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Are ING Direct's "Cafes" An Excuse to Avoid Lending to Low-Income Borrowers?

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ING Direct (ING) has long been the online, fuss-free alternative to traditional brick and mortar banks like Dow Jones (^DJI) component Bank of America (BAC), Citibank (C), Wells Fargo (WFC) or JP Morgan Chase (JPM), but it has been slowly building a physical presence in the US.
 
However, don’t expect to be able to make deposits or cash a check at most of ING Direct’s retail outlets. In fact, don’t even call them branches. Take the latest one that just opened in San Francisco for example: Instead of queue poles and bank teller windows, you’ll see, according to The Bay Citizen, “13 flat-screen televisions; beanbag chairs; a deli counter that sells coffee, cookies and sandwiches; and plenty of tables and outlets for customers using the free wireless Internet access.”
 
"We're a bit like Southwest Airlines. We don't take this banking thing too serious," Arkadi Kulmann, ING Direct’s president and CEO, told the San Francisco Chronicle, saying that the bank’s new outlet was really more of a “cafe”.
 
That means that the staff on site at the Union Square location will be able answer queries about opening checking accounts or mortgages, but they will not help customers open an account. Customers who wish to cash or deposit checks have to use pre-addressed, stamped forms that will be mailed to ING Direct’s office in St. Cloud, Minnesota.
 
However, as The Bay Citizen reports, some consumer groups believe that ING Direct’s marketing strategy of opening such concept retail outlets is in large part due to its desire to escape federal regulatory rules put into place by the 1977 Community Reinvestment Act, in which banks have “requires banks to lend money to low- and moderate-income borrowers in metropolitan areas where they have branches that accept deposits than with a desire to be cutting-edge”.
 
The bank managed to successfully get the Treasury Department’s Office of the Comptroller of the Currency to classify its cafes as “agency offices” instead of branches when it opened the first one in New York in 2001, which meant that they did not heed the requirements mandated by the Community Reinvestment Act.
 
ING Direct’s lending ratios are also disproportionate racially, with only three of the 705 loans the bank originated in the Bay Aread in 2010 going to African-American borrowers while Hispanics obtained six.
 
According to The Bay Citizen, Kulmann denies the charge that its cafes were a way of getting around the Community Reinvestment Act.

“We didn’t start cafes as a way to get around regulations,” Kuhlmann said. “We did it as a way to help people save their money.”

In fact, Kuhlmann said, it was the desire to be more involved in Bay Area civic life that sparked the decision to open a San Francisco cafe. It will serve as a starting point for charity walks and a meeting place for community-based nonprofit groups, he said. In September, Kuhlman announced that ING Direct’s charitable foundation had donated 500 new books, a puppet theater and a spaceship learning center to a Head Start center in Chinatown.

Whatever the motive behind the cafes might be, they will be around for some time, with ING Direct having signed a 10-year lease for the San Francisco outlet. Of course, the bank will be formally acquired by Capital One Financial (COF) this year, pending regulatory approval, and Kulmann told the Chronicle that the Fortune 500 company is more than supportive of his marketing strategy.
 
"It wouldn't be logical to be opening a cafe if Capital One really didn't like cafes," he said.
POSITION:  No positions in stocks mentioned.

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