Robert Patrick Cooper
‘Forceful action required’
Numbers tell the story of how difficult it is for banks owned or run by minorities to succeed. Only 205 of 8,615 U.S. banks are “minority depository institutions,” according to the Federal Deposit Insurance Corp., which maintains a national list.
Just three of Massachusetts’ 205 banks qualify as minority-owned. Black-owned OneUnited Bank is based in Boston; Asian-owned Cathay Bank and United Commercial Bank, both of which are based in California, have Boston locations.
While federal policies are in place to help minority-owned banks succeed, a 2006 report from the General Accounting Office questions whether they are effectively enforced. The report was the subject of a congressional subcommittee hearing on Oct. 30.
Industry watchers have questioned whether the policies conflict with other bank regulations, and a Bay State minority bank currently in formation says it expects to do just fine without them.
“We understand that we have to be given some consideration by state and local communities, usually in the form of deposits,” said Pedro Arce, a member of the founding team of Veritas Bank. Arce said more than half the bank’s board positions will be held by Hispanic members and the institution expects to attain status with the FDIC as minority-owned when it opens in Lawrence next March.
“We appreciate that [that status] needs to be acknowledged,” he added, “but whether the bank works or not is up to us.”
The U.S. Treasury Department, on its Web site, “encourages federal agencies, state and local governments and the private sector to use Minority Bank Deposit Program participants as depositaries and financial agents.” OneUnited already is a member. Cathay Bank and United Commercial Bank did not return phone calls from Banker & Tradesman by press time.
Massachusetts State Treasurer Timothy Cahill’s office also runs a monthly online auction through which Bay State financial institutions can compete for $50 million in state certificate of deposit investments each month. Eligibility for deposits is determined by a bank’s Community Reinvestment Act rating and total capital, but banks with 35 percent or more minority ownership can increase the amount for which they qualify by up to 5 percent. Banks that “show a commitment of service to minority communities” in other ways also qualify for the increase.
Jeffrey M. Gibbons, Veritas’ incoming chief lending officer, said he and his colleagues have eschewed membership in the National Bankers Association, a trade group representing minority- and women-owned banks, in favor of the national, general-interest American Bankers Association.
But Robert Patrick Cooper, senior counsel at OneUnited Bank and incoming president of NBA, testified at last week’s hearing, conducted by a subcommittee of the House Financial Services Committee in Washington, D.C. Cooper’s term as president of NBA will begin in January.
Cooper emphasized the importance of enforcing policies that assist minority-owned banks, particularly The Financial Institutions, Reform, Recovery and Enforcement Act of 1989, known as FIRREA. Section 308 of the law defines a minority-owned bank as a depository institution in which 51 percent or more of the stock is owned by one or more “socially and economically disadvantaged individuals.” The FDIC, which is regulator to more than half the minority banks in the country, adds that if a majority of a bank’s board is black, Asian, Hispanic or Native American, and the community it serves is predominantly minority, it also will be considered minority-owned.
FIRREA directs the FDIC and the Office of Thrift Supervision to “preserve” and “promote” minority-owned banks using specific measures. Two other federal regulators – the Federal Reserve and the Office of the Comptroller of the Currency – are exempt, though it is unclear why. Representatives of those agencies testified at the hearing that they would not be averse to adhering to FIRREA’s directives, according to Cooper.
The provisions also do not apply to credit unions, which are separately regulated by the National Credit Union Administration.
FIRREA “specifically sought to improve the standing of minority banks,” Cooper told the Oversight and Investigations Subcommittee, which is chaired by U.S. Rep. Melvin L. Watt, D-N.C., and is under the auspices of the House Committee on Financial Services, chaired by U.S. Rep. Barney Frank, D-Mass.
Changing CRA
The hearing was slated to gather input from regulators and leaders at minority-owned banks about best practices for encouraging and preserving minority ownership of financial institutions.
“Unfortunately Â… [FIRREA] failed to improve the position of minority banks relative to their peers,” Cooper said. “The NBA strongly believes more forceful congressional action and oversight is now required.”
Cooper said banks today must be vigilant to make sure FIRREA is enforced.
He said that at the hearing, that point was illustrated by Rep. Maxine Waters, who represents the Los Angeles district where a branch of OneUnited is located. Waters recounted the story of Family Savings Bank, a black-owned institution that, in 2002, was poised to be purchased by a bank in Illinois. Waters said she went to regulators and asked what could be done, according to Cooper, and when they told her “nothing,” she refused to accept it.
OneUnited, which had made a better monetary offer on Family Savings Bank to begin with, eventually acquired the bank, even though Family Savings already had executed a purchase-and-sale agreement with the Illinois bank, Cooper said. The acquisition preserved the minority-owned status of the Family Savings branches.
“FIRREA helped that to happen, because we pointed it out to [regulators],” he said.
Some question whether FIRREA, in a specific goal that directs the OTS and FDIC to “preserve banks’ minority character” in cases involving mergers or acquisitions, conflicts with other regulations.
“The FDIC has a countervailing policy,” said Cornelius Hurley, a Boston University law professor and director of BU’s Morin Center for Banking and Financial Law. He suggested a hypothetical instance in which a minority bank fails, and two banks – another minority institution and a larger, non-minority controlled bank – bid to acquire it. In that case, he said, the FDIC would be bound under the Federal Deposit Insurance Corporation Improvement Act (FDICA) of 1991 to accept the larger offer.
Since it is a bank insurer in addition to being a regulator, “the FDIC has to resolve a failing bank at the least cost to its fund,” Hurley explained, meaning that if the non-minority bank’s bid were higher, the FDIC would be bound to accept it.
Cooper agreed that in that case, FDICIA rules might prevail.
Addressing the fact that in 2004, OneUnited earned a “Needs to Improve” score from the FDIC and the Massachusetts Division of Banks on its compliance with the Community Reinvestment Act, which measures lending to low-income communities, Cooper said the National Bankers Association hopes to change the CRA law to reflect the importance of having minority-owned bank branches in minority neighborhoods.
“We [OneUnited] actually operate in these distressed areas,” many of which include sizable minority populations, he said, “but are given very little credit for operating there. We are looking for a change in CRA framework that would take that into account.”
Cooper said that just as minority-owned banks can benefit from federal policy designed to ensure their survival, residents of low-income neighborhoods benefit from the existence of a minority-owned bank in their community.
Studies have shown minority groups and immigrants from different cultures can be distrustful of financial institutions, and leaders of minority-owned banks often speculate that their institutions encourage unbanked minority groups to overcome their misgivings and become depositors and savers when they otherwise might not.
A spokesman for Frank said regulatory assistance to help minority-owned banks is warranted, because it helps the people they serve.
“We place restrictions all the time on federal regulators to make sure that, in the competitive world of financial services, the folks traditionally not served have opportunities,” Steven Adamske said.
David Barr, an FDIC spokesman who attended last Tuesday’s hearing, added that no one there advocated assisting minority-owned banks at the expense of their safety and soundness.
“Safety and soundness are paramount,” he said.
