More Banks Find Profit in Loans to Inner City

American Savings Bank built itself into California’s second-largest provider of home loans largely on the strength of a program that focuses on minority and lower-income neighborhoods.

American’s efforts earned it praise and profit and made it more attractive to Washington Mutual Inc., a Seattle thrift holding company that agreed Monday to pay $1.4 billion in stock to buy the Irvine thrift.

But despite the path forged by American, banks and thrifts nationwide have only recently realized that inner-city lending can be profitable and can be a help in mergers and acquisitions, industry analysts say.

“The trend among many banks and thrifts in the last few months is to expand lending to less advantaged borrowers because it can be so profitable,” said Thomas F. Theurkauf Jr., an analyst at Keefe, Bruyette & Woods in New York.

Other institutions are figuring out what American learned more than three years ago: Inner-city borrowers want to buy homes as much as suburbanites do and they’re just as responsible in making loan payments.

For institutions on the sale block, Theurkauf said, a rating of “outstanding” by regulators in fulfilling obligations under the Community Reinvestment Act should make it easier to get federal approval for any merger.

The high marks that regulators have given Washington Mutual and American for their lower-income lending should make a review of their combined CRA lending “relatively routine,” said Lee D. Lannoye, an executive vice president for the Seattle company.

Public interest groups, which already hold American up as the industry model for lower-income lending, charge that many institutions don’t merit the good CRA ratings handed out by regulators.

That’s because the ratings are based on a host of factors--such as lunches with community leaders--that have little to do with getting loans to communities that need them, said Robert Gnaizda, policy director for the Greenlining Institute, a San Francisco public interest group.

So community groups have been quick during the recent spate of mega-mergers among banks to challenge deals that take banks and their lending out of communities that need more banking services. That trend is expected to continue if, as analysts predict, more large thrifts begin to merge.

Regulators, Gnaizda pointed out, are toughening rules to base CRA ratings on an institution’s actual loan in inner-city and underserved communities.

CRA-based protests “seem to be pretty routine these days” among large mergers, said Mary Trigg, a spokeswoman for Home Savings of America, which is fighting a protest over its pending acquisition of 61 First Interstate Bank branches.

The protests rarely block a deal--and Trigg doesn’t expect them to block or delay approval of its purchase. But even regulators acknowledge that they make the approval process more expensive and, usually, longer.

Greenlining knows nothing about Washington Mutual, Gnaizda said, but it will learn about the institution’s past lending habits and its plans for California as it considers whether to file a protest.

Washington Mutual isn’t worried. More than 30% of its loans go to lower-income and minority areas, Lannoye said.

American is California’s leader, providing more than 50% of its loans to moderate- and low-income borrowers over the last three years. The program, spearheaded by the S&L;’s chairman, Mario J. Antoci, has been incorporated as part of its normal operations.

“A lot of bankers think of CRA lending as something they have to do,” Lannoye said. “Washington Mutual and American have found it’s part of good business. CRA isn’t a burden; it’s part of our business plan.”