`No Credit Doesn't Necessarily Mean Bad Credit'

Elmira Singleton struggled for most of a decade to buy her own home. The 41-year-old mother of two, who earns a modest living as a Philadelphia bakery clerk, tried sheriff's auctions and government sales of abandoned properties. She even spent $85 for a worthless "how to" book pitched on late-night TV. But on July 14, Singleton's dream became reality when she moved into a $24,500, two-bedroom row house in South Philadelphia, financed by a Fidelity Bank program. "They gave me a chance when nobody else did," she says.

Singleton remains a too-rare success story. A Federal Reserve study, released on Oct. 27, shows the nation's banks still do a dismal job of mortgage lending to low-income minority borrowers. It found that, all else equal, blacks and Hispanics are far more likely to be rejected for mortgages than whites (chart).

NEW NICHE. That's hardly news. Yet there are signs that some banks may be making a bit of progress. While demand for conventional mortgages ran flat in 1991, applications from low-income individuals shot up 45%. Much of that surge may be due to plunging interest rates. But some experts feel it could represent a payoff of work by some banks to provide mortgages, as well as other loans and services, to low-income individuals.

Banks surely didn't go rushing after minority business on their own. Many grudgingly offered services to low-income customers only after activists invoked the Community Reinvestment Act to block banks' plans to merge or expand. The law requires banks to plow money back into the communities where they do business. Over the past decade, CRA protests have yielded $10 billion in inner-city lending, according to Washington's Center for Community Change.

Although they may have been dragged into the business kicking and screaming, many banks admit they've stumbled upon a new--and modestly profitable--niche in tailoring traditional services to meet the needs of low-income residents. To get into these markets, banks often enlist the services of the very community activists they had been fighting. Philadelphia's Fidelity, for example, works with the Association of Community Organizations for Reform Now (ACORN). In several cities, churches and community groups screen potential borrowers, then help them make applications. If homeowners fall behind on payments, the groups help them rearrange their finances to catch up. Community groups "are helping bankers relate to a part of the universe they don't feel comfortable in," says Allen J. Fishbein of the Center for Community Change.

PAYOFF. In many instances, activists have had to persuade banks to alter their lending standards to accommodate low-income borrowers. Since relatively few inner-city residents have cars, charge cards, or even checking accounts, many have no credit records. In Philadelphia, ACORN persuaded Continental Bank to apply such alternative tests as how well applicants paid their rent and utility bills. Continental also agreed to waive an employment standard--two years at the same job--and simply ask whether the applicant was continuously employed for at least three years. Notes Continental Senior Vice-President Ralph F. Desiderio: "We've come to understand that the poor have different income streams--and that no credit doesn't necessarily mean bad credit."

At most banks, the new business is paying off: Out of 150 low-income mortgages Continental has written, none has defaulted and only three are more than 60 days past due. Managers at Huntington National Bank in Columbus, Ohio, expect that the 265 mortgages they've written will be just as profitable as other home loans, even though they waive most lending fees.

To boost its return, Huntington doesn't take out private mortgage insurance for possible losses. Instead, it hopes housing values will spurt enough to allow it to sell the mortgages into the secondary market--while retaining a tidy servicing fee. "There are ways of pricing these markets that make sense," says Donald E. Walters, senior vice-president at Huntington.

Nationally, these outreach efforts remain the exception. And critics still are pushing banks to live up to their Community Reinvestment Act duties. But if banks figure there's money in these markets, self-interest may make the banks better citizens than regulations ever have.

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