Remarks of Richard H. Neiman Superintendent of Banks for the State of New York Before the Neighborhood Housing Services of New York City, Inc. Regional Interagency Committee (RIAC) Annual Breakfast Marriott Marquis Hotel, New York City
May 19, 2009
Good morning. Thank you, Sarah, for that kind introduction and for inviting me to speak again at this annual breakfast.
It is an honor to be here with people like you who are doing so much to help families at risk during this economic downturn. These are stressful times- and not just for the major banks that have been undergoing supervisory “stress tests.” Consumers, nonprofits, and, yes- even us regulators- are feeling the stress, too.
In these tough times, the amazing work that you and the whole team at NHS do every day is more important than ever. And your results speak for themselves.
In the past year, NHS has-
- Invested $185 million in New York City neighborhoods;
- Provided both pre- and post-purchase education to more than 11,000 residents; and,
- Prevented 341 families from losing their homes to foreclosure.
It’s no wonder that NHS Mortgage Corp. was the winner of the 2008 National Innovations in Homeownership Contest. These are winning results for consumers and for our communities.
We are here today to work together in building on that great momentum. With partnerships between the public, private, and nonprofit sectors, we can help consumers and work to stabilize the financial system. This regional inter-agency gathering is the perfect opportunity to consider how we could deepen our connections, with the goal of ensuring continued access to affordable credit.
The importance of CRA and credit accessNon-profits like NHS are important partners for us at the state, in implementing housing initiatives and in foreclosure prevention. We are constantly finding new ways in which the nonprofits’ community connections bring value and help our public programs to succeed. Banks could make the same discovery, and should see nonprofit partners in a new light, beyond the traditional lens of CRA compliance.
I believe the most important reason to reinvigorate partnerships between nonprofits and banks is to ensure that consumers have access to affordable credit choices. The abundance of credit opportunities that we saw in recent years were often in the form of irresponsible or predatory lending, often by non-depositories, which led to a disproportionate number of foreclosures in many minority neighborhoods. Credit access in these same communities is now being threatened due to tightened underwriting standards, the foreclosure crisis, and declining property values.
I remember speaking at this breakfast two years ago, when we were recognizing the thirtieth anniversary of CRA. It was a time to celebrate substantial achievements in economic inclusion, but also a time for serious reflection. We remain at a critical juncture, and decades of progress in credit access are in jeopardy.
The record of CRA over the past thirty years is impressive. Banks’ CRA activities have leveraged infusions of public capital into low and moderate-income communities, perhaps by as much as 10 to 25 times, attracting additional private capital in the process. And in the last ten years alone, CRA has contributed to bank lending to small businesses and farms in excess of $2.6 trillion, exactly the type of stimulus we need in these challenging economic times.
Even so, it is sobering to consider that we now have communities, often communities of color, that are being ravaged not by the lack of credit opportunities but by foreclosures due to an abundance of irresponsible and often predatory credit. This fact is not a reflection on CRA, as only a tiny fraction of higher-cost or subprime loans were either originated or purchased by banks for CRA credit. But it is a real phenomenon that credit access is threatened in communities where it is most needed.
The New York Times reported just this weekend that defaults occur three times as often in mostly minority census tracts as in mostly white ones, and that 85% of the hardest-hit neighborhoods have a majority of Black and Hispanic homeowners. These disturbing facts match with the Banking Department’s own foreclosure research which confirms that minority communities are being disproportionately affected. For example, approximately 90% of foreclosure filings in the Bronx, 78% in Brooklyn, and 87% in Queens are in minority areas.
There are neighborhoods that were historically redlined, that became targets for steering or “reverse redlining” by predatory lenders. And now these communities are understandably concerned that the pendulum will swing back too far in the opposite direction, leaving them shut out of credit choices and victimized once again. This yo-yo treatment leaves many people understandably skeptical of financial institutions, and could lead to a reversion to the kind of credit vacuum that existed in the 1970’s before CRA was adopted.
The role of nonprofits as business partners
Banks should not respond to the current market uncertainty by going back to a contraction in credit in these neighborhoods. That is why groups like NHS are such important partners to banks. There are good business opportunities that financial institutions might otherwise miss without involvement from nonprofits.
As soon as I mention expansion of lending in low and moderate-income areas, some of you might question whether this is the right time due to the current stress and uncertainty in the financial system. And others might even suggest that CRA actually contributed to the financial crisis and encouraged banks to bend prudential standards to approve loans in low and moderate-income areas. I would like to dispel both myths. This is the right time for banks to creatively and prudently grow their business, and lending in underserved areas can be a positive part of that plan.
I understand that this is a period of deleveraging, for lenders as well as households. And we need to return to responsible, sustainable underwriting standards after some lenders (no one in this room, I’m sure!) abandoned prudent behavior during the height of the housing boom.
But the business expansion I envision is the sustainable kind- lending that is fair, as well as prudent and profitable. This goes beyond a “check-the-box” approach to CRA. Nonprofits are more than a resource for compliance purposes. They can be business partners to responsibly deploy capital in a world of increasing risk.
There are two main ways that I see this nonprofit support to business- in risk mitigation, and in building trust with potential new customers.
- Risk mitigation. First, nonprofits can play an important role in risk mitigation, to help banks realize expanded opportunities within the context of safe and sound lending. Nonprofits can transform the borrower through financial education and counseling, to prepare them for successful homeownership. They can also perform the detailed, time-consuming underwriting that is necessary to differentiate a good-but-nontraditional application from a poor credit risk. The extensive experience that NHS has with their portfolio demonstrates how successful this model can be, and their effort to really know the customer has translated into positive loan performance.
- Building trust. Second, nonprofits have the trust of the communities they serve, at a time when public confidence in banks and their management is at an all-time low. If bankers don’t do something soon, they’ll risk being associated with politicians, or- even worse- lawyers. In the 2008 Gallup Honesty and Ethics Poll still, only 23% of Americans rated bankers as having high ethical standards. In this environment, the partnership of a trusted intermediary can make all the difference for financial institutions in winning trust and developing customary loyalty.
And that's why CRA remains so relevant. But we cannot just look at CRA solely as a compliance obligation. Nor is it merely a charitable or philanthropic effort. Lending in low and moderate-income communities needs to make good business sense and the nonprofits are a way to bridge that gap.
In the wreckage of the mortgage market, CRA has been one of the few examples of what has worked. With this model for responsible lending, we can go back to the roots of CRA as a way to build creative partnerships between the public, private, and non-profit sectors to preserve credit access and homeownership.