Reaching Out

Under Strong Pressure, Banks Expand Loans For Inner-City Homes

Mellon Seeks Out Borrowers In Philadelphia Program; Groups Teach Budgeting

It's 'Everything I Wanted'

By KENNETH H. BACON

Staff Reporter of THE WALL STREET JOURNAL

PHILADELPHIA - When Rubbie Clark set out to buy her first home, she had three strikes against her - a blemished credit record, low savings and the prospect that she could find an affordable house only in an inner-city neighborhood where banks have long been reluctant to lend.

But after completing a financial-counseling program with a community group. Ms. Clark repaired her credit record and in 1991 qualified for a mortgage from Mellon PSFS, the Philadelphia unit of Mellon Bank Corp. The 43-year-old office worker borrowed 95% of the cost of her $36,000 row house, where she lives with her foster-daughter and nephew.

Her loan is part of a quiet revolution at American banks, which are rewriting their lending rules to make it easier for minorities and lower-income people to borrow. The banks are being shamed into action by community groups and threatened by federal regulators policing fair-lending laws. High-Priority Issue

The Clinton administration has placed a high priority on the issue. Just last week, the Treasury Department's Office of Thrift Supervision rejected applications from four thrifts in New Jersey and Ohio to trade in their federal charters for state licenses. The agency ruled that they hadn't met the provisions of the 1977 Community Reinvestment Act, which requires banks and savings and loans to lend in all areas in which they take deposits.

Increasingly, banks such as Mellon are working with the Association of Community Organizations for Reform Now, churches and other community groups to reach out to new borrowers. It was after attending a church meeting on how to buy a house that Ms. Clark decided to apply for a loan. Despite her dream of home ownership, she had never sought a mortgage from bankers because "there was nothing that made me think they would have given me one."

Now, her house in a North Philadelphia neighborhood called Nicetown "has every thing I wanted - hardwood floors and an enclosed front porch,” she says. And it has one advantage she didn't expect: Her monthly mortgage payment, including taxes and insurance, totals $319, compared with the $425 a month she had paid to rent a one-bedroom suburban apartment. Financial System Changing

Slowly, it seems, the U.S. financial system is changing. Mellon Bank seeks out applicants from inner-city neighborhoods and has more than doubled its loans to lowand moderate-income people. A decade ago. Acorn says, it wrapped a Mellon office in red tape in protest of alleged red lining: now Acorn and the bank work side by side. Fleet Financial Group Inc., after years of pressure, has just announced a program to boost lending to such home buyers and to minority-owned businesses. NationsBank Corp. and Chemical. Banking Corp. already have launched similar programs.

The banks are learning that they can make a profit on such lending and develop new customers as well through counseling and other programs. "We believe it's the right way to get at this issue of neighborhood investment," says Paul Beideman, president of Mellon PSFS. Mellon has similar programs throughout its business area in Pennsylvania, Maryland, Delaware and Boston, Mass., but the Philadelphia program is the most aggressive.

THE WALL STREET JOURNAL February 23, 1994 Front Page

The outreach efforts follow three years of damning studies by the Federal Reserve Board that were based on racial-lending data collected under the Home Mortgage Disclosure Act. The figures showed that blacks were more than twice as likely to be turned down for mortgages as whites with similar incomes.

Bankers initially criticized the reports as misleading because they focused on the race, rather than the credit risk – as measured by other loans outstanding, income stability and savings - of mortgage applicants. But the reports gave new evidence of discriminatory lending patterns to community groups and galvanized regulators and the Justice Department to act.

In response, leaders, while denying conscious discrimination, are changing their practices. "The era of finger-pointing has long passed," says Stephen Ashley. president of the Mortgage Bankers Associ ation. "We must address discrimination head-on. We must increase our outreach and marketing efforts to communities." Mellon's Program

Ms. Clark owes her mortgage to a cooperative effort by Philadelphia banks and community groups to help minorities and low- and moderate-income people buy houses. Mellon PSPS, which made Ms. Clark's loan, extended 573 loans to low-and moderate-income borrowers under its Neighborhood Banking Program last year, up from 223 such mortgages in 1990. The Mellon unit, which operates only in the Philadelphia area, says 55% of these loans went to minority borrowers last year.

Overall progress is slow, however. De spite efforts to expand minority lending, the Fed numbers show that in 1992, the Please Turn to Page A10, Column !

Reaching Out: Under Pressure, Banks Lend More in Inner Cities

Continued From First Page last year for which federal figures are available, blacks were rejected twice as often as whites for loans. But the rejection rates don't reflect an increase in credit because such rates measure only denials as share of total applicants; the figures don't focus on lending volume. Moreover, the banks trying hardest to serve the inner city are, by reaching out to less credit-wor thy applicants, more likely to have high rejection rates. So, despite such stubbornly high rates, more credit is flowing to people and areas that banks had avoided.

Loans to lower-income people have risen. In 1992, conventional home-purchase loans to borrowers with incomes below the local median rose 27.1%, more than double the growth in loans to borrowers whose incomes are equal to or greater than the median, according to the Federal Reserve Board's latest data. And in 1992, the number of loans to blacks rose faster than those to whites.

Part of what is changing is the percep tion that poorer borrowers necessarily carry greater risks of default. That just isn't true, bankers increasingly say. A low-income homeowner will go to unusual lengths to keep from having a house repos. sessed. "Customers really don't want to lose their property." Mr. Biedeman says. And while poorer people are more likely to miss payments than wealthier people, the "higher delinquencies don't necessarily mean higher losses," he says, because Mellon works closely with delinquent borrowers and credit counselors to help get payments back on track.

Another myth is that poor people can't afford mortgages. Indeed, many, as Ms. Clark once did, are paying rents that are higher. In parts of Philadelphia, a Mellon official says, "you can buy a house for $20,000 easily and pay $180 a month." How Consortium Works

The consortium formed by Mellon and seven other Philadelphia lenders, called the Delaware Valley Mortgage Plan, works with community groups to help people with incomes of $36,000 or less purchase houses that cost $57,000 or less (in any neighborhood with homes at that price level). Frequently, the borrowers require extensive credit counseling from community groups before they qualify for loans. The counselors belp them work out payment plans for old debts, design savings plans to assemble down payments and teach basic budgeting skills.

The loan terms are adjusted to fit low-income borrowers, about 80% of whom are single mothers. A key to the program's success is flexible underwriting standards that allow welfare, Social Security or foodstamp benefits to count as income and allow borrowers without bank accounts or credit cards to prove their credit-worthiness by showing that they have reliably paid their rent and utility bills.

Since the government began to highlight racial disparities in rejection rates. the Federal National Mortgage Associa tion and the Federal Home Loan Mortgage Corp., the two government-chartered, stockholder-owned agencies that purchase mortgages from lenders, have launched new programs to help finance home buying in inner cities and poor rural areas. A 1992 law requires these companies to devote more of their resources to low- and moderate-income programs.

In its Neighborhood Banking Program, Mellon waives a demand that applicants work for two years in the same job or industry. All that is required is a steady income. Mellon also lets loan applicants use cash for down payments, an arrangement that helps low-income applicants who, in many cases, don't have bank accounts. And applicants also get a break on interest rates. Ms. Clark's 7.126% rate was 1.5 percentage points below the mar ket rate when she got her mortgage - with a down payment of only 5%.

"Mortgages are the spine of the neighborhood" because homeowners encourage investment and development, says Bruce Dorpalen, Acorn's director of banking programs in Philadelphia. "If you can maintain property values, then people can borrow on their houses to get their roof fixed or to send their kids to college," he says.

Benefits of Counseling

Ms. Clark got her loan from Mellon after going through a credit-counseling program at Acorn. Her income as a

service associate at Penn Mutual Insurance Co. was under $30,000 when she bought the house. But without counseling. some delinquent student-loan payments and other credit problems probably would have prevented her from getting a loan.

Since many low-income borrowers need help getting their finances in line, Mellon recently hired Nelson Acevedo, a former community worker, to help borrowers who are having problems meeting their payments. He meets with people who miss a payment, and, if necessary, he helps them work out alternative payment plans to avold foreclosure. Sometimes he arranges assistance with energy bills or other temporary help from state and local agencies to pull people through periods of unusual financial strain.

The counselors and community groups seem to help bankers bridge the cultural gap that has long made the financial system inaccessible to poor or minority areas. "Bankers have very little in common with people in poor communities," Rep. Joseph Kennedy says. But, the Massachusetts Democrat says, banks in Boston and elsewhere are beginning to realize that they can build strong customer bases in communities once spurned - despite "a tremendous amount of suspicion on both sides of the street."

Even though expanding into onceshunned neighborhoods, Mellon still per forms badly when measured by denial rates. Even in its Neighborhood Banking Program, it rejected 19% of the applications from black applicants last year. compared with 6% of white applications and 8% from Hispanics. "Because of our outreach, we're going to see more applica. tions and we're going to lend more, but we're also going to turn down more," Mr. Beideman explains. All rejected applications receive a second review.

But while the disparity between rejections rates remains high, the number of loans Mellon PSFS makes to minorities has risen sharply. In 1990, Mellon made 51 loans to blacks and 39 loans to Hispanics through its Neighborhood Banking Program; last year, it made 165 loans to blacks and 128 to Hispanics. In the Philadelphia area, in fact, Mellon is making more than twice as many loans through its Neighborhood Banking Program as it does through its conventional mortgage program.

When Cynthia Henderson went to Mellon to discuss a loan, the lending officer quickly decided that she wouldn't qualify

for a normal loan because she had held her current job only six months. But the Mellon lending officer recommended that she go to Acorn for help.

Learning the Ropes

There, Allison Hughes learned that Ms. Henderson had just returned to work after a divorce, reclaiming a job at a General Electric Co. plant that she had held for several years before her marriage. Ms. Hughes was able to sort out her employment record and help Ms. Henderson plan to assemble the 5% down payment on a $44,000, two-bedroom house. She ultimately got a mortgage from Mellon and lives in an attractive row house with her three-year-old daughter.

"I love Mellon," she says, noting that she also has a car loan from the bank.

Often, financial counseling can get applicants past the rejection threshold. "It's our belief that discrimination, where it occurs, often affects applicants with some blemishes," Comptroller of the Currency Eugene Ludwig says. "In many cases, such assistance - requesting explanation of derogatory credit information, suggesting ways to improve an applicant's reported income or reduce the applicant's current debt, or offering an applicant loan

"How many single parents do you deal with?" she asks.

"A lot. Maybe 70% to 80%," he says.

Relieved, she begins to answer ques tions about her finances and credit record. She concedes that she has more than $1,000 in unpaid bills, some of them delinquent for several years. Mr. Saffold tells her that she has to settle the bills and get them removed from her credit report before she can get a mortgage.

"For anyone who has negative comments on their credit report, the bank does require that you come to budget class," be adds. He signs her up for a series of three classes to teach her how to set up a monthly budget and manage credit.

-Steven Lipin in New York contributed to this article.