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I am pleased to insert into the record a recent article in the Wall Street Journal which highlights an innovative program that Mellon Bank launched to expend mortgage lending in the inner city. Mellon has launched programs in the past to improve conditions for their customers.

Now Mellon Bank Corporation faces another great challenge: to continue protecting and satisfying the consumer in the face of changes to the banking environment a merger like this one would create.

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 Stall Reporter of THE WALL STREET JOURNAL

PHILADELPHIA - When Rubbie Cart 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 bants have long been reluctant to lend.

But after completing a financial-coun seling program with a community group. Ms. Clart repaired her credit record and in 1991 qualified for a mortgage from Mellon PSFS, the Philadelphia unit of Mellon Bank Corp. The 13-year old office worter 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 rues to make it easier for minortties and lower-income people to borrow. The banks are being shamed into action by community groups and threatened by lederal regulators policing fair-lending lam. 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 Rein vestment Act, which requires banks and savings and loans to lend in all areas in which they take deposits.

Increasingly, bants 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. Clart decided to apply for a loan. Despite ber dream of home owner ship, she had never sought a mortgage from bankers because there ws nothing that made me think they would have given me one."

Now, her house in North Philadelphia neighborhood called Nicetown "has every thing I wanted - hardwood floor and in 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 SBI mooth she had paid to resto one bedroom suburban apartment. Floandal System Changling

Slowly, it seems, the U.S. financial system is changing. Mellon Bank seets out applicants from inner dty neighborhoods and has more than doubled its louns to loro and moderate-Income people. A decade ago. Acorn man. It wrapped Mellon office in red tape in protest of alleged red lining; now Adam and the bank port side by side. Heet Financial Group Inc., after years at pressure, has just announced a program to boost lending to much home buyers and to minority owned businesses. NationsBank Corp. and Chemical Banking Corp. already have launched similar programs.

Dhe bants are learning that they can make a profit a sucha lending and develop new customers as well through counseling and other programs. "We believe it's the right ny tore at this issue of neighbor hood investment," says Paul Beldeman, president of Mellon PSPS. Melloa has similar programs throughout its business area in Pennsylvania, Maryland, Delaware and Boston, Mass., but the Philadelphta program is the most nagressive.

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

Bankers initially criticized the reports us misleading because they focused on the nce, rather than the credit risk - usmes. sured by other loans outstanding. Income stability and sering - a mortgage applicants. But the reports gave her evidence of discriminatory lending patterns to coer munity groups and paranized regulators and the Justice Department to act

In response, leaders, while denyine conscious discrimination, are changing their practices. "The era of lager-pointing has long passed." says Stephen Ashley president of the Mortgage Bankers Assoct ation. "We must address discrimination head on. We must increase ou outreach and marteling efforts to communities." Melton's Progra

Ms. Cart owes her mortgage to. cooperative effort by Philadelphia bants and community groups to help minorities and low- and moderate-income people bwy houses. Mellon PSES, which made Ms. Cart's loan, extended 573 loans to low and moderate-income borrowers under its Neighborhood Banking Program last year. up from 223 such mortgages in 1980. The Mellon unit, which operates only to the Philadelphia aren, way 5 dl these loans went to minority borrowers last year.

Overall progress is slow, however. De spite efforts to expand minority lead ing. The Fed numbers show that in in the

Please No to Page 010 Cobra 1

THE WALL STREET JOURNAL February 23, 1994

Front Page

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

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

Since the government began to high light racial disparities in rejection nitas the Pederal National Mortgage Associetion and the Federal Home Loan Mortgere 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 182 law requires these companies to devote more of their resources to low and moder ate-income programs.

In its Neighborhood Banking Program, Mellon waives a demand that applicants wort 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 arrange ment that helps low-income applicants who, in many cases, don't have bank accounts. And applicants also get a break on interest rates. Ms. Clart's 7.128% rate was 1.5 percentage points below the mar tet rate when she goe ber mortgage - with a down payment of only 5%.

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

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

Continued Prom First Page last year for which federal figures are Irailable, Dlacts were rejected twice as aftea as whites for loans. But the rejection rates don't reflect an increase in credit because such rates measure only denials u share of total applicants: the figures don't focus op lending volume. Moreover, the banks trying hardest to serve the inner

city are, by reaching out to less credit-wor they applicants, more likely to have high rejection rates. So, despite such stut bornly high rates, more credit is howing to people and areas that banks had avoided.

Loons to lower-income people have risen in 1992, conventional home-pur chase loans to borrowers with incomes below the local median rose 77.1%, more than double the growth in loans to bor roven those 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 blachs rose faster than those to whites.

Part of what is changing is the percep tion that poorer borrowers necessarily carry greater risks of delault. Thal 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 love 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 Melloa vortis closely with delinquent bor rowers and credit counselors to help get peyments back on track

Another myth is that poor people can't afford mortgages. Indeed, many, as Ms. Cart once did, are paying rents that are higher. In parts of Philadelphia, a Mellon official says. "you can buy a house for $2.000 easily and pay $180 a month." How Consortium Worts

The consortium formed by Mellon and seves other Philadelphia lenders, called the Delaware Valley Mortgage Plan, worts with community groups to belp people with incomes of $36,000 or less purchase houses that cost $87,000 or less (in any neighbor hood with homes at that price level). Frequently, the borrowers require extensive credit counseling from community groups before they qualify for loans. The counselors help them work out payment plans for old debus, design savings plans to assemble down payments and teach basic budgeting stills

service associate at Penn Mutual Insur ana Co. was under $0,000 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 retting their finances in line, Mellon recently hired Nelson Acevedo, a former community worter, to belp borrowers who are having problems meeting their pay ments. He meets with people who miss payment, and. If necessary, be helps them port out alternative payment plans to avoid foreclosure. Sometimes he arranges assistance with energy bills or other tem porary 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 Nnancial system inaccessible to poor or minority areas. "Bankers have very little in common with people in poor communities," Rep. Joseph Kennedy says. But, the Mas. sachusetts Democrat says, banks in Boston and elsewhere are beginning to realize that they can build strong customer bases in communities once spurned - despite "1 tremendous amount of suspicion on both sides of the street."

Even though expanding into once shunned neighborhoods, Mellon stil 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 % of white applications and 8% from Hispanics. "Because of our outreach, we're going to see more applications 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 rejec. tions 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 Pro gram: last year, it made 165 loans to blactos and 128 to Hispanias. In the Philadelphia area, in fact, Mellon is making more than twice as many loans through its Neighbor hood Banking Program as it does through its conventional mortgage program.

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

for a normal loan because she had held her that might improve his or her current job only six months. But the Mello ability to meet under writing standardslending officer recommended that she app an mean the difference betweea dental to Acord for belp.

ud acceptance." Learning the Ropes

More people are dropping by Acorn's There, Allison Hughes learned that Me

Recond-floor walk up odloe loi battered Henderson had just returned to work ana

building next to a former opera house now i divorce, reclaiming job at a General

med us a church Richard Saffold, Electric Co. plant that she had held for

relatively Dee counselor, is helping a several year before her marriage. Mach 37 year old mother of two who is interested Hughes was able to sort out her employ

in a loun ment record and help Ms. Henderson plan

"How many single parents do you deal

with?" she asb. to assemble the 5down payment on $44,000, two bedroom house. She all

"A lot. Maybe 70% to 80%," he says. mately got a mortgage from Mellon and Rellered, she begins to answer quest lives in an attractive rou howe will her tion about her finances and credit record. three-year old daughter.

She conoidea that she has more than $1,000 "I love Mellon," she says, noting that i upald bills, some of them delinquent she uso basi ar loun from the bank for several years. Mr. Saffold tells her that Often, financial counseling can get ap

the has to settle the bills and ret thera plicants past the rejection threshold. It's removed from her credit report before she our better that discrimination, where i can get 1 mortgage. occurs, often affects applicants with some "For anyone who has negative con blemisha," Comptroller of the currency ments on their credit report, the bank doa Eugene Ludwig says. "In many cases, require that you come to budget dans," be such assistance - requesting explanation adds. He stens her up for a series of three of derogatory credit Information, present dases to teach her how to set up I ing ways to improve an applicant's re monthly budget and manage anedit. ported income or reduce the applicant's -Stroa Liper ir Nere Yont contributed current debt, or offering an applicant loan to outs article.

Mr. DINGELL. The gentlelady can please be recognized.

Ms. MARGOLIES-MEZVINSKY. Welcome gentlemen from Mellon and from Dreyfus.

Can you explain or outline the ways that you intend to preserve customer confidentiality?

Mr. CAHOUET. Yes. I hope I can to your satisfaction. We value very sincerely the confidentiality of our customers, and we would continue to do that as we have in the past.

Ms. MARGOLIES-MEZVINSKY. Could you be a little bit more specific?

Mr. CAHOUET. Well, we don't make the confidential information, financial information of our customers available to third parties without their consent.

Mr. STEIN. I just might add to that that in our case we always keep the information secret and we cannot have permission even to use the list, because it is owned by the funds, without the specific approval of the directors of the funds.

Ms. MARGOLIES-MEZVINSKY. Why do you think that people are so confused when they buy mutual funds through a bank?

Mr. CAHOUET. I don't know for certain. I think that inherently there is some confusion out there in the marketplace for a large part of the population, whether they buy funds from banks or mutual funds or from brokerage companies. Our interest in our organization is to do whatever we can in order to alleviate that kind of confusion and that is what we want to do because we think that we are doing a better job for our customer in the process.

I can't really comment as to why people in general, other than a lot of people are either making investments for the first time, are not particularly sophisticated in themselves as it relates to financial instruments, and haven't taken the time to understand.

Ms. MARGOLIES-MEZVINSKY. Mr. Stein?

Mr. STEIN. I think a part of the confusion, I guess, is the culture because they have been exposed for what, 60 years, to insured products at a bank, and that is something that they remember. I think it is up to us for the people who are interested in uninsured products or noninsured products to be educators over the same period of time to the fact that it does exist, what exists, and what the risks are, and that they can lose money. I think those efforts have to be made very strongly. Hopefully, they will not be as confused.

Ms. MARGOLIES-MEZVINSKY. Mr. Cahouet, I noticed that you promised to preserve the Dreyfus name and not to rename them as Mellon funds. I also understand that your existing funds, the Laurel funds, do not use the bank's name. Could you explain why?

Mr. CAHOUET. Well, the answer for the Dreyfus question is a very simple answer, and I will just say that the Dreyfus name is known the world around and it is a highly respected name, and it has tremendous value. I think that that really disposes of that issue.

As regards why we chose the Laurel name rather than using the Mellon name, quite frankly, was to avoid the confusion.

Ms. MARGOLIES-MEZVINSKY. Do you agree with many consumer groups that bank-sponsored funds that use banks' names pose a special risk to investors and depositors?

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