Board of Governors of the Federal Reserve System

Preface

The Federal Reserve Board (Board) publishes this report to inform the public about its efforts to preserve and promote minority depository institutions (MDIs). This report looks at the Federal Reserve System's (System) supervision efforts, the System's Partnership for Progress (PFP) initiatives, the Board's research efforts, and other System efforts and initiatives.

The Board is responsible for implementing numerous provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), including mandates to preserve and promote MDIs.¹

The Board maintains a Regulatory Reform website, which provides an overview of regulatory reform efforts implementing the Dodd-Frank Act and a list of the implementation initiatives completed by the Board as well as the most significant initiatives the Board expects to address in the future.²

Abbreviations

BSA/AML

Bank Secrecy Act/Anti-Money Laundering

CDFI

Community Development Financial Institution

CRA

Community Reinvestment Act

FIRREA

Financial Institutions Reform, Recovery, and Enforcement Act of 1989

FRB

Federal Reserve Bank

LMI

Low- and moderate-income

MDI

Minority depository institution

NBA

National Bankers Association

PFP

Partnership for Progress

Executive Summary

Vulnerable populations in the United States, such as low- and moderate-income (LMI) communities and racial and ethnic minorities, were particularly hard hit in 2020 by the COVID-19 pandemic.

Low-wage and minority workers experienced disproportionate harm to both their lives and livelihoods as a result of the COVID-19 pandemic: Minorities lost their jobs at higher rates during the crisis and were slower to be rehired as the recovery began.³ Minority-owned small businesses closed at a higher rate than White-owned businesses.⁴ And minority individuals suffered worse health outcomes as a result of COVID-19.⁵

Given that MDIs serve minority people and communities, the Federal Reserve took extra steps to support and assist MDIs in light of the COVID-19 pandemic. Among them, the Federal Reserve responded to the crisis by conducting individualized outreach on a variety of topics, including how to access the discount window and the Paycheck Protection Program Liquidity Facility, and organized a meeting between all Federal Reserve regulated MDIs and Federal Reserve Governors Michelle W. Bowman and Lael Brainard to discuss the challenges and responses to COVID-19.

This report looks at four areas of the Board's efforts in preserving and promoting MDIs:

• State Member MDIs looks at the System's supervisory responsibility for the 14 state member MDIs.
• Partnership for Progress Programming looks at how the System supports MDIs through its Partnership for Progress (PFP) program, which is a national outreach effort to help MDIs confront unique business-model challenges, cultivate safe banking practices, and compete more effectively in the marketplace.
• Research on MDIs and Low- and Moderate-Income looks at research conducted and the articles and surveys published by the Federal Reserve to better understand the challenges minority banking institutions face in their local market areas.
• Efforts and Initiatives looks at additional ways the Federal Reserve continued to dedicate resources to engage in proactive outreach and technical assistance activities.

State Member MDIs

Throughout all of 2020, the System retained primary supervisory responsibility for 14 state member MDIs,⁶ which, with few exceptions, are community banks with total assets of $10 billion or less (see table 1). This represents a reduction of one institution from year-end 2019 due to a merger of a state member Asian American MDI with another Asian American MDI supervised by the Federal Deposit Insurance Corporation (FDIC) in the first quarter of 2020. (For more details on the 14 state member MDIs discussed in this report as well as a comparison of the number, assets, and demographics of state member MDIs from 2016–20, see appendix B.) The System's community banking organizations program, which is responsible for the risk-focused supervision of state member banks with less than $10 billion in total assets, maintains supervisory responsibility for the System's portfolio of MDIs.

Table 1. Asset distribution of state-member MDIs

Geographic Dispersion

In 2020, state member MDIs were located in seven of the 12 Reserve Bank Districts, with assets concentrated in the New York and San Francisco Districts (see table 2).⁷ State member MDIs in these two Districts accounted for 98 percent of the total state member bank assets in the System's MDI portfolio. Though smaller in asset size, there is also a concentration of state member MDIs in the Kansas City District. All four of these banks are located in Oklahoma and are Native American MDIs.

Table 2. State-member MDI distribution by Federal Reserve District

Minority Ownership Type

The System's MDI portfolio includes banks representing all minority ownership categories as defined by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). As of year-end 2020, most state member MDIs were under Asian American ownership, followed by Native American ownership (see figure 1).

Partnership for Progress Programming

The System supports MDIs primarily through its Partnership for Progress program, a national outreach effort to help MDIs confront unique business-model challenges, cultivate safe banking practices, and compete more effectively in the marketplace.

The PFP program is jointly managed by the Community Banking Organizations section of the Federal Reserve's Supervision and Regulation Division and the Community Development (CD) section of the Consumer and Community Affairs Division. Supervision and Regulation strives for a resilient and well-managed financial system that fairly meets the needs of consumers and businesses while working to tailor its supervisory programs in a way that avoids imposing excessive burden on the financial institutions it oversees. The CD function within the System—consisting of individual community development departments at each of the 12 Federal Reserve Banks (FRB) and at the Board—promotes economic growth and financial stability for lower-income communities and individuals through a range of activities, including convening stakeholders, conducting and sharing research, and identifying emerging issues.

The two divisions share in the staffing of the PFP program and have appointed senior officers from both divisions to co-chair the program's Executive Oversight Committee. In addition, each FRB has designated a PFP District coordinator(s) who communicates regularly with the MDIs in their District and assists with accomplishing the mission of the PFP program.

The 2020 PFP programming reflected the strengths of both divisions and emphasized coordination between the two functions in the Reserve Bank Districts. The System also worked to encourage partnership between examination and community development staff at the FRBs to bring additional resources and creative programming to MDIs throughout the country.

PFP provides technical assistance and outreach to the System's regulated MDIs but also views the congressional mandate in section 308 of the FIRREA to preserve and promote MDIs as more than simply supervising these institutions. In this regard, the Board actively works with colleagues at the other regulatory agencies with section 308 responsibilities to ensure a coordinated approach to supporting all MDIs.

In addition, the Board leverages the many resources available to the central bank of the United States to support MDIs consistent with the goals of the PFP program. First, the Federal Reserve is a research-driven institution and has engaged with internal and external stakeholders on a range of research projects to enhance our understanding of the business models of MDIs and how they serve their communities. Second, Federal Reserve leadership, including Board Members and Reserve Bank presidents, have spoken publicly about the importance and positive impact of MDIs on underserved communities.⁸ Third, through the convening power of the Federal Reserve, the System seeks to bring together individuals and institutions to form partnerships that will assist the MDI sector. Though COVID-19 meant that the PFP could not hold any in-person meetings during 2020, the Board continued to convene MDIs via webinars and other virtual forums.

Response to COVID-19

The COVID-19 pandemic upended business as usual, and as a result, the PFP program pivoted to ensure critical information was reaching stakeholders in a timely fashion. To that end, the following actions that supported MDIs throughout the pandemic were taken during 2020:

• The System paused examination activity and extended a 90-day time period to respond to preexisting examination findings.
• The System took MDIs into consideration when developing and implementing crisis response facilities, such as the Paycheck Protection Program Liquidity Facility and the Main Street Lending Program.
• System staff reached out to all Fed-regulated MDIs to offer technical assistance. Communication with Fed-regulated MDIs continued on a regular basis throughout the crisis.
• A variety of Ask the Fed ^® (AtF) sessions provided information to the banking industry on managing the current COVID-19 pandemic, including initiatives available to respond to the crisis such as Paycheck Protection Program, Paycheck Protection Program Liquidity Facility, Main Street Lending Program, and discount window operations. PFP staff carried out targeted outreach to all Fed-regulated MDIs to ensure that they were invited to all AtF sessions and offered additional assistance to answer any questions from MDIs on AtF topics.
• Governor Bowman held a call with Kenneth Kelly, the Chairman of the MDI trade association, the National Bankers Association (NBA), and Kim Saunders, the CEO and President, to gather input on the impact of COVID-19 on their membership and the communities they serve.
• The Board established a website to provide answers to questions received from bankers on the impact of COVID-19 and issued various statements to provide guidance on how banks should navigate the issues posed by the COVID-19 pandemic. PFP staff shared this information with Fed-regulated MDIs.

Conferences and Convenings

Throughout 2020, the Federal Reserve staff conducted a number of programs specific to MDIs, including the following:

MDI Leaders Forum, May 13, 2020
The MDI Leaders Forum was originally an in-person forum but was converted to a virtual meeting with Governors Bowman and Brainard. The CEOs of all Fed-regulated MDIs were invited. This engagement was used to gather input on the impact of COVID-19 on Fed-regulated MDIs and the communities they serve.

The CDFI Research Conference, May 27, 2020
Originally planned as an in-person conference, the Community Development Financial Institutions (CDFI) Research Conference was transformed into a four-part webinar series. The second webinar, on May 27, featured academic research on MDIs and credit access for minority-owned firms. Kim Saunders from the National Bankers Association (NBA) provided the practitioner perspective as a respondent, and Gregory Fairchild from the University of Virginia presented his paper on the comparative institutions risk of MDIs (see below for more details on this paper). Over 130 people attended the webinar.

Banking and the Economy: A Forum for Minorities in Banking, September 21–25, 2020
The Minorities in Banking conference was held virtually over the course of a week and featured many MDI leaders as speakers. It was sponsored by the System and hosted by the Federal Reserve Bank of Atlanta. This conference attracted over 700 participants from over 40 states.

Input on Community Reinvestment Act Modernization

In September 2020, the Board voted unanimously to approve an Advance Notice of Proposed Rulemaking (ANPR) for the CRA. The ANPR included a section on MDIs and several proposals to support MDIs.

Per the CRA statute, activities with MDIs can receive credit nationwide even when they take place outside of assessment areas, and the ANPR asked for feedback on whether these activities with MDIs should be a potential pathway to an outstanding rating. The Board proposed these policies because they would provide incentives for majority-owned institutions to capitalize and to partner with MDIs, which will ultimately support more equitable financial access to low-income and minority consumers and communities. In an effort to support mutually beneficial partnerships between MDIs, the ANPR also proposed providing credit for MDIs and women-owned financial institutions investing in other MDIs, women-owned financial institutions, and low-income credit unions, as well as in their own institutions.

Beyond MDIs, the ANPR also asked more broadly how the CRA can better address racial inequality. Congress enacted the CRA in 1977 primarily to address economic challenges in predominantly minority urban neighborhoods that had suffered from decades of disinvestment and other inequities—due in large part to a practice known as "redlining" that produced inequities in credit access, along with a lack of public and private investment.⁹ Redlining occurred when banks refused outright to make loans or extend other financial services in neighborhoods comprised largely of Black and other minority individuals, leading to discrimination in access to credit and less favorable financial outcomes even when they presented the same credit risk as others residing outside of those neighborhoods. Redlined neighborhoods typically had a high percentage of minority residents, were overwhelmingly poor, and had less desirable housing.¹⁰

A foundational goal for the ANPR is to advance the core purpose of the CRA statute. To that end, question 2 in the ANPR reads:

In considering how the CRA's history and purpose relate to the nation's current challenges, what modifications and approaches would strengthen CRA regulatory implementation in addressing ongoing systemic inequity in credit access for minority individuals and communities?¹¹

Collaboration with Trade Groups and Other Partners

PFP consulted closely with the NBA, the trade group for minority banks, throughout the crisis.

• In April, PFP staff, collaborating with the NBA, convened discount window subject matter experts to discuss the Federal Reserve's discount window operations and newly expanded credit and collateral options. The virtual meeting, hosted by the NBA, was attended by approximately 40 of the NBA's member banks. Board staff coordinated the call and Federal Reserve Bank of Richmond staff provided an overview of the discount window and recent policy changes in light of the COVID-19 pandemic.
• PFP consulted with the NBA throughout the crisis for their feedback on resources from the Federal Reserve as well as to learn more about what would be helpful to MDIs in navigating the crisis.

Speeches

• In October, Governor Brainard delivered a speech entitled "Modernizing and Strengthening CRA Regulations: A Conversation with Minority Depository Institutions" and participated in a question-and-answer session at the NBA annual conference. The remarks centered on the MDI proposals in the CRA ANPR and discussed how revisions to the CRA can strengthen MDIs. The speech is available here: https://www.federalreserve.gov/newsevents/speech/brainard20201015a.htm.
• In November, Governor Brainard delivered a speech entitled "Modernizing and Strengthening CRA Regulations: A Conversation with the National Congress of American Indians" and participated in a question-and-answer session. The remarks centered on the proposal in the CRA ANPR that seeks to strengthen investments in Indian Country and Native MDIs. The speech is available here: https://www.federalreserve.gov/newsevents/speech/brainard20201110a.htm.

Research on MDIs and Low- and Moderate-Income Communities

Research on MDIs

Continuing with the Federal Reserve's commitment to understanding the challenges minority banking institutions face and their local market areas, in 2019 the Board commissioned a new piece of research on MDIs.¹² The research was completed in 2020. All research is available on the PFP website.¹³ Below is an abstract of the 2020 paper, which was presented at the CDFI Research Conference webinar in May:

Just How Risky? Comparative Institutional Risks of Minority Depository Institutions (MDIs) and Community Development Banking Institutions (CDBIs).

By Gregory B. Fairchild and Megan E. Juelfs, University of Virginia

We examine the relative institutional failure risks for three sets of bank depositories: Community Development Banking Institutions (CDBIs), Minority Depositories (MDIs) and what we term Non-Mission Depository Institutions (hereafter, NMDIs). CDBIs have primary missions of community development and serving underserved populations; MDIs are typically led by minorities and serve minority populations (a single institution can be both a Community Development Banking Institution (CDBI) and an MDI, either or neither). In this analysis, NMDIs represent all other depository banks. Given their operation within lower-income and minority communities, MDIs and CDBIs appear, prima facie, to be face greater institutional failure risks. We examine these risks across each set of institutions, ceteris paribus. Utilizing data from a number of sources, including the Reports of Condition and Income (Call Reports) for a substantial set of FDIC-insured banks in the United States, we apply a modified Capital Assets Management Earnings and Liquidity model (CAMEL) to measure the predictive likelihood of failure. Recognizing that MDIs are not homogeneous, we also examine relative institutional failure across types of depositories. The results indicate that CDBIs and MDIs are systematically at lower failure risks, and that there are differences across service designations.

Articles and Surveys

In addition, throughout 2020, Board staff published articles and surveys that both evaluated conditions in LMI communities and described efforts to support them, including efforts by community banks. Much of the research was focused on the impact of the COVID-19 pandemic on low-income and minority communities, the same communities served by MDIs. The community development function at the Board and Reserve Banks spearheaded much of this work. Because the success of MDIs is often dependent on the health of the communities they serve, these articles and surveys are particularly relevant to the MDI business model. In addition, several of these articles noted the difficulty minority and LMI populations have in accessing credit from mainstream financial institutions, including small business credit. These articles intend to provide service providers, policymakers, and others with a way to assess the needs of these communities and to evaluate changes in the economic conditions of these populations.

The following list highlights some of the articles and surveys published during 2020:

• Perspectives from Main Street: COVID-19's Continued Impact on Low- to Moderate-Income Communities: The spread of COVID-19 is affecting communities nationwide, particularly LMI and underserved households. To best respond to this crisis, information is needed about the scope and scale of the pandemic's challenges. Throughout 2020, all 12 Federal Reserve Banks and the Federal Reserve Board of Governors surveyed representatives of nonprofit organizations, financial institutions, government agencies, and other community organizations to understand the effects of COVID-19 on low- and moderate-income communities and the entities serving them.¹⁴
• Center for Indian Country Development resources: Throughout 2020, the Center for Indian Country Development at the Federal Reserve Bank of Minneapolis conducted several surveys to better understand the impact of the COVID-19 pandemic on Indian Country and Native Americans. The Center for Indian Country Development also produced several publications that went into the details of the pandemic's impact in Indian Country. Topics included Indian Country small business lending, Native employment during COVID-19, and the financial conditions of tribal entities.¹⁵
• Struggle for Access: Small Lenders, Small Businesses, and the Paycheck Protection Program: In September, Fed Communities, a project that amplifies the Federal Reserve's work in low- and moderate-income communities and other underserved areas across the U.S., published a series of articles exploring the experiences of minority small-business owners and the community lenders that helped them secure Paycheck Protection Program (PPP) funds through the U.S. Small Business Administration's emergency-relief loan program. Several of the lenders profiled were MDIs. With titles like "I Can't Believe I Got a Real Person," the articles described how minority owners of small businesses were able to succeed in getting PPP loans due to the personalized approaches of MDIs.¹⁶

Efforts and Initiatives

Preserving the Character and Number of MDIs

To preserve the character and number of state member MDIs, staff from the Board's mergers and acquisitions function coordinate with the FDIC to help identify healthy minority banking organizations capable of acquiring or merging with state member MDIs that are in troubled condition. To this end, PFP staff provide the FDIC with a quarterly list of all MDIs under System supervision. The Federal Reserve's mergers and acquisitions function continues to offer a pre-filing option for banking proposals, which provides critical feedback on potential issues and potentially shortens the review period for many formal proposals. Finally, whenever the Federal Reserve staff receive a proposal involving an MDI banking organization, every effort is made to ensure that the institution is preserved and that its future prospects are enhanced.

Promoting the Creation of MDIs

The Federal Reserve strives to promote the creation of new MDIs by providing guidance via public websites about regulatory procedures for minority bank ownership, informing MDIs of advantageous federally sponsored programs, and promoting community development. These web posts also provide guidance about financial institution development, including information about the process of starting a bank, managing a bank through the de novo period, and growing shareholder value while ensuring safe and sound operations. Further, District coordinators from each Federal Reserve Bank periodically discuss emerging issues, attend conferences, serve on local exam teams during examinations, and collect feedback from MDIs on what they are seeing and how the PFP can provide additional assistance.

During 2020, PFP staff engaged with three groups seeking guidance from the regulatory agencies on navigating the de novo process for establishing new MDIs. PFP staff and relevant Reserve Bank staff answered questions, provided resources, and offered assistance on navigating the de novo applications process.

Training, Technical Assistance, and Educational Programs

District coordinators from each FRB meet regularly with MDI management to discuss emerging issues and provide technical assistance, especially to those in troubled condition, to explain supervisory guidance, discuss challenges, and respond to management concerns. Trending topics discussed throughout 2020 included the discount window, the CRA, Bank Secrecy Act, and Paycheck Protection Program Liquidity Facility (PPPLF). The goal of these conversations is to help MDIs through technical complexities as well as provide the PFP with valuable insight and feedback on challenges facing MDIs.

Partnership for Progress Website

Consistent with past years, one of the primary vehicles for distributing educational materials relevant to MDIs continues to be the System's PFP website.¹⁷

The website provides information about new regulations and their impact on community banking organizations, advertises regulatory and agency events relevant to MDIs, and shares information focused on market conditions and economic data related to areas typically served by MDIs. To ensure continued relevance of posted material, PFP staff regularly update the website.

Publications and Webinars

The Federal Reserve continues to support enhanced communications with community banks, including MDIs. To this end, the staff disseminates important information about regulatory matters through the publication and programs below, most of which are accessible through links on the PFP website.

The System's Community Banking Connections® publication¹⁸ serves to

• clarify key supervisory guidance,
• highlight new regulations,
• provide perspectives from bank examiners and System staff, and
• address challenges and concerns facing community banks and provide resources to assist them.

The System's Consumer Compliance Outlook® publication¹⁹ focuses on compliance with federal consumer protection laws and regulations for financial services and serves to

• clarify key supervisory guidance,
• explain new and existing regulatory compliance requirements,
• provide perspectives from bank examiners and System staff,
• address challenges and concerns facing community banks and provide resources to assist them, and
• discuss emerging compliance issues such as lenders' use of alternative data in credit decisions.

Outlook Live²⁰ is a webinar series dedicated to consumer compliance. The Outlook Live webinars involve a variety of presenters from both the System and the other federal financial regulatory agencies, focusing on key emerging issues in the industry.

Ask the Fed²¹ (AtF) is a program of the Federal Reserve for officials of state member banks and other insured depository institutions, bank and thrift holding companies, state bank commissioners, and state banking associations. AtF consists of periodic conference call/webinars that feature Federal Reserve experts and guest speakers on top banking questions of the day with time at the end for questions and comments.

Appendix A: Section 308 of FIRREA

Section 308 of FIRREA, as amended by the Dodd-Frank Act, requires

1. CONSULTATION ON METHODS.—The Secretary of the Treasury shall consult with the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Chairman of the National Credit Union Administration, and the Chairperson of the Board of Directors of the Federal Deposit Insurance Corporation on methods for best achieving the following:

   1. Preserving the present number of minority depository institutions.

   2. Preserving their minority character in cases involving mergers or acquisition of a minority depository institution by using general preference guidelines in the following order:

      1. Same type of minority depository institution in the same city.
      2. Same type of minority depository institution in the same State.
      3. Same type of minority depository institution nationwide.
      4. Any type of minority depository institution in the same city.
      5. Any type of minority depository institution in the same State.
      6. Any type of minority depository institution nationwide.
      7. Any other bidders.
   3. Providing technical assistance to prevent insolvency of institutions not now insolvent.
   4. Promoting and encouraging creation of new minority depository institutions.
   5. Providing for training, technical assistance, and educational programs.

2. DEFINITIONS.—For purposes of this section—

   1. MINORITY FINANCIAL INSTITUTION.—The term "minority depository institution" means any depository institution that—

      1. if a privately owned institution, 51 percent is owned by one or more socially- and economically-disadvantaged individuals;
      2. if publicly owned, 51 percent of the stock is owned by one or more socially- and economically-disadvantaged individuals; and
      3. in the case of a mutual institution, the majority of the board of directors, account holders, and the community which it services is predominantly minority.
   2. MINORITY.—The term "minority" means any Black American, Native American, Hispanic American, or Asian American.²²

In addition, section 367 of the Dodd-Frank Act amended FIRREA to require the supervisory agencies to submit an annual report to the Congress containing a description of actions taken to carry out FIRREA section 308.

Appendix B: MDI Tables and Figures

Table B.1. State-member MDIs

Table B.2. List of MDIs as of December 31, 2020

Footnotes