What’s the impact of persistent barriers to basic financial services?

On the surface, fair access to financial services may seem less urgent than addressing housing discrimination and wealth inequality in the efforts to tackle historical economic racial disparities. Yet making it easier to open a checking account, obtain a reasonable home mortgage or business loan, or quickly access your own money are essential to that work, said Esther George, president of the Federal Reserve Bank of Kansas City.

"Being able to save and borrow money on fair and equitable terms is very much at the heart of financial security," George said while opening the 10th event in the Federal Reserve's Racism and the Economy series.

The virtual event explored barriers that prevent disproportionate numbers of BIPOC (Black, Indigenous, people of color) from accessing affordable financial services. Panelists said these barriers perpetuate gaps in wealth, home ownership, business growth, and other economic measures between white Americans and communities of color.

Panelists said traditional financial sector business approaches continue to thwart low-income and BIPOC communities' access to financial services. These practices include unwitting cultural bias, predatory lending, and a reliance on credit scoring methods that some see as outdated or discriminatory.

For example, Terri Friedline, an associate professor of social work at the University of Michigan, researched the struggles Black business owners had securing the federal Paycheck Protection Program loans. The PPP loans aimed to assist businesses struggling during the pandemic.

Friedline discovered that in the rush to disburse PPP loans, banks relied on existing customer relationships, which more often involved White-owned businesses. Further, even among firms with good credit scores, Black-owned firms were about half as likely as white-owned companies to receive all the PPP financing they sought, according to the Federal Reserve's 2021 Report on Firms Owned by People of Color.

Bill Bynum, CEO of Hope Enterprise Corporation, an advocacy organization which provides financial services, said the fallout from that approach continues.

"Over the past 20 months, we've seen disastrous effects of relying on traditional banks to finance Black businesses," he said.

Panelists say limitations for assessing credit scores undergird everything

Several speakers suggested that methods of determining credit scores are inherently detrimental to lower-income populations.

Camille Busette, senior fellow in economic studies and director of the Race, Prosperity, and Inclusion Initiative at the Brookings Institution, said a core assumption of credit scoring is that everyone starts adult life at the same point financially, then some take actions that enhance their financial standing, like making mortgage payments on time, while others don't. That core assumption is a fundamental flaw of algorithms that generate credit scores, she said.

"We need to reexamine some of the basic assumptions behind credit scoring," Busette said. "That undergirds everything."

Abbey Wemimo, cofounder and co-CEO of Esusu Financial, a firm focused on reworking the mechanisms behind credit scores, described a proposal to credit renters for on-time monthly rent payments, just like timely mortgage payments figure into the credit scores of homeowners.

Wemimo said that would unlock some $4 trillion in credit and other financing for mostly low- to moderate-income renters, because they would enjoy better credit scores and thus broader access to financial instruments that are mostly off-limits to them today.

"Let's give credit where credit is due," Wemimo said. "This would be not only advantageous to bridging the racial wealth gap but (would) contribute toward taxpayers' dollars and really fulfill the true founding creed of these United States, which is to make it (a) more perfect (union)."

Two panelists, José Quiñonez, CEO of the Mission Asset Fund, and Lakota Vogel, executive director of the Four Bands Community Fund, discussed designing financial products based on what is working among "unbanked" or "underbanked" populations. That includes informal financing arrangements rooted in immigrant or Indigenous cultures, such as "lending circles" through which ordinary people pool their money and make loans to one another, Quiñonez said.

Lisa Rice, president and CEO of the National Fair Housing Alliance, proposed a special-purpose credit program for first-generation home buyers. Rice said white households are 71% more likely than Black households to own their home. The gap hasn't improved much in decades, and it feeds the Black-white wealth divide, but special-purpose credit programs can help, she said.

If designed correctly, Rice said, the programs allow underserved consumers to circumvent structural inequities - such as living in a neighborhood hurt by appraisal bias or having a low credit score - to obtain good, affordable credit.

Her proposal would also blend special-purpose credit programs with down payment assistance for first-generation home buyers. Robert James II, president of the National Bankers Association, said buying a home has become so expensive, particularly for first-generation buyers, that it is time to overhaul the basic 30-year mortgage financing mechanism. We need, he said, to "start thinking about how we reengineer that to make it more relevant for the current economic environment."

Presidents discuss fast payments

In a separate panel, three Federal Reserve Bank presidents addressed whether people are "unbanked" or "underbanked" in part because banks don't offer immediate access to the funds in their paychecks. Tom Barkin, president of the Federal Reserve Bank of Richmond, said that can force people to use high-cost options like check-cashing outfits to get the money they need.

The Fed is working on a real-time payments service, FedNow, that could address the problem because it's being designed to allow money to move from account to account instantly, so it's available to people immediately.

Atlanta Fed President Raphael Bostic said speeding access to funds could help dismantle structural racism in financial services, because it would respond to the daily realities of lower-income people, including how they access and use their resources.

Measures like FedNow are part of an underlying effort, Bostic said, "to make being poor less expensive."

Minneapolis Fed president Neel Kashkari closed the session by saying the Racism and the Economy series has confronted racism embedded in the nation's economic systems in ways that have exceeded organizers' hopes. The series concludes in February with an event exploring how the Fed can incorporate knowledge from the 10 sessions to advance its work for economic inclusion.

"We have to look at what role we can play to try to improve outcomes for all Americans, Kashkari said, "because we work for all Americans."

This article was written by Charles Davidson from the Federal Reserve Bank of Atlanta.

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