For the last 16 years, my career in banking has allowed me the opportunity to identify some of the best lending practices and offer potential solutions when it comes to lending. I've seen what borrowers experience when trying to get loans. I've also seen the impact when credit needs aren't met. What I've learned from my experience is that lending is critical. It's a building block to take dreams from ideas to implementation.
Lending is also what has kept many communities of color from being able to compete. It is what has prevented them from homeownership. Ultimately, it has hampered the ability to pass down assets that create generational wealth. At its worst, lending can be predatory. It takes advantage of people with limited means. The quick and easy approvals, along with fast turn arounds of alternative financial services such as payday loans, have been used to bridge gaps between paychecks, help with the costs of emergencies, and is even used as personal credit lines. These loans are marked up with unfathomable interest rates that nobody with better options would consider.
Poor communities stay poor due to a lack of access to non-predatory lending and credit options. Black communities have a well-documented history of being associated with poor communities. Data shows that the two aren't mutually exclusive. Need more convincing? See all the conversations and work being done around closing the racial wealth gap from scholarly to Presidential platforms. Black-owned banks should be part of the solution to put predatory lenders out of commission because these Black banks disproportionately serve communities of color. Black communities are predatory lenders' target market.
In the past, lending was based solely on personal relationships. A borrower went into a branch, talked to the lending officer and, at his discretion, if he knew you, was able to provide the credit seeker with a pathway to meet their lending needs. Although that isn't standard now, what we have in place now, in my opinion, is something arguably worse — an ineffective underwriting process. It is the undisclosed minimum credit score you didn't meet to get the loan. The lack of years you've been in business and the assets you don't have to pledge as collateral are barriers to entry. These lending standards in place to decrease and, if possible, prevent banks from taking losses are the same standards cutting swaths of people out from the start.
Black banks have the opportunity to be able to lead the charge. These institutions could test new lending policies that give potential borrowers with challenged credit a stronger chance to not only get the loan but successfully repay their loans. Black banks can expand upon CD secured loans by rewarding good payment history with the conversion of their secured loan to a non-secured one, and incorporate financial education into credit increases, putting guard rails in place to decrease the borrower's chance of default.
In a past role, I used CD secured loans to work with people with challenged credit. It was, at the time, a new and innovative way to serve an unserved customer base. We would put money the customers saved into CDs, then turn around and lend to them up to the amount they had in their CD. The purpose of this was to get them a bank approved loan on their credit report in hopes that it would help increase their creditworthiness upon payback.
We can take these initiatives to a higher level. We can create solutions to get customers into these entry-level loans and then be able to come up with programs that educate people through the process of getting loans and beyond.
Additionally, there are lessons to be learned from the more flexible credit union practices, institutions owned by the members, that do as much as possible to get their members into their loans. Since we live in a world that revolves around credit, capital increases your chance of success dramatically. Underwriting practices need to be changed completely to make sure that all people have an opportunity to get loans. There is a way to be profitable, to stay in business and be impactful by opening doors that are locked for individuals, preventing their ability to access the credit market.