“Beyond Foreclosures” starts discussion on the wealth gap and how to address it

More women will declare bankruptcy than get college degrees this year. Over one quarter of U.S. households are unbanked or underbanked, and 85 percent of these consumers are people of color. For every dollar that white Americans have, Latinos have 12 cents and African-Americans have 10 cents.

These are the kind of sobering statistics that experts presented to more than 100 representatives from community, research, financial, regulatory, and government groups at “Beyond Foreclosures: The Impact of the Financial Crisis on the Wealth Gap and Economic Opportunity.” Indeed, a staggering number of consumers lack sufficient access to banking services that would help them build wealth, do not have opportunities to build a positive credit history, and must resort to the costly and stigmatizing process of bankruptcy. However, presenters also gave examples of nonprofit, private, government, and regulatory strategies that hold great potential to address the wealth gap and create opportunities for economic security.

The event was kicked off by Kilolo Kijakazi, a program officer in the Financial Assets and Economic Security Unit of the Asset Building and Community Development Program at The Ford Foundation. Kijakazi gave an overview of how the racial wealth gap developed in America. She noted that African-Americans largely missed out on some of the biggest wealth-building opportunities of the past century, as they had limited access to government-encouraged homeownership programs such as the Homestead Act, the Home Owners’ Loan Corporation, and the GI Bill after World War II. The practice of redlining continued to restrict access to the real estate market. Kijakazi called for bold regulatory changes to address this systemic problem, including regulatory restructuring, updating the Community Reinvestment Act, enforcing consumer protection and fair lending laws, and expanding Home Mortgage Disclosure Act data collection.

The first panel on “Financial Instability, the Economic Crisis and the Unbanked” assessed the extent of the wealth gap from a variety of viewpoints. Joshua Sledge of the Center for Financial Services Innovation gave  an overview of consumers who underutilize or lack sufficient access to traditional banking services, noting that these consumers are disproportionately people of color. Sledge said that a growing lack of trust in banks is part of the reason consumers are avoiding the traditional banking system, and that the tightening of credit due to the recession is pushing more consumers into alternative financial services such as pre-paid debit cards, payday loans and auto title loans. Professor Robert Lawless of the University of Illinois College of Law presented research findings showing that African-American bankruptcy filers disproportionately file for Chapter 13 bankruptcy, which takes longer, offers less debt relief and is more expensive than the other option of Chapter 7. Vikki Frank of the Credit Builders Alliance explained a history of the credit scoring and reporting system and noted that individuals with low or no credit have fewer and fewer opportunities to build a positive credit history. Frank highlighted the fact that credit scores often are improperly used as proxies for underwriting and employer background checks.

Presenters on the second panel discussed efforts to close the racial wealth gap. Nancy Brown of Bethel New Life spoke about their wealth-building products and program, including secured credit cards, the “New Start” second chance checking program, and the “Smart Savers” Individual Development Account program, which offers matched savings that incentivize participants to save for a home, a business, or postsecondary education. Brown stressed the need for values-based financial education that changes financial behavior and helps students achieve their goals. James Maloney of Mitchell Bank reviewed their alternative small dollar loan program and identified factors that influenced nonperformance, including no credit score and use of an ITIN number instead of SSN. However, having a low credit score did not affect performance, and 61 percent of the savings accounts opened through the mandatory savings component of the small dollar loan program stayed open after the loan was paid off. Maloney suggested the creation of an SBA-type federal loan guarantee program for banks’ affordable small dollar loans and urged banks to compete with check cashers by offering similar products to customers and non-customers alike at affordable rates and basic transaction accounts with no overdraft fees.

Chris Giangreco of the Illinois Asset Building Group presented several state policy strategies aimed at building wealth, including children’s savings accounts, universal voluntary retirement accounts, and a campaign to eliminate asset limits for public benefits that discourage benefit recipients from saving. Angelisa Harris of the FDIC wrapped up the panel by sharing some of FDIC’s initiatives to create a more inclusive banking system and promote wealth building, such as encouraging banks to provide low-cost banking products and small dollar loans, development of the Money Smart financial management curriculum in multiple languages,  periodic data collection and reporting on the unbanked and underserved, and inclusion of diverse representatives on advisory committees. Harris summed up a common theme of the panel by saying that “government needs to set the rules so that markets work for everybody.”

While the current financial situation of low-wealth people and people of color is distressing, “Beyond Foreclosures” showed that many promising public, private and nonprofit initiatives to close the racial wealth gap are underway. The passage of comprehensive payday loan reforms by the Illinois General Assembly and the passage of financial reform by the U.S. House of Representatives and the Senate are two developments that promise to limit predatory practices and enhance wealth creation opportunities for consumers in Illinois and across the country.

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