CRA ratings of minoriW banks and, in particular, their denial of loan applications to minority applicants bears great resemblance to the denial rates for loan applicants at non-minority banks, it is likely that "subtle forms of discrimination borne out of individual prejudice are [not] completely extinct," [Kim 1997, p. 2]. Nonetheless, the passage of CRA and the establishment of minority banks have probably worked to alleviate, if not eliminate, the adverse lending environment for minority loan applicants. References Allison, M. "Own Race Not a Factor, Lender Study Says," Chicago Tribune, June 16, 2002, Section 5, p. 2. Barefoot, J. S. "July 1 nears. Is your CRA program ready?" ABA Banking Journal, LXXXII, No. 6, June 1990, pp. 43-45, 47. Benston, G. J. "The Community Reinvestment Act: Looking for Discrimination that isn't There," Cato Policy Analysis, 354, October 6, 1999, http://www.cato.org/pubs/pas/pa-354es.htmt. Feldman, R. E. "Policy Statement Regarding Minority Depository Institutions," by order of the Board of Directors of the Federal Deposit Insurance Corporation, April 9, 2002.8 pages. Griswold, M. C.; Karels, G. V.; Peterson, M. O. "Racial Characteristics of Employees and Customers at Minority Owned and Nonminority Owned Banks: Self-Selection or Discrimination?" http: / /www.sbaer.uca.edu/Research/1999 /WDSI/99wds215.html. Kim, B. "Disparate Loan-Denial Rates Can Be Justified," The News-Sentinel, August 15, 1997. http://www.stats.org/statswork/redlining.html. Traiger, W. W. "CRA Must Go Beyond Bricks and Mortar," American Banker, 19, 12, May 16, 1991, p. 4. "The Background of the Credit Reinvestment Issue," in A Compliance Guide for the Community Reinvestment Act Background ~ Implications, Published by Consumer Bankers Association, pp. 6-17. ht tp ://www.i~ec.gov/crac f/crarating/main.cfm. http://www2.fdic.gov.crapes.

MATASAR

AND PAVELKA:

MINORITY

BANKS

Appendix A Alphabetical List of American Minority Banks Name City Amerisa Bank Flushing Baxter Springs American BK Baxter Springs American First National Bank Houston American Metro Bank Chicago American State Bank ~lsa Asian American Bank&:Trust Co Boston Asian Bank Philadelphia Asiana Bank Sunnyvale Banco Popular North Assn Orlando Banco Popular North America New York Oklahoma City Bank 2 Bank of Cherokee County Hulbert Stilwell Bank of Commerce Bank of the Orient San Francisco Bay Bank Green. Bay Borrego Springs Bank NA Borrego Springs Boston Bank of Commerce Boston Broadway National Bank New York California Center Bank Los Angeles Canyon National Bank Palm Springs Capital City Banks~Trnst Co Atlanta Carver State Bank Savannah Cathay Bank Los Angeles Centinal Bank of Taos Taos Chinese American Bank New York Citizen's Saving B&T Co Nashville Citizen State Bank Roma Citizens Trust Bank Atlanta City Bank Honolulu City NB of New Jersey Newark Commerce Bank Laredo Commonwealth National Bank Mobile Community Bank of Lawndale Chicago Community Commerce Bank Los Angeles Communitys Bank Bridgeport Concord Bank National Assn Houston Consolidated Bank&:Trust Co Richmond Continental NB of Miami Miami Douglass National Bank Kansas City Eastbank National Assn Ney York Eastern International Bank New York Evertrust Bank City of Industry F&:M Bank in OK City Oklahoma City Falcon International Bank Laredo Farmers &: Merchants Bank Crescent Finance Factors Ltd Honolulu

55

State NY KS TX IL OK MA PA CA FL OK OK OK OK OK WI CA MA NY CA CA GA GA CA NM NY TN TX CA HI NJ TX AL IL CA CT TX VA FL MO NY NY CA OK TX OK HI

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I A E R : F E B R U A R Y 2004~ VOL. l0 t NO. 1

Appendix A (continued) Name City First American Bank Jackson First American Intl Bank Brooklyn First Bank Americano Elizabeth First Commerce Bank Encino First Continental Bank Rosemead First Independence NB Detroit Detroit First Intercontinental Bank Doraville First International Bank Chuta Vista First International Bank Plano First National Banks&Trust Co Shawnee First State Bank Danville First State Bank of Porter Porter First Tuskegee Bank Tuskegee First United Bank San Diego Fort Gibson State Bank Fort Gibson Foster Bank Chicago Gateway NB of St. Louis Saint Louis General Bank Los Angeles Global Commerce Bank Miami Great Eastern Bank of FL Baltimore Harbor Bank of Maryland Honululu HawaiiNationM Bank Chicago Highland Community Park Decatur Horizon Bank Oxon Hill Industrial Bank Chicago International BK of Chicago Brownsville International BK of COM Laredo Internaitional BKof COM Zapata Internaitional BKof COM Milwalkee Legacy Bank New York Liberty Bank of New York New Orleans Liberty Bank&Trust Co Pharr Lone Star National Bank Pembroke Lumbee Guaranty Bank Durham Mechanics and Farmers Bank Memphis Memphis First Community Bank Houston Metrobank National Assn Oakland Metropolitan Bank San Francisco Milennia Community Bank San Francisco Mission National Bank Harvey Mutual Bank Durham Mutual Community SS SSB San Francisco NAB Bank San Francisco National American Bank Chicago National Republic BK Chicago Browning Native American Bank NA

State MS I~rY NJ CA CA MI GA CA TX OK VA OK AL CA OK IL MO CA FL MD HI IL GA MD IL TX TX TX WI NY LA TX NC NC TN TX CA CA CA IL NC CA CA IL MT

M A T A S A R A N D PAVELKA-- M I N O R I T Y B A N K S

Appendix A (continued) Name City BroILx New York National Bank North Milwaukee Bank Milwaukee Ojai Valley Bank Ojai Pacific Global Bank Chicago Pacific International Bank Seattle Pacifica Bank Los Angeles Pan American Bank Los Angeles Peoples National Bank Seneca Preferred Bank Los Angeles Premier Bank Denver Premier Bank Wilmette Ranchers Banks Belch Saehan Bank Los Angeles Seaway NB of Chicago Chicago Security Bank of Dupage Naperville South Carolina CMTY Bank Cotumbia Sothwestern National Bank Houston State Bank of Texas Irving State Bank&Trust Co Dalias Carroltton Texas First National Bank Houston Transatlantic Bank Miami Tri-State Bank of Memphis Memphis United Americas Bank NA Atlanta United Bank of Philadelphia Philadelphia United Bank&Trust Co New Orleans United SK El Paso Del Notre E1 Paso United Central Bank Gartand United Heritage Bank Edison United Orient Bank New York Unity NB of Houston Houston WaIlis State Bank Wallis Western State Bank Duarte Woodlands National Bank Hinckley Source: http://www.FFIEC.gov

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State NY WI CA IL WA CA CA MO CA CO IL NM CA IL IL SC TX TX TX TX FL TN GA PA LA TX TX NJ N-Y TX TX CA MN