The recent CFPB and Department of Justice redlining proposed settlement with Hudson City Savings Bank has got me thinking about the mixed messages that the CFPB is sending.
Hudson City Savings Bank was dinged by the Bureau for $5.5 million in the form of a civil money penalty, and the Bank was “coached” to agree to invest $25 million in a loan subsidy program in majority-Black and Hispanic neighborhoods. The Bank also agreed to spend considerable money to advertise in those neighborhoods and partner with community-based organizations providing financial education and credit counseling programs.
The mixed message that the Bureau is sending is that while lending in historically disadvantaged neighborhoods is a necessity, and it is exceedingly important that economically deprived persons have access to capital, the Bureau at the same time criticizes consumer finance companies for what the Bureau deems to be an over-concentration in those same areas.
Not only is the message from the Bureau mixed, but it is wrong. America's traditional installment lenders operate locally and in most all of our nation's communities without respect to racial or economic make-up. Finance companies know their customers by name. Consumers are not mere statistics with only a credit score profile to distinguish them.
Traditional installment lenders are highly motivated to make good, quality loans because such loans remain in their portfolios. Most consumer finance companies do not securitize and sell-off their loans in the secondary market. And, a good lender, like every other successful retailer, wants repeat business from satisfied customers.
Larger financial institutions, such as Hudson City Savings Bank, are just not equipped to provide the hands on, customized service that local lenders can provide. The “Know Your Customer” (“KYC”) concept has long been the key element of the consumer industry's success. Consumer finance companies really know their customers as a core business practice, not just a response to the KYC resolutions.
When the Bureau adopted the Ability to Repay standards for qualified mortgage loans, it recognized the important role played by smaller lenders in hard-to-serve markets. In its rulemaking, the Bureau acknowledged: "the Bureau believes that small creditors often are particularly able to make highly individualized determinations of ability to repay that take into consideration the unique characteristics and financial circumstances of a particular consumer."
The same issues abound in personal property lending as they do in real property lending. Rather than discouraging traditional installment lenders from making credit available in disadvantaged neighborhoods, the Bureau should be congratulating and encouraging such lenders to continue in their efforts to make credit available to those historically disadvantaged.