Board of Governors of the Federal Reserve System

Promoting Minority Depository Institutions - September 2022

Preface

The Federal Reserve Board (Board) submits this report pursuant to section 367 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 367 of the Dodd-Frank Act requires the Board to submit an annual report to Congress detailing the actions taken to fulfill the requirements outlined in section 308 of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, as amended by the Dodd-Frank Act in 2010 (see appendix A). In addition to the annual reporting requirement, FIRREA section 308 requires the Federal Reserve System (System) to devote efforts toward preserving and promoting minority ownership of minority depository institutions (MDIs). This report looks at the System's supervision efforts, the System's Partnership for Progress (PFP) initiatives, the Board's research efforts, and other System efforts and initiatives in 2021.

The Board is responsible for implementing numerous provisions of the Dodd-Frank Act, including mandates to preserve and promote MDIs.

The Regulatory Reform page on the Board's website provides information on the Board's efforts implementing the Dodd-Frank Act as well as initiatives the Board expects to address in the future.¹

Abbreviations

ANPR

Advance notice of proposed rulemaking

CDFI

Community Development Financial Institution

CRA

Community Reinvestment Act

ECIP

Emergency Capital Investment Program

FIRREA

Financial Institutions Reform, Recovery, and Enforcement Act of 1989

FRB

Federal Reserve Bank

LICU

Low-income credit union

LMI

Low- and moderate-income

MDI

Minority depository institution

NBA

National Bankers Association

PFP

Partnership for Progress

WDI

Women's depository institution

Executive Summary

Low-wage individuals and minority communities experienced disproportionate harm to both their lives and livelihoods as a result of the coronavirus (COVID-19) pandemic: More minorities lost their jobs during the pandemic and were slower to be rehired as the recovery began.² Minority-owned small businesses closed at a higher rate than White-owned businesses during the early part of the pandemic.³

Given that MDIs serve minority 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 to MDIs and working with the U.S. Department of the Treasury (Treasury) to implement the Emergency Capital Investment Program (ECIP).

This report, which covers calendar-year 2021, 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 looks at how the System supports MDIs through its 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 Communities looks at research conducted and the articles and surveys published by the Federal Reserve to better understand the challenges MDIs face in their local market areas.
• Efforts and Initiatives looks at ways the Federal Reserve continued to dedicate resources for proactive outreach and technical assistance activities.

State Member MDIs

Unchanged from 2020, the Board had primary supervisory responsibility for 14 state member MDIs in 2021,⁴ which are mainly community banks with total assets of $10 billion or less (see table 1).⁵ Accordingly, 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 most of the Board's portfolio of MDIs.

Table 1. Asset distribution of state member MDIs as of December 31, 2021

Geographic Dispersion

In 2021, state member MDIs were located in 7 of the 12 Reserve Bank Districts, with assets concentrated in the New York and San Francisco Districts (see table 2).⁶ 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 as of December 31, 2021

Minority Ownership Type

The Board'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 2021, five state member MDIs were classified under Asian American minority status, five were classified under Native American minority status, three were classified under Hispanic minority status, and one was classified under Black minority status. (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 section of the Consumer and Community Affairs Division. The Division of 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 the Board's supervisory approach based on the size and complexity of firms. The community development 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 both divisions have appointed senior officers 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 2021 PFP programming reflected strong coordination and effort across the Board and FRBs. 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.

The PFP views the congressional mandate in section 308 of the FIRREA to preserve and promote MDIs as more than simply supervising these institutions. In addition to providing technical assistance and outreach to the System's regulated MDIs, 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 it as 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 better understand the business models of MDIs and how they serve their communities. Second, Federal Reserve leadership, including Board members and Reserve Bank presidents, have used their public platforms to speak about the importance and positive impact of MDIs on underserved communities.⁷ 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 prevented holding any in-person meetings related to the PFP during 2021, the Board continued to convene MDIs via webinars and other virtual forums.

COVID-19 Response and Recovery: Emergency Capital Investment Program

The COVID-19 pandemic brought unprecedented challenges to MDIs and the communities they serve. In the Consolidated Appropriations Act, 2021, Congress established the ECIP, which authorizes the Treasury to make up to $9 billion in capital investments in banks and credit unions certified as MDIs or community development financial institutions (CDFIs). ECIP is intended to support the efforts of these institutions to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers in underserved communities that may be disproportionally affected by the economic fallout of the COVID-19 pandemic.⁸ Per the statute, the Treasury sets aside $2 billion for CDFIs and MDIs with less than $500 million in assets and an additional $2 billion for CDFIs and MDIs with less than $2 billion in assets.

Since the creation of ECIP, Board staff have worked closely with the Treasury on many issues. For example, in March 2021, the federal banking agencies clarified through an interim final rule that preferred stock issued through ECIP qualifies as additional tier 1 capital and that subordinated debt issued through ECIP qualifies as tier 2 capital. In addition, the preamble to the interim final rule indicated that, for purposes of the Small Bank Holding Company and Savings and Loan Holding Company Policy Statement, preferred stock issued under ECIP is equity and subordinated debt issued under ECIP is debt.

During the application review process, PFP staff at the Board and FRBs reviewed the applications for all ECIP applicants that were either bank holding companies or Federal Reserve-regulated state member banks—close to 100 applications. This review entailed confirming the applicant's eligibility, including their status as an MDI.

Supervision and Regulation Letter on the PFP Program for MDIs and Women's Depository Institutions

In March 2021, the Federal Reserve issued SR letter 21-6/CA 21-4: Highlighting the Federal Reserve System's Partnership for Progress Program for Minority Depository Institutions and Women's Depository Institutions. This SR/CA letter outlines for System staff, MDIs, and women's depository institutions (WDIs) the System's PFP program and resources through the PFP that are available to MDIs and WDIs.

The SR/CA letter clarified and highlighted the two definitions used by the System for MDI designation. The System's definition of MDI is consistent with the FIRREA definition of a "minority bank," and states that an MDI is any depository institution (either privately or publicly owned) where 51 percent or more of the voting stock is owned by one or more socially and economically disadvantaged individuals. The definition also states that an MDI, in the case of a mutual institution, is where the majority of the board of directors consists of minority individuals, the majority of the account holders consists of minority individuals, and the community which it services is predominantly minority. In addition to institutions that meet the FIRREA qualifying criteria, the System considers an institution to be an MDI if a majority of its board of directors consists of minority individuals and the community that the institution serves is predominantly minority.

The SR/CA letter also formally defined WDIs and included newly defined WDIs as being eligible for assistance under the PFP program. The System's definition of "women's depository institution" is consistent with the definition of this term in the Community Reinvestment Act (CRA) and includes any depository institution where a majority of ownership or a majority of revenue is held by at least one woman, and a significant percentage of senior management positions are held by women.

Conferences and Convenings

Throughout 2021, the Federal Reserve conducted a number of programs specific to MDIs, including the following:

National Interagency MDI and CDFI Bank Conference

Every two years, the federal banking regulatory agencies (the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), and Federal Reserve) host an interagency conference for MDI and CDFI banks to help preserve and promote their mission. The 2021 conference was held virtually, September 27–30, 2021.

The theme for the conference was "Navigating the Economy with Resilience and Reinvention," and MDI and CDFI bank executives were invited to participate and dialogue with senior agency officials. The conference began with opening remarks by Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen. Principals from each agency—Board Governor Michelle Bowman, FDIC Chairman Jelena McWilliams, and Acting OCC Comptroller Michael Hsu—then engaged in a fireside chat that reflected on the key role MDIs and CDFIs play in serving their communities. Governor Bowman's comments focused on the PFP program and reaffirmed the Federal Reserve's commitment to preserving and promoting MDIs.

More than 300 people attended the conference with participants from over 70 banks. The conference covered a diverse range of topics that included

• updates from senior officials on trending topics, including resources, programs, and policies that can help minority and CDFI banks achieve their goals;
• discussions by CEOs from MDI and CDFI banks on top issues faced by bank leadership, trends in banking, and successes they have had competing in today's marketplace;
• discussions on innovation, collaboration, and the evolving financial services landscape, with examples of successful responses by community and midsize banks; and
• a discussion on ways in which banks have adapted to new technology and innovative products, as well as the impact of the changing landscape on their business practices.

Banking and the Economy: A Forum for Minorities in Banking, October 18–22, 2021

The System sponsored the sixth annual Banking and the Economy: A Forum for Minorities in Banking in October. The forum gathers minority professionals in middle to senior management in the banking and financial services sectors nationwide. This initiative is designed to support the System's mission through

• providing minority professionals with advanced tools and knowledge to enhance their careers and networks and increase diverse representation at the senior level in the banking and financial services industry and
• enhancing awareness of the System by delivering banking and economic updates, quality content and program experience, and education on the organization's mission and work.

The Minorities in Banking Conference was hosted by the Federal Reserve Bank of Minneapolis and attracted over 800 participants from over 42 states. The week-long virtual forum delivered eight hours of programming focused on leadership, professional development, updates on the banking sector and the economy, and diversity and inclusion content, in addition to two hours of virtual networking opportunities.

Webinars

• On April 14, 2021,Board and PFP staff attended an interagency webinar session hosted by the FDIC to promote and train MDIs on the Capital Estimator Tool and the Capital Guide for use by MDIs as they contemplate ECIP and other investment options. The tool and guide assisted the entities in determining the impact of additional capital raised either through the Treasury's ECIP or via private equity investments.
• On May 6, 2021, the Board and FRB Richmond partnered with the FDIC to present a webinar entitled "Investing in Minority Depository Institutions and Opportunities for Partnerships." Over 250 people registered, and PFP staff presented on the Federal Reserve's PFP program.
• On May 24, 2021, Board and PFP staff hosted an interagency "Ask the Regulators" session in partnership with the Treasury. The purpose of the webinar was to provide an overview of ECIP for eligible MDI and CDFI banks and to answer questions from these institutions.⁹

Community Reinvestment Act

In September 2020, the Board approved an advance notice of proposed rulemaking (ANPR) for the CRA. The ANPR included a section on MDIs and several proposals to strengthen CRA provisions to support MDIs, WDIs, low-income credit unions (LICUs), as well as CDFIs. The comment period for the ANPR closed in February 2021, and PFP staff led the MDI/CDFI working group that reviewed all comments related to MDIs and CDFIs.

Stakeholders noted that CRA activities through bank partnerships with MDIs, WDIs, LICUs, and CDFIs are key in helping to meet the credit needs of low- and moderate-income (LMI) individuals and communities. Stakeholders supported a stronger emphasis on community development financing and services that support these institutions, including equity investments, long-term debt financing, technical assistance, and contributions to nonprofit affiliates. Some stakeholders suggested the need to increase certainty surrounding the treatment of activities in partnership with MDIs, WDIs, LICUs, and CDFIs.

Informed by stakeholder feedback, the MDI/CDFI working group recommended criteria and standards that could be used to determine qualifying activities with MDIs, women-owned financial institutions, and LICUs, as well as criteria to determine what activities with these institutions could be considered especially impactful. These recommendations were sent to the CRA team.

Collaboration with Trade Groups and Other Partners

Throughout 2021, PFP consulted closely with the National Bankers Association (NBA), the trade group for minority banks.

• In February, PFP organized a call between Board staff and the NBA's Keepers Fund to discusss Change in Control and Bank Holding Company Act rules for investing in banks. PFP continued to consult with the NBA throughout 2021 on their Keepers Fund.
• Also in February, PFP staff and Board staff held a call with the NBA and Community Development Bankers Association regarding the Treasury's ECIP.

Speeches

Another way the Federal Reserve promotes MDIs is through public speeches from its leadership. For example, in October, Governor Brainard delivered a speech entitled "Financial Inclusion and Economic Challenges in the Shadow of the Pandemic: A Conversation with Tribal Leaders" at Fed Listens: Roundtable with Oklahoma Tribal Leaders. The remarks centered on barriers to financial inclusion in Indian Country.¹⁰

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, the Board has commissioned research on MDIs. All past research is available on the PFP website.¹¹

Articles and Surveys

Throughout 2021, Board staff published articles and surveys that both evaluated conditions in LMI communities and described efforts to support them, including efforts by MDIs and 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 FRBs spearheaded most 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 articles noted the difficulty minority and LMI populations have in accessing credit from mainstream financial institutions, including small business credit. The 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 2021:

• Minority Banks during the COVID-19 Pandemic: The COVID-19 pandemic disproportionately affected the health and financial well-being of minority communities. Over the past year, minority banks that specialize in providing financial services to underserved communities and minority borrowers have also performed significantly worse than other banks of similar size. Minority banks projected higher loan losses and had lower profits than non-minority banks. See https://www.frbsf.org/economic-research/wp-content/uploads/sites/4/el2021-20.pdf.
• Black-Owned Banks and the Communities They Serve: Black-owned banks are uniquely positioned to assist the economic recovery in majority-Black communities where they operate. The COVID-19 pandemic had a disproportionate impact on Black-owned businesses and areas, while Paycheck Protection Program loans were slow to arrive. The number of Black-owned banks has been declining, but recently they have attracted greater support, and some Black-owned banks have reported an uptick in deposits. See https://www.stlouisfed.org/publications/regional-economist/first-quarter-2021/black-owned-banks-communities-they-serve.
• Understanding Community Development Financial Institutions and their Impact in Low- and Moderate-Income Neighborhoods - Volume 15, Issue 1: CDFIs are mission-driven lenders that create economic opportunity for low-income communities and individuals throughout the United States. The history of CDFIs dates back to the 1970s. There are currently over 1,100 operating as banks, credit unions, nonprofit loan funds, and venture capital funds. CDFI financing leads to the creation of jobs, affordable housing, community facilities and more. This issue of the Community Development Innovation Review is a collection of research papers designed to expand our understanding of CDFIs and their impact in vulnerable communities across the country. See https://www.frbsf.org/community-development/publications/community-development-investment-review/2021/may/community-development-financial-institutions-impact-low-moderate-income-neighborhoods/.
• Which Lenders Are More Likely to Reach Out to Underserved Consumers: Banks versus Fintechs versus Other Nonbanks?: There has been a great deal of interest recently in understanding the potential role of fintech firms in expanding credit access to the underbanked and credit-constrained consumers. This paper explores the supply side of fintech credit, focusing on unsecured personal loans and mortgage loans. In addition, this paper investigates whether fintech firms are more likely than other lenders to reach out to "underserved consumers," such as minorities; those with low income, low credit scores, or thin credit histories; or those who have a history of being denied for credit. Using a rich data set of credit offers from Mintel, in conjunction with credit information from TransUnion and other consumer credit data from the FRB New York/Equifax Consumer Credit Panel, this paper compares similar credit offers that were made by banks, fintech firms, and other nonbank lenders. Fintech firms are more likely than banks to offer mortgage credit to consumers with lower income, lower-credit scores, and those who have been denied credit in the recent past. Fintechs are also more likely than banks to offer personal loans to consumers who had filed for bankruptcy (thus also more likely to receive credit card offers overall) and those who had recently been denied credit. For both personal loans and mortgage loans, fintech firms are more likely than other lenders to reach out and offer credit to nonprime consumers. See https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2021/wp21-17.pdf.

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 quarterly with a list of all MDIs under Board 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 Federal Reserve staff receive a proposal involving an MDI, every effort is made to ensure that the institution's MDI status 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, coordinators from each FRB 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 2021, PFP staff engaged with three groups seeking guidance from the regulatory agencies on navigating the de novo process for establishing new MDIs. Staff of the PFP and relevant FRB answered questions, provided resources, and offered assistance on navigating the de novo applications process.

Training, Technical Assistance, and Educational Programs

Coordinators from each FRB meet as needed 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 2021 included the ECIP program, multifamily lending, capital rules, CRA, and the Bank Secrecy Act. The goals of these conversations are to help MDIs through technical complexities; provide the PFP with valuable insight and feedback on challenges facing MDIs; and gather MDI feedback on regulatory reform proposals, such as the CRA ANPR.

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.¹²

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.

Starting in 2021, the PFP team engaged an external consultant to begin the process of substantially updating the PFP website for the first time since its inception. The goals of the website revision are to modernize the website, increase stakeholder engagement, and improve the accessibility of information. Work will continue through 2022, with an anticipated launch date of 2023.

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 publications and programs listed below, most of which are accessible through links on the PFP website.

The System's Community Banking Connections publication serves to¹³

• 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 publication focuses on compliance with federal consumer protection laws and regulations for financial services and serves to¹⁴

• 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 Live" is a webinar series dedicated to consumer compliance.¹⁵ 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 Fed" is a Federal Reserve program for officials of state member banks and other insured depository institutions, bank and thrift holding companies, state bank commissioners, and state banking associations.¹⁶ "Ask the Fed" consists of periodic conference calls/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.¹⁷

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 as of December 31, 2021

Table B.2. List of MDIs as of December 31, 2021

Footnotes