Low-Income Borrowers Find New Credit Sources

PARK Street in Lawrence, Mass., is lined with run-down triple-decker houses, some of which are blackened and boarded up - grim reminders of last summer's spate of arsons. But Park Street recently got a rare sign of hope.

In late April, Hippolito and Judy Marte reopened their burned-out Pueblo Supermarket, which stocks foods popular with Puerto Rican and Dominican families in Lawrence.

After the fires, the Martes were determined to rebuild. But even with considerable financial know-how (both have business degrees from a nearby college), they faced a difficult time getting a loan. The banks Mrs. Marte initially visited quickly turned thumbs down. Lawrence, a mid-sized city with king-sized economic problems, is not a place to inspire a banker's confidence.

Yet the Martes got their loan - from an unexpected source. Mrs. Marte had at first not even considered Bank of Boston, one of the largest banks in the region. "I thought it wouldn't care about the little guy who wants less than half a million dollars," she says. But when she visited the Lawrence branch, she was soon under the wing of a loan officer who "was on my team."

The bank worked out a loan package in collaboration with the federal Small Business Administration, which guaranteed most of the amount, and the Massachusetts Minority Enterprise Investment Corporation.

Bank of Boston's cooperative attitude "led me to believe there's a change in the air," says Mrs. Marte. She's right. The bank's readiness to help the Martes is part of a larger trend toward increased community-development lending that embraces both mainstream banks and other kinds of institutions.

Its boosters include President Clinton, whose aides last month circulated plans for a Community Banking and Credit Fund to feed money into a variety of local financial institutions that serve low-income areas. At $382 million, the fund represents a scaling back of the president's earlier proposal to create 100 new community development banks, but the new plan's embrace of lenders other than banks will probably win it broad support.

The push toward community banking began in the late 1970s. In 1978, Congress passed the Community Reinvestment Act (CRA). Since then, United States commercial banks have been under a mandate to pay more attention to financial needs in their own backyards, typically low-income urban neighborhoods. While bankers have complained about the act's vagueness and other critics have charged that it's loosely enforced, CRA requirements have nudged banks toward greater community involvement. CRA performance is one factor regulators weigh before approving bank mergers or the opening of new branches.

Mr. Clinton's proposal will include CRA rule revisions designed to cut paperwork and encourage more bank lending.

Some large commercial banks have created in-house subsidiaries that specialize in community-development lending, from small business loans to home mortgages designed for low-income families. Bank of Boston, for example, operates the First Community Bank, a "bank within a bank" that has branches in many of Boston's poorer neighborhoods. Gail Snowden, who runs First Community, grew up in Boston's Roxbury section, and she says the bank's strength is her staff's first-hand knowledge of their clients: "We kno w the community, we know the streets."

Her unit is expected to turn a profit just like other Bank of Boston operations, Ms. Snowden says. She points to a low default rate on First Community loans and profitable branch offices as evidence that the "folklore" about the high risks of doing business in urban areas is wrong.

EXHIBIT A for debunking that folklore is Chicago's South Shore Bank. It has financed renovation of thousands of apartments in low-income districts of that city during the past 20 years and has a record of sound financial management.

"In some communities, actual banks may not work. But we have lots of experience with all kinds of institutions, such as loan funds and credit unions," says Julia Ann Parzen, a researcher with the Joyce Foundation in Chicago who recently co-authored a book on community banking.

She cautions, however, that a major hurdle for commercial banks is the difficulty of making a profit from small loans, which may cost nearly as much to process as large business loans.

Cliff Rosenthal, executive director of the National Federation of Community Development Credit Unions, says his members help meet low-income people's need for modest loans. The federation represents nearly 400 institutions; some have been in business for 50 years. Credit unions devoted to bringing financial services to poor neighborhoods exist in some of the most depressed parts of urban America, including South Central Los Angeles, Crown Heights (Brooklyn), N.Y., and Camden, N.J.

"We see this as a growth industry," Mr. Rosenthal says. He advocates stronger enforcement of the CRA, but doesn't think that law is a solution in itself. "It doesn't prevent the departure of banks [from poor neighborhoods], or meet the demand for small loans to low-income people," he says.

Another loan source in low-income areas is the community-development fund. Unlike banks and credit unions, loan funds are not regulated. They get their money from individuals and institutions who like the idea of "social investment" - often churches or religious orders - and lend primarily to nonprofit agencies involved in housing and small-business development.

Martin Pinsky works with the Ad Hoc Coalition of Community Development Financial Institutions, which is watching the evolution of community-banking policy in Washington. "We'd love to see the federal government get involved," he says, "but if it's not done right, it's a waste of money." Doing it right, in his view, involves strengthening the array of community-development institutions already in operation, as Clinton's plan proposes.