Lessons from history show that those who are most disadvantaged before a disaster are likely to be most vulnerable during a disaster as well as on the road to recovery. As the novel coronavirus continues to spread, we are witnessing heavy impacts on low- and moderate-income communities as small businesses shutter, workers are laid off, and more and more households find themselves in unexpected financial circumstances. Low-income individuals and households are more vulnerable to illness and potential economic disruption for a variety of reasons, including lower availability of paid sick leave and ability to work from home, less wealth or savings to dip into in case of emergency, higher transmissibility due to larger household sizes, greater social interaction between the young and elderly, higher likelihood of underlying health conditions and weakened immune response due to toxic stress, and lack of health insurance to cover the cost of preventive doctor visits and prescriptions.
Banks play a key role in helping to alleviate the economic impacts of COVID-19 and have been encouraged to leverage their Community Reinvestment Act (CRA) activities in their response, as described in this interagency guidance from the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency. In the early days following the spread of COVID-19, the Federal Reserve Bank of San Francisco sought to understand bank response in order to share emerging and best practices for greater scale and impact across the field.
For this research brief, we conducted semi-structured interviews with community development officers across financial institutions in the Twelfth Federal Reserve District, collected additional responses via email, and examined a subset of online resources posted by banks to get a pulse on the early response of CRA-motivated institutions.1 We asked about changes to lending, services, and investments, whether the recent CRA guidance had spurred any changes to the ways banks were operating, how banks were prioritizing growing need, and ways banks were being responsive to evolving community conditions.
We found that in the short weeks following spread of COVID-19 in the United States, community development officers are involved in immediate response, including implementing operational changes and giving to local nonprofit organizations to address basic needs in their communities. Many respondents are leveraging existing relationships with community partners to better understand short- and longer-term need. Overall, we found that while many are eager to support communities in need, many others are hesitant to take action in the short term in the midst of such uncertainty. While many expressed eagerness for more innovation and adoption of new approaches, these approaches are still emerging. Below we explore these themes in greater detail.
- Banks are providing funding for immediate needs and providing flexibility to grantees
Several banks indicated that they are providing donations of varying size to community organizations that are helping households meet immediate basic needs. Several banks have supported pooled emergency funds held by large non-profits (e.g. local United Way chapters) and community foundations to address food security and shelter needs, and others were considering direct donations to local food banks. Respondents expressed that these community-based organizations are in a good position to leverage the funds given their experience serving communities, though they also acknowledged that their donations are not sized to be enough to meet growing needs. One respondent expressed that their bank has limited funds and is taking a more measured approach in assessing whether to leverage their resources for the “direct response” or the “aftermath.” This respondent also expressed wanting to direct resources to plug gaps in the distribution or eligibility of the emerging federal policy response to ensure that the federal assistance “gets to where it needs to go.”
Respondents also expressed that they have been making changes to their corporate giving approach in favor of expediency and flexibility for non-profit grantees. Some have provided grantees the ability to change programmatic funding to general operating support so nonprofits can best serve their clients in the ways they see fit. Banks expressed looking at more expedient ways to get the funding to nonprofit partners, given that resources are needed sooner rather than later. One bank expressed changing their funding portfolio to shift funding away from nonprofits that are not involved in immediate COVID-19-related work to those organizations who are working on providing COVID-19-related shelter and medical care.
In order to encourage more giving at this time, some banks have expanded employer matching programs to leverage the donations of their employees, while others have expressed not wanting to ask their employees to donate their own funds at this time. One bank has an external matching grant program open for both individuals and businesses donating to food banks, and their bank leaders send personalized invitations to encourage more participation.
- Banks are implementing operational changes to protect staff and customers
All banks we spoke with have made major changes to their operations in response to COVID-19. A variety of different approaches are being taken to provide in-person services, including: closing bank branches or limiting hours, focusing more on drive-thru business, limiting the numbers of people allowed to enter branches based on distancing requirements, additional cleaning protocols, and creating set times for older adults who are most at risk to come to the bank. In addition, supports are being given to bank employees to work from home, and staff are being redeployed to help with loan servicing, anticipating increased demand in that area.
Banks are providing support to their own employees as well, including financial contributions to employee hardship funds that were previously funded through employee-giving, additional paid time off, and raises, bonuses, and free lunches from local restaurants to non-exempt front-of-house workers who are dealing directly with customers.
- Banks are offering short-term relief to their clients
Most banks are offering changes to provide short-term relief to customers. These approaches include various options for forbearance, skipped payments, and waived fees for overdraft and late payments. Options are being offered for consumer and small business lending. Banks have suspended residential property foreclosure sales, evictions, and involuntary auto repossessions, and they are not reporting to credit bureaus. There is a spectrum of length of relief (from 90 days to up to six months), as well as a spectrum of how proactively these programs are rolled out to customers, from widespread communication, to one-on-one outreach, to relying on customers to reach out and contact the bank directly. While banks are preparing for a deluge of deferral requests, some respondents acknowledged the limitations of this approach: interest is still accruing and for some of the loans the full amount is due after the forbearance period. One respondent pointed out that if people don’t have the funds now, they are unlikely to have the full amount in 90 days, acknowledging the need for longer term strategies.
Banks are looking at ways to provide additional access to capital for small business borrowers. One respondent indicated that the crisis has resulted in more aggressive deployment of capital to community development financial institutions (CDFIs) that work with small businesses. Another bank requested approval to participate in small business disaster programs after its region was declared a major disaster by the Federal Emergency Management Agency (FEMA). The bank recognized that the FEMA declaration allowed additional activities to be eligible under the CRA. Some banks are involved in supporting loan funds and exploring ways to expand their reach, as well as to shore up the organizations administering them given the expected demand for these funds and anticipated challenges from lack of payment.
- Banks are leveraging existing relationships to understand evolving community needs
Banks are relying on their relationships with nonprofit, CDFI, and municipal government partners to help them understand the impacts of COVID-19 in local communities. Most banks acknowledged that they are still collecting information from community partners to identify how they can serve the greatest needs. Banks are leveraging their positions on community boards that are meeting virtually, as well as attending virtual convenings held by other community leaders. One bank expressed that, while they would typically reach out to nonprofit partners for information on community need, they hesitated to overtax providers who were responding to the crisis and instead leveraged their relationship with the municipal government to sit in on the mayor’s listening sessions. Keeping informed on local conditions is helping banks balance immediate versus longer-term responses.
- Ideas are developing for new and responsive programs
Some early strategies are emerging to address the growing needs. One respondent mentioned that despite the bank being less likely to do small dollar loans in the past, they are offering an employment disruption loan, a low-interest small-dollar loan available to consumers who have lost their jobs. Some banks are looking at how to allow customers easier access to funds in individual development accounts and enabling early withdrawals from certificates of deposit. Banks are also cutting red tape to expedite loan modifications and originations and reducing limitations on the frequency of use of digital platforms, for example, by allowing for more daily electronic deposits. Some banks are planning to waive fees that they would typically charge non-customers to cash federal aid checks that are forthcoming as part of the economic stimulus package.
Banks are particularly interested in addressing the needs of small business borrowers and leveraging in-house expertise to provide small business technical assistance. Banks are following federal legislation and working to build capacity to be responsive to it. One bank expressed working to increase capacity across their geographic footprint for CDFI and business technical assistance organizations given likelihood of increased demand. In examples of on-the-ground programs encouraging community members to support local businesses, one bank’s foundation spearheaded a social media campaign to foot half the bill for restaurant take-out customers, and another bank is giving customers 10% cash back when they make purchases at restaurants with their bank-issued credit card.
Respondents are also prioritizing the needs of nonprofit customers, who have been overlooked in previous disaster responses (while also acknowledging that this time the Small Business Administration’s approach includes them). Banks are leveraging in-house technical expertise to support the changing finance needs of nonprofit organizations.
Given current requirements for shelter-in-place and social distancing, several banks are exploring the viability of virtual delivery of financial education, first-time homebuyer education, and nonprofit finance technical assistance, and some have made their existing virtual programs more widely available. Banks are assessing whether the content would be well-received virtually, as well as if the intended audience has access to internet and enough bandwidth to be able to join remotely. Banks are also engaged in or considering virtual volunteer programs.
- Banks are motivated to meet community needs and go beyond CRA
Bankers appreciated that the interagency guidance encouraged them to be doing what they can for vulnerable populations and the clarification that their activities in response to COVID-19 may be eligible for CRA credit. Some bankers expressed that the recent CRA guidance is not motivating the changes they are making, as their community response would be occurring with or without CRA consideration. One respondent indicated that the guidance is standard, and several expressed concerns that many of those who will be in need during this crisis will not qualify as low- or moderate-income.
- There is opportunity to do more
Respondents indicated that changes made during this crisis may offer the opportunity to imagine and incubate a new future and develop new perspectives and solutions to old problems. Many vulnerable populations were in crisis prior to COVID-19, and bankers have been considering if there are new opportunities to better meet their needs. Some emerging ideas that came up in interviews included cash bridges for consumers to help avoid the use of payday lenders, the need to address mental health implications for communities, and options for struggling small business owners to convert their businesses to shared ownership models. One respondent suggested that the crisis offered the opportunity to break down false divisions. For example, while small business owners and individual financial capability are often seen as distinct, for many small business owners the individual and business finances blur. More can be done to address their needs holistically. Another respondent cautioned that it is important for banks to push toward new approaches and leave behind “the previous disaster’s playbook.”
Lessons learned
Several lessons for addressing COVID-19 and other future disasters emerged through this research:
- Leverage pre-existing partnerships. Respondents consistently indicated relying on their previous relationships to understand and be responsive to community need. One respondent particularly expressed that, as in the last financial crisis, it was critical to have a concerted approach and be working together. Partnership and relationship development should be an ongoing process, and it can be leveraged in times of need.
- Maintain active and clear communication with customers. Respondents highlighted the need to reach out to customers through various channels and the importance of clear and active communication during this time of volatility.
- Each new crisis requires new approaches. The causes and consequences of this economic crisis are distinct from the last one and require that banks employ their resources to address the unique circumstances of this moment. Compared to the last financial crisis, banks may be better capitalized and thus have more flexibility in their community responses.
- Address immediate needs while looking at systemic issues. Given that resources are constrained, it is important that banks work to leverage their resources not just for immediate needs but to enable a supportive long-term strategy as the crisis unfolds.
- Leverage what exists. Rather than employing the energy required to start something new, bankers are asking how new resources can be deployed using existing infrastructure. For example, one respondent is considering what could be done using existing apparatus to get more credit out to borrowers, such as through lending circles and microcredit organizations.
- Develop a systematic approach to understanding community needs. Every ecosystem of community partnerships is different – some are very coordinated and have large networks of nonprofit partners, while others are more diffuse or have smaller communities of providers. Banks need to develop an approach that works for their markets. One bank expressed that they often “naturally” hear about what is going on through client requests and organizations they provide loans to, but formalizing an approach to collecting and sharing information may reduce the lag time and result in a more complete understanding of what is unfolding in communities.
COVID-19 poses threats to our overall economy, particularly for low-income communities who were already struggling prior to this crisis. Banks are poised to provide key leadership during this time and can leverage their resources to reassure customers and stabilize communities. In the coming weeks and months, we will continue to follow banks to see how they build on these early actions in our country’s collective response to the current economic crisis.
Acknowledgment: Thanks to Joselyn Cousins, Craig Nolte, and Laura Choi for their contributions to the conception, data collection strategy, and analysis for this brief, to the Federal Reserve Bank of San Francisco’s Community Development field team for conducting interviews and sharing key resources, to Laurel Gourd for editorial guidance, and to the community development officers from banks around the Twelfth Federal Reserve District who shared their time to provide responses on the phone or via email.
Disclaimer: The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of San Francisco or the Federal Reserve System, and do not indicate endorsement of any practices described.
1. Hereafter the word “banks” refers to those included in data collection for this research brief.
Article Citation
Shrimali, Bina. 2020. “What are Banks Doing to Address the Impacts of COVID-19 on LMI Communities? Early Approaches to Addressing the Crisis,” Federal Reserve Bank of San Francisco Community Development Research Brief 2020-1. doi: 10.24148/cdrb2020-01