A Win-Win for Community Banks with Personal Loans, CRA, and the FDIC
In the early 20th century, redlining was a common practice used to discriminate against lower-income areas, denying them access to adequate banking services. Although redlining became illegal in 1968, certain regions of the country still suffer from the effects of this discriminatory practice and face a shortage of financial opportunities. Today, community banks play a vital role in reducing this disparity by providing essential financial services to marginalized communities. In this article, we’ll examine how community banks can meet their community’s diverse financial needs and help build financial wellness by incorporating personal loans into their services.
Understanding the Community Reinvestment Act (CRA)
In 1977, the United States Congress enacted the Community Reinvestment Act (CRA) in an effort to reduce discriminatory credit practices in low- and moderate-income (LMI) areas. The CRA, which collaborates with the FDIC, OCC, and FRB, seeks to bridge the gap between financial institutions and the credit needs of their served communities. Under the CRA, banks and financial institutions are required to fulfill their community obligation of providing accessible credit and deposit services to underbanked populations. By expanding banking services in marginalized areas, banks help to promote financial literacy and wellness, which leads to growth in the community’s financial environment.
To qualify for credit under the CRA, banks must provide specific lending and investment services with the purpose of improving the financial circumstances of LMI neighborhoods. These specific practices, which are called qualifying activities, ensure CRA banks remain committed to local investment and improving the overall financial health of their community. The OCC provides an illustrative list of activities that qualify banks for CRA credit, which ranges from providing an unsecured consumer loan to a moderate-income family for accessible vehicle modification to small-dollar personal loans for farms to purchase equipment. Once granted CRA eligibility, banks must maintain their status by satisfying certain requirements, such as receiving regular evaluations from federal regulators and investing in community projects. The CRA not only incentivizes banks to support their local communities but also holds banks accountable for fair and just lending practices.
The FDIC’s Role in Economic Inclusion
The CRA is only a small piece of the FDIC’s mission to promote economic inclusion in underserved populations. In 2014, the FDIC published its Economic Inclusion Strategic Plan, which seeks to promote “a state in which all U.S. households can establish, sustain, and benefit from banking relationships to create a strong financial foundation, manage their day-to-day finances, build wealth, and live in communities strengthened by bank lending, services, and investments” (https://www.fdic.gov/resources/consumers/economic–inclusion/index.html). The plan centers around four opportunity areas that emphasize consumer and community outcomes: create and sustain foundational banking relationships, build household financial stability, achieve a secure financial future, and live in strong and healthy communities. The FDIC provides various resources and support for community banks in redlined areas to help them improve banking access. Community banks can receive training through workshops and webinars, benefit from FDIC-led networking and collaboration opportunities, access financial literacy and education materials like the Money Smart Program, and equip themselves with the technology to promote economic inclusion and financial wellness in underserved areas. Since the adoption of the Economic Inclusion Strategic Plan, the U.S. has seen record-low numbers of underbanked households.
The Importance of Personal Loans for Community Banks
As inflation rises and the cost of living grows every day, personal loans prove to be the most valuable asset in a community bank’s financial services. The flexibility and accessibility of personal loans make them a high-demand financial solution for LMI areas with diverse financial needs. Small-dollar and unsecured personal loans usually have a smaller barrier to receiving credit, making it an accessible option for borrowers with limited credit histories. Additionally, personal loans can be used to fund a variety of financial needs, such as credit consolidation, home improvements, medical emergencies, and car repairs. Personal loans help to fill in the financial gap created by traditional banking services in marginalized communities, paving the way for financial inclusion and economic stability in underbanked areas.
Offering personal loans provides several benefits to community banks. One of the ways these loan types are advantageous is their use for a variety of expenses. By offering personal loans, community banks can appeal to borrowers with diverse financial needs, leading to an increase in a bank’s customer base. Additionally, personal loans help banks establish and deepen their relationships within the community, which further builds loyalty and trust between bank and consumer. Satisfied customers are more likely to maintain and expand their banking relationships as well as recommend the bank to others. Through these deepened relationships powered by personal loans, community banks can invest in and support local economic growth, contributing to improved physical, mental, and financial well-being in the community.
Personal loans also help banks fulfill their CRA obligations of serving and investing in LMI communities. Affordable and accessible personal loan products provide essential credit opportunities to areas typically underserved by traditional banking services. These loans help underbanked individuals tackle a variety of financial obstacles, such as home repairs, educational costs, or small business needs. When consumers are able to address these needs, the CRA’s purpose of achieving a broader community development goal is satisfied.
Building Financial Wellness Through Personal Loans
Personal loans are instrumental in building financial wellness in underbanked communities. By providing resources that enhance overall economic stability, personal loans help improve credit and establish responsible lending practices. As small-dollar loans usually have lower entry barriers and flexible terms, those with limited or no credit histories can use these loan types to build their credit. Additionally, responsible use and timely repayment of personal loans can further improve one’s credit scores. Many lenders also offer financial education resources for borrowers to learn necessary financial skills, such as budgeting and money management, contributing to long-term financial stability. Although personal loans are used for individuals, offering personal loans can have a positive ripple effect on the larger community. Borrowers equipped with the knowledge, support, and funds to achieve their goals feel more empowered to invest back into their community, resulting in communities thriving with overall financial wellness.
Compliance with CRA through Personal Loans
Not only are personal loans beneficial for borrowers and their communities, but they also directly support the CRA’s goals and help community banks meet compliance standards. By offering personal loans, community banks can provide essential financial services to the underserved markets targeted by the CRA and the FDIC’s inclusion plan. By bridging this gap between financial institutions and marginalized areas, community banks can help establish financial stability and facilitate local economic growth while also satisfying CRA requirements. Staying compliant with CRA standards requires a strategic plan set forth by the bank to ensure all information is accurately reported. Becoming familiar with CRA requirements, updating internal policies and procedures regarding lending and documentation standards, staying consistent with thorough reporting of loan information and community involvement, and utilizing financial technology like Vergent LMS are essential steps in ensuring CRA compliance.
Personal loans are an invaluable asset in a bank’s financial services, providing an accessible form of credit for underbanked communities with diverse financial needs while simultaneously satisfying CRA requirements. By offering personal loans, community banks empower individuals to achieve financial stability, which leads to thriving communities centered on financial wellness. Community banks should explore and implement personal loan offerings to best serve the various economic needs of their community.
Vergent LMS wants to help community banks promote financial wellness with turn-key loan management software tailored to help community banks effortlessly meet CRA requirements. Learn more about our Financial Inclusion Program. Request a demo today!
