I have been listening intently to the voices who criticize the banking industry for its lack of diversity. The evidence is apparent. This inattention to the needs of all consumers has fueled racial imbalances. These disproportions have led to a lack of access to fair and affordable services.
The overall tension has spilled into social unrest and calls for change. The attention to diversity, equity, and inclusion resides on many meeting agendas. I thought it was time I threw my hat into the ring to offer a practical solution to racial inequity in the financial services industry.
Ascribing guilt to an entire industry seems to be an outplay. I don’t doubt some financial institutions are culpable of bad practices. However, putting the whole industry on trial to find the guilty parties can be a traumatic exercise. Solutions that call for wholesale punishment or widespread resocialization of the industry present their own sets of challenges.
Big social problems usually call for government action. A regulatory approach can feel a bit heavy-handed. The history of the credit union movement has shown we don’t require a government mandate to provide full and fair treatment to all consumers. Yet, we credit unions have a place in society and an obligation to seek big solutions.
Our trade associations and many credit unions will recoil at the idea of additional regulatory burden, and I can’t say I blame them. My colleagues and I are usually reluctant to surrender to governmental control. We usually spend our time arguing over the scope of government, interference with free markets, and policy interpretation. This can be exhausting. There must be another approach.
When it comes to ending racial inequities ... the best remedy is when the market comes together for an answer.
Let’s look at the challenge from a legal point of view. There are complaints by marginalized communities that they have been treated badly by financial institutions. We have a class of people who assert a crime has been put upon the whole Black community. Taken for true, what’s the remedy? We could address this with special damages. Special damages is a fancy legal term that means someone wants money for their pain. The amount of financial remedy and to whom such is owed is often the center of the debate.
The other kind of remedy is one where a plaintiff might seek specific performance. Specific performance is when a court orders a party to perform explicit behavior. The behavior sought could be to do something, or it could be an injunction to refrain from some act. There is a place for specific performance in a grievance when we know who’s the culprit. But what do we do when the entire system is the suspect?
I have been giving some thought to what kind of change could be helpful to the whole community. I think governmental action or legal solutions might only bring about more division. Don’t take me wrong. I’m up for a good lawsuit when it will be useful, but it seems to me the best remedy is when the market comes together for an answer.
Let’s give financial institutions the benefit of the doubt. Financial services can be risky business. To manage the risk, we determine which markets to enter and exit. One could rationalize that a financial institution does not want to make service available to a community because it believes the risks are too high. As repugnant as it might sound, it might seem rational to an institution to avoid some members of the community because they want to minimize a perceived risk. Academically, I get that.
Financial institutions make money by doing business with as many folks as practicable. What if there was a way to eliminate the risks of doing business with a class of people? This transfer of risk would make it so that operating in any community would be no different than doing business anywhere else. The market has done this before.
The Veterans Administration was created to help facilitate mortgage lending for veterans. When speaking to veterans, the VA states it has a “mission to serve you, we provide a home loan guaranty benefit and other housing-related programs to help you buy, build, repair, retain, or adapt a home for your own personal occupancy.” The VA convinces financial institutions to make these loans by guaranteeing a portion of the loan. In other words, reducing the risks.
The Federal Housing Agency has a similar mission. The FHA was created to help consumers buy homes, build wealth through equity, and stimulate the economy. For financial institutions that might be reluctant to cater to modest-income consumers, they are incented to make these loans with the FHA mortgage insurance.
Consider a market-driven solution with the mission of helping people of color gain financial services. This Agency could guarantee depository accounts (unbanked people); provide blanket indemnification for small-dollar, unsecured loans (equal pricing for all); and sponsor wealth-creation products (financial literacy and business development).
This Agency could accept membership from banks and credit unions that will pay premiums for the insurance protection. Think NCUSIF. The risk of making loans in some communities for some consumers would be neutralized. Making a loan to any consumer would be no different than anyone else. Financial institutions that join the Agency would gain new business, grow revenues, and build a larger balance sheet.
This would be the free market at its best. Government does not need to order financial institutions to serve the whole community. Government can assist the market by providing a backstop and reinforcement. All financial institutions will find it to be good ole fashioned business to reach into every neighborhood. The financial institutions that align with the Agency will see untold success and growth. The communities that gain access to services will develop new businesses and jobs. The economy at large will expand with the opportunities that will abound. Further, the increased availability and competition in historically underserved markets will benefit all consumers.
When it comes to ending racial inequities, we need a financial infrastructure that works for everyone. Rather than waiting on government or the courts alone to fix the problem, the market can play an essential role. Let’s roll up our sleeves and work on a solution that will end racial injustice as we know it.
Maurice R. Smith is the CEO of Local Government Federal Credit Union and Civic Federal Credit Union. Both credit unions are member-owned cooperatives serving the financial needs of employees, appointed officials, elected officeholders, and volunteers of local governments in North Carolina. Smith celebrates 41 years in the credit union movement.
Smith received his B.S. in Business Administration from the University of North Carolina at Wilmington and earned a Juris Doctor from the North Carolina Central University School of Law. Smith is licensed to practice law in North Carolina, the United States Supreme Court, and the District of Columbia. Smith is also a North Carolina Certified Superior Court Mediator and a CUNA Certified Credit Union Executive.