Financial Empowerment for the Unbanked and Underbanked Consumer:

Transcription

1 Financial Empowerment for the Unbanked and Underbanked Consumer: Center for African-American Policy Crossing the Red Line Rickie C. Keys, PhD, MPH Study Findings & Recommendations Research shows that even though The industry must provide a mechanism to banks may be physically located in transition and graduate consumers from sub-prime to prime credit scores in order for areas with high concentrations of them to be able to accumulate wealth. unemployment and low FICO scores, The industy and legislative bodies must work together to develop a new business model and a the consumers in these impoverished set of regulatory policies to provide access to mainstream products and require financial service areas still lack access to the bank s organizations to report payment histories to the major credit bureaus. services when compared to higher Organizations that offer credit products to credit income and higher FICO score challenged consumers must be allowed to factor in appropriate risks when extending these communities. This results in a lack services while fostering a competitive regulatory environment. of supply of mainstream financial financial services to underbanked and unbanked consumers. 1

2 Introduction This study, compiled by the Figure 1 University of Denver - Center for African-American Policy in conjunction with the National Black Caucus of State Legislators (NBCSL), was conducted to gain a greater understanding of the availability and accessibility of credit and financial services in African- American and minority communities. This report provides a detailed look at the disparities in accessing mainstream financial services and credit products in several cities using location mapping and correlations. The maps overlay poverty, income, While credit is a key enabler to organizations, in many cases, employment, ethnicity and other obtaining wealth, it also affects provide the only option to access variables with the availability of fundamental aspects of daily life such financial services and financial traditional banking and fringe as insurance, employment,median assistance. financial institutions in those income, poverty, housing and communities. ultimately, wealth. (Figure 1) Consumers with high or prime credit scores are generally allowed Our research demonstrates that This study also illustrates that access to a wide variety of as banks, credit unions and while banks have branches in banking and credit services. savings and loan institutions lower income and lower credit Credit-challenged consumers concentrate on deposit score communities, they do not generally have limited options accumulations and lending, they provide a proportional level of and are not typically afforded avoid low credit score areas, accessibility as they do for the same opportunity to access resulting in fewer financial higher income, higher credit credit and banking products. service options for the unbanked score communities. This is What our study found lacking is and underbanked consumer. revealed by the comparably that while prime and sub-prime Additionally, this report reveals stronger correlation of credit categories are clearly that higher concentrations of mainstream financial service defined, there is not an identified lower credit scores in an area organizations in high income and vehicle or endorsed method by erode consumer options and higher credit score communities, which consumers can move from create a cycle where there are as compared with those in low a sub-prime, low credit score few opportunities to improve income and low credit score category to a prime or high credit scores. communities. credit score category. Because credit is a key enabler The study found the need for Wealth is a noble and desired of wealth, the ability for these financial services still exists in objective shared by nearly every communities to create and retain many communities, leading American, without regard to wealth is diminished when low fringe, non-mainstream, financial race, creed, color or any other credit scores concentrate. services companies to enter the demographic characteristic. marketplace. These The Kansas City Federal Bank 2

3 (KCFRB) defines wealth as cash Most major credit bureaus view practices to review credit scores on hand, personal/household real fringe financial services of most borrowers. The estate holdings, investment real customers with more risk and as requirements for higher reserves estate holdings and investments inherently more likely to default requires more capital. Thus, in stocks, bonds and other on credit obligations. This banks limit making loans to and investments and assets. assessment is purely based on opening accounts for consumers According to KCFRB, at least the type of financial services with low sub-prime FICO scores. 37% of U.S. household wealth company making the loan with is real estate oriented. Our no regard to the customer's Our research demonstrates the study notes that the ability to credit and payment history. physical location of a bank, acquire real estate is based on Consumers using most fringe credit union or traditional a number of determinants financial service organizations, financial institution does not including availability of credit. (such as check cashers, pawn ensure that equal access to Since consumers are granted or shops, title loan companies and credit products and services are denied credit based on their mono-line payday lenders) who available to residents in those credit score, consumers with low pay their bills on a regular and communities. This report reveals credit scores are restricted in timely basis are not afforded an that while traditional banks will their ability to acquire real opportunity to build and/or locate in lower income, lower estate and by extension, improve their credit ratings. This credit score communities, they restricted in their ability to paradox affects African-Americans provide limited banking and credit acquire and retain wealth. and Hispanic-Americans at a services because consumers in disproportionately higher rate these areas do not have A FICO score is a measure of credit than others because these sufficient deposits to justify risk calculated from a credit report groups represent a significantly placement and their FICO scores using a standardized formula. higher percentage of the are too low to secure loans. In Typically, scores range from underbanked and unbanked many cases, credit challenged consumer market. consumers are simply denied access to services on the basis While credit is a key enabler to Affect on Unbanked and of their credit scores. obtaining wealth, it also affects Underbanked Consumers many fundamental aspects of Methodology daily life. Often, access Federal regulatory policies and to an increasing array of basic guidelines have created a major This study presents maps that necessities, including jobs, void in the accessibility of demonstrate a strong correlation housing, insurance, energy financial products and services between the average credit score communications are now for credit impaired consumers. and various demograhic influenced by an individual s Regulatory policies are characteristics by the cities that credit score. In short, both imposed on traditional banks to were examined. The data for the credit scores and credit reports ensure that costs associated maps was gleaned from the U.S. have become vital factors in with the risk of servicing Census Bureau (Census), U.S. purchase decisions today. consumers are limited to protect Bureau of Labor Statistics (BLS), the viability of the banking U.S. Bureau of Economic Analysis Most fringe financial service system. (BEA), Federal Depository organizations do not report Insurance Corporation (FDIC), payment histories to credit Specifically, FDIC policy Credit Union National Association bureaus in order to protect their uses FICO scores to evaluate (CUNA), State Banking Agencies, customers. Additionally, credit credit risks of consumer loans Telephone Directories and other bureau databases are not and risk-weights capital sources. We gathered structured properly to accept requirements. Bank regulators demographic information compiled the data. use "safe-and-sound" business from the zip codes of thirteen 3

4 targeted cities across the country. For example, using zip code information supplied by the U.S. Census, we mapped the physical locations of all banks and fringe financial service providers in that area. We then plotted the results on maps, using demographic characteristics of specific areas, which allow the viewer to easily examine these locations. Figure 2 We then used a statistical analysis to calculate the number of institutions in that zip code, which led to our percentage findings. African-American Distribution African-Americans reside disproportionately in the Southern region of the United States. While 13% of the U.S. population is African-American, approximately 75% of them reside in the South and Southeastern regions of the country. In North Carolina, nearly 22% of the state s population is African-American The highest concentration of African-Americans in North Carolina is predominatedly located in the Northeastern region of the state. In Charlotte, one of North Carolina s largest cities, African- Americans represent 32% of the city s population, most of whom reside in the mid-section of the city. African-Americans make up more than 41% of the population in zip codes 28202, 28203, 28206, 28208, 28213, 28215, and (Figure 2) While this 4

5 Figure 3 Americans is located in the central part of the city, there is no correlation between the Americans and the number of banks and check cashing/payday loan companies. (Figure 7) FICO Scores Average FICO scores, provided by Experian, Inc., demonstrate regions with higher concentrations of African- Americans typically have lower FICO scores. Therefore, the Southern and Southeastern regions of the United States have average FICO scores that are less than 682, the lowest of the quadrilles. (Figure 3) Likewise, in North Carolina, the vast majority of the counties in the Northeastern region of the state have average FICO scores that are less than 654, again among the lowest of the quadrilles. (Figure 3) In Charlotte, zip codes with the highest concentration of Africanaverage FICO Americans have the lowest scores. There is a significant and negative correlation between the Americans in Charlotte and average FICO scores. In essence, as the percentage of African-Americans in Charlotte increases by zip code, the average FICO score decreases. This factor is directly opposite to the relationship of FICO scores and Whites by zip code in Charlotte. As the percentage or concentration of Whites increases, the average FICO scrore increases as well. (Figure 7) 5

6 Of the factors examined, there is a stronger and more direct, negative correlation between FICO scores and the number of banks and check cashing facilities in Charlotte. As average FICO scores increase, the number of banks increases as well. Conversely, as the average FICO scores decrease, the number of check cashing/payday loan companies increases. Figure 4 Unemployment A strong national relationship exists between the Americans and unemployment. However, there is a higher rate of unemployment in the Southern and Southeastern regions of the United States. (Figure 4) Likewise, in North Carolina, the regions with higher rates of unemployment are the counties located in the Northeastern region of the state. (Figure 4) In Charlotte, zip codes with the highest Americans have the highest rates of unemployment. (Figure 4) In Charlotte, a significant and positive correlation is also evident between the concentration of Africanunemployment rate. In essence, Americans in the city and the as the percentage of African- Americans in Charlotte increases by zip code, unemployment rates also increase. This factor is directly opposite to the relationship of unemployment for Whites by zip. As the percentage or concentration of Whites increases, 6

7 Figure 5 unemployment rates decrease. (Figure 7) There is no apparent correlation between the availability of financial services, either traditional banks or payday loan/check cashing facilities, and the unemployment rate in the city of Charlotte. Poverty There is also a strong national relationship between the Americans and the poverty rate. The Southern and Southeastern regions of the United States have the dubious distinction of having the highest percentage of residents living in poverty. (Figure 5) Again, these regions of the country have the highest Americans in the United States. Similarly, the counties in the Northeastern region of North Carolina, those with higher concentrations of African- Americans, also have the highest poverty rates. (Figure 5) Twelve percent or more of the residents who live in zip codes 28202, 28203, 28204, 28205, 28206, 28208, and live in poverty. (Figure 5) These zip codes encompass a higher percentage of African- Americans. There is significant and positive correlation between the Americans in Charlotte and the rate of poverty. There is, on the other hand, a significant, yet negative, correlation between zip codes with higher concentrations of Whites and the rate of poverty. There is also a weak and positive correlation between poverty and the availability of payday loan/ 7

8 check cashing facilities. There is no correlation between banking service availability and poverty in Charlotte. (Figure 7) Figure 6 Homeownership It is widely known that the surest means of acquiring wealth is through homeownership. According to the United States Census, the homeowership gap is significant with non-hispanic Whites having a homeownership rate of 72.4%, while African- Americans have a rate 46.3%. This gap is also seen in North Carolina where the non-hispanic White homeownership rate is 75.7% versus 52.5% for African- Americans. This is attributable to a number of factors, including the varying FICO scores of each population. There is not a strong national relationship between the Americans and homeownership rates because owning a home is more a regional issue, nationally, than a racial issue. (Figure 16) On the contrary, counties in the Northeastern region of North Carolina have higher concentrations of African- Americans and have lower, on average, rates of homeownership. (Figure 6) Residents who live in zip codes 28202, 28203, 28204, 28205, 28206, 28208, 28213, and have homeownership rates less than 43%. (Figure 6) These zip codes encompass a higher percentage of African- Americans. There is significant and negative correlation between the 8

9 Figure 7 stakeholders to consider as they ability to pay should be a Americans in Charlotte and the enact legislation and regulatory factor in credit granting rates of homeownership. There policies to bridge the gap of the Full, clear and is, on the other hand, a financial empowerment divide. understandable disclosure significant, yet positive should be mandatory correlation between zip codes We must develop a Individual risk-based/riskwith higher concentrations of comprehensive financial vehicle adjusted pricing allowing Whites and the rate of that will give credit challenged recovery of the cost of homeownership. There is also a consumers the opportunity to capital and balancing the significant and positive obtain traditional banking associated risk correlation between services and products to Mandatory graduation to homeownership and FICO scores. improve their scores. This lower interest rates and There is no correlation between program should also provide a better terms for consumers banking and payday loan/check bridge to graduate consumers who exhibit good payment cashing service availability and from sub-prime to prime borrower histories the rate of homeownership in status. This program must also Mandatory reporting of Charlotte. (Figure 7) be implemented with the consumer payment histories following elements: to credit bureaus Study Conclusions: A Model Access to credit products Development and for Change and services for all implementation of full consumers, regardless of service financial institutions Our study offers the following how low a consumer's credit providing various financial recommendations for policy score may be services and credit products makers, legislators and other A consumer's individual to appropriately service 9

10 unbanked and underbanked consumers Delivery of comprehensive financial literacy and consumer education programs to assist consumers in making sound financial choices Fostering of a competitive regulatory environment through regulatory oversight Acknowledgements The University of Denver, Center for African-American Policy would like to thank the National Black Caucus of State Legislators and CompuCredit, Inc for its generous support of our research on programs that encourage the availability of financial services to unbanked and underbanked consumers. The author is grateful to Peter Groff and Wendel DuFour for their research and mapping assistance. Furthermore, we are grateful to the National Black that will increase the Caucus of State Legislators, President Mary Coleman availability and accessibility and the Executive Staff for their guidance and of financial products and assistance. services. Ensuring that regulatory bodies allow and encourage bank partnership arrangements between For More Information: financial services companies Rickie C. Keys, PhD, MPH and federal and state Senior Research Fellow chartered banks to increase rkeys@blackpolicy.org the availability and accessibility of mainstream For General Information: financial products and Center for African American Policy services to financially 2199 S. University Blvd. underserved consumers. Mary Reed Building - Room 107 Denver, CO We believe that if new business (Tel.) models and regulatory policies (Fax) are adopted, the disparate accessibility to financial and banking services for credit challenged consumers will be alleviated over time. We believe this is a vital step toward enabling unbanked and underbanked consumers to cross the redline and create wealth. 10