Thursday, October 14, 2021

NCBJ 2021: Minority Banks and Lending

This panel, including Judge Christopher Lopez from the Southern District of Texas and Josiah Lindsay from Fortress Investment Group, contained a wealth of information. The panel generally covered the economic health of the African American community, the disparate impact of Covid on the African American community and how Minority Deposit Institutions (MDIs) and Community Financial Development Institutions (CFDI) can help to alleviate those conditions. 

Some Sobering Economic Facts

The panelists discussed some sobering conclusions from the McKinsey Institute for Black Economic Mobility's recent report titled The economic state of Black America: What is and what could be. I have linked to the report here for those who are interested.   

Their first conclusion was that if the wage gap between Black and White Americans were closed, it would help bring 2 million African Americans into middle class for the first time.

African Americans are concentrated in lower paying jobs. Nearly half of Black workers are concentrated in healthcare, retail, and accommodation and food service.

35% of all nursing assistants are Black. 33% of bus drivers and security guards are Black.

While the median wage in the U.S. is $42,000, 43% of Black workers earn less than $30,000

Mr. Lindsay pointed out that many Black workers were in public facing jobs that were affected the most by Covid and that many are choosing not to return to these jobs. He gave the example of going to a Best Buy and only finding maybe five people working there. 

Additionally, many Black communities are consumer deserts in need of greater fresh food, affordable housing, broadband and healthcare providers. Instead of going to Costco, everybody gets their meat from the place they simply call "market" with meat of questionable provenance.

The median Black household has 1/8 the net worth of median White family. This is due to lower paying jobs and a lack of intergenerational wealth transfers. African Americans could not get home loans due to redlining. As a result, they missed out on the suburbanization of America. Because Black families did not have as much access to home ownership, they were not able to pass wealth on to the next generations. The McKinsey report estimates that diminished inheritances account for 60% of the difference in wealth between White and Black Americans.

Home ownership is one area where racial disparities are present. For White families, there is a 74% level of home ownership, while the figure for Black families is only 44%

Mr. Lindsay emphasized that home equity is often access to capital for small businesses. If a person can't accumulate capital in the form of a house and then transfer that wealth to the next generation, he and his descendants will have fewer opportunities.

Mr. Lindsay said that his grandfather fought in World War II. When he got back from the war, he didn't have access to GI Bill and didn't have access to veteran subsidized loans to buy homes because the government didn't allow minorities to access programs. (Ed.: this is an example of what people mean by systematic or structural racism). 

 During the PPP loan process, companies that were well banked came out ahead. The first tranche of PPP loans was to customers of large banks. Minority small business owners had to wait, by and large, for the third tranche.

Judge Lopez pointed out that 80% of African Americans aspire to higher education. However, student loan debt is extremely high and interest rates are extremely high. Added to this, it's hard to discharge student loan debt. For someone trying to aspire, trying to get an undergraduate degree, if things don't work out, their options are limited.

Mr. Lindsay related that he was on his school's reunion committee. He said that when he asked what it currently costed to attend, he almost fell out of his chair. He said it was literally three times the cost from when he was there. 

MDIs and CDFIs

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) recognized that minority depository institutions provide important financial services to historically underserved communities and minorities

To qualify as an MDI, either 51% or more of voting stock must be owned by minority individuals or a majority of the board of directors must consist of minorities and the community served must be predominantly minority. 

 FIRREA says there is a need to preserve MDIs. They have shrunk since 2008 from the 200s to 144. Many had to had to merge to survive

Mr. Lindsay stated that "capital is the grease that allows economic activity to take place." He said that MDIs know the community and know how to evaluate borrowers in ways other financial institutions would not.

MDIs are where your local church is going to get its loan for a building or individuals will get their car loan

Judge Lopez told a great story about his experience with an MDI. When he went to college, there was a table where he could get a t-shirt and a credit card. The t-shirt meant that he could avoid washing clothes for another day. The credit card meant that he could go to Marshall Fields and run up his balance. This was when he learned about minimum payments. His mother told him that he got himself into the mess and he could get himself out. Later, he went to the local branch of Unity National Bank, an MDI, met with the Bank President and was provided a loan. He said that the power of MDIs is that someone believed in him. 

Mr. Lindsay said that we need these institutions to provide the grease for economic activity where the president could see you and not just spit out an algorithm that says no.

The primary mission of a CDFI is community development

60% of their financing activities must be targeted to low and moderate income or underserved communities

Many MDIs are also CDFIs. Many CDFIs are credit unions

They often offer no cost and low-cost checking and saving accounts for first time customers as well as second chance checking accounts

They offer mortgage loans to encourage home ownership and commercial loans that give small businesses alternatives to predatory lenders (ed.: think Merchant Cash Advance companies).

They also provide financial education. Judge Lopez said that when he went to get the car loan mentioned above, the bank also provided him with financial literature to read.

Judge Lopez said that he comes from Flushing, Queens where there is a huge Asian community. He said it helps when people see a bank where someone who would want to start a small business wouldn't have to worry about language barriers.

One benefit of MDIs and CDFIs is that they are in the community. They can see guy the has a food truck and wants to double his business. This guy might not be able to get a loan from JP Morgan Chase or Wells Fargo. However, the local entity in the community can know that it is a viable business if you know the person. Investing in local businesses adds revenue to the community.

Judge Lopez said that many minorities will feel that you will be turned down if you go to the big bank. There is a perception about how big banks work, especially when you don't have collateral.

94% of Black small businesses are sole proprietorships, such as a barber shop or a food truck. These are the types of people who are reluctant to seek funding from a big bank. 

The speakers said that the effect of Covid on minority-owned businesses was pretty scary.

Mr. Lindsay said that before Covid, 1 million minority owned businesses employed 8.7 million workers and generated $1 trillion in economic output.

During Covid, 41% of Black-owned businesses were wiped out, representing a lot of jobs, but also a lot of sole proprietorships.

32% of Latinx businesses faced the same fate.

26% of Asian-owned businesses were lost. 

Unfortunately, the location of Covid cases coincided with the locations of Black owned businesses. This makes it harder for businesses to start over when they have a foreclosure or an eviction on their record.

Mr. Lindsay said that the people who will provide capital to those businesses are likely to be MDIs and CDFIs.  

Mr. Lindsay also said that the hope was that PPP loans would blunt effect of the pandemic. However, they didn't reach certain communities. If you didn't have that bank relationship, you didn't get in on round one. 42% of phase one loans went to larger businesses although they only account for 4% of total businesses. Minority owned businesses didn't get into the program until round three and by then it was too late. 

The speakers said that the death of George Floyd was a wake-up call to corporate America. After Mr. Floyd's death, individuals and corporations started investing in MDIs and CDFIs, including 100,000 new customer accounts. Netflix, Yelp, Wells Fargo and Uber are all corporate entities that have moved resources into financial institutions that serve underrepresented communities. They said that the murder of George Floyd made corporate America realize that there were two Americas.

Mr. Lindsay said that there was a wakeup call that we've got to change how we've been deploying capital. He said that for the first time since I have been on wall street for 20 years, senior management is paying more than lip service to minority investment. He said that they manage pension funds and a lot of those employees who contributed to pension funds are minorities. 

Mr. Lindsay said that he knew maybe five people who look like him who do what he does in the whole country. He said that the biggest barrier is people's uncomfortable view of giving an individual a chance. He told the story of how he was able to break into the financial sector. His first career was as an engineer. He worked as a process engineer and a research engineer at a plant making carbon fiber. When he went to law school, his summer associate jobs were focused on intellectual property which did not interest him. He began calling alums of Virginia to pick their brain. One graduate recommended attending an investment conference where there would be 500 scions of business. However, he was a 3L and the conference cost $5,000 which he didn't have. He said that a week later the person's assistant called and said that were was a student program that only cost $500, which he could afford. When he attended, he realized that he was the only student there. He said he realized that Mr. Tucker's doing a solid; he created a student fee for one person. He said his benefactor was being mindful of helping a person interested in business who didn't even know what that business was. 

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