CRA successes demonstrate need for future commitments

May 7, 2009 - 10:39am

In the mid 1990s, changes to the Community Reinvestment Act set off a series of community reinvestment agreements between Chicago-region community reinvestment advocates and the City’s largest financial institutions.  One of the earliest of these agreements in Chicago was negotiated by Woodstock Institute and the Chicago CRA Coalition during the acquisition of First Chicago NBD by Bank One in 1998.  The agreement resulted in a commitment from Bank One to carry out a pilot of a “second chance” checking product that was eventually expanded successfully to all of Bank One’s markets.

Before free checking was standard industry practice, a basic transaction account with few or no fees was something offered only to a bank’s most profitable and creditworthy customers-locking millions of low-wealth households out of the mainstream banking system.  By 1998, with more and more employers offering direct deposit, and fewer financial institutions willing to cash checks for non-customers, a basic transaction account was a necessity. 

The announcement that the Columbus-based Bank One would acquire Chicago’s then largest depository, First Chicago NBD, provided a window of opportunity for advocates to push for more inclusive account opening standards and ensure that basic checking accounts were available to the greatest number of low-wealth people possible.  The Chicago CRA Coalition, convened by Woodstock Institute, led this effort and worked with Bank One to develop a series of written, verifiable community reinvestment goals.  At the top of the list for Woodstock and the Coalition was the establishment of modified checking requirements that would make it easier for low-wealth people to open accounts.  After months of tense negotiations between representatives of Chicago’s affordable housing, financial education, and economic development community and senior representatives of First Chicago, an agreement was reached in Fall 1998.

While the agreement also set strong goals for mortgage and small business lending, one of the key commitments the Chicago CRA Coalition received from the bank was the launch a pilot program to test more inclusive criteria for new checking accounts.  Dubbed the “Alternative Banking” program, these new standards allowed borrowers with no credit history or a past due account to open a checking account.  If approved using the Alternative Banking criteria, the bank agreed to reduce the initial deposit from $100 to $10.  To address the bank’s concern about the risk of bad checks, funds availability was reduced from $500 per day to $50 per day for newly deposited checks.  If a customer remained in good standing for 12 months, the bank agreed to graduate them to a standard account.

The bank’s existing disclosures were insufficient to effectively communicate these conditions to an unbanked or previously banked audience. To develop new disclosure materials, the Chicago CRA Coalition requested that the bank work with an expert with experience working with an unbanked audience.  The bank agreed, and, in consultation with the bank’s legal department, the expert helped develop disclosure materials readable at a sixth grade level, in place of the bank’s existing materials developed at the post-high school reading level. 

In Spring 1999, Bank One launched the “Alternative Banking” pilot in three Chicago communities––Englewood, Logan Square, and North Lawndale.  The Chicago CRA Coalition and the bank chose these communities based on estimates of the number of unbanked customers and potential support from the bank manager––a factor both sides recognized was critical to the pilot’s success.  To market the pilot, the bank provided grants to several community-based organizations.  These organizations also provided direct financial education training to potential customers and worked with them to understand the account disclosures and statements.

Four years later, the Chicago CRA Coalition revisited the “Alternative Banking” criteria and its effectiveness in extending affordable checking accounts to previously unbanked people.  During the renegotiation of Bank One’s CRA commitments as part of its merger with JP Morgan Chase, bank staff recognized the original pilot’s success in changing the way their checking accounts were priced.  The bank also noted that most of the new customers acquired through the pilot maintained healthy account balances and, through cross-selling of additional products, established profitable, long-term relationships.   By 2004, the “Alternative Banking” credit check criteria had been adopted throughout  Bank One’s national branch network and the once-standard $100 initial deposit had been waived for all customers with direct deposit. 

Woodstock Institute and the Chicago CRA Coalition, now expanded statewide and re-launched as the Illinois Community Investment Coalition, continue to convene community stakeholders, bankers, and regulators to hold banks accountable for their services and lending practices in low-wealth communities.