Consumer Lending: Inequity & Debt, From Students to Homeowners
|Racial Equity Library|
Redlining is the act of systematically denying services to residents of specific, often racially associated, neighborhoods or communities. The term originated in the 1930s through a practice by which mortgage lenders deliberately 'redlined' or marked specific neighborhoods with higher proportions of Black residents to intentionally deny services — or charge higher prices — in those areas.
Redlining was openly sanctioned by America's place-based financing system until the Community Reinvestment Act (CRA), a key piece of legislation in the 1970s, made redlining illegal and launched a new era of activities intended to reverse its effects. Nonetheless, a century of extractive practices and the less overt forms of modern-day redlining practices have preventing us from overcoming racial injustice. According to the Center for Responsible Lending, for example, predatory lending today costs U.S. borrowers $9B a year, particularly affecting low- income borrowers and people of color. Below are some of the ways that foundations and other investors are working to undo the long-term, compounding effects of inequity that continue to persist.
All forms of debt, from home mortgages, to student debt, to payday and predatory loans, have disproportionately harmed people of color. For impact investors, ending extractive lending practices, disrupting their ability to reach low income communities, or offering better alternatives all provide powerful opportunities to intervene.
The industry of community development financial institutions (CDFIs), one of the first impact investing systems in the U.S., was designed to meet the needs of low incomes communities. Although they continue to pursue equity and evolve their practices to achieve racial equity, a multitude of factors have hindered progress.
Although the history of redlining has resulted in strong correlations between low income neighborhoods and communities of color, investors may need to collect demographic data on communities served to fully understand whether and how their investments are benefiting people or color.
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CDFIs: An Alternative to Predatory Loans
The industry of community development financial institutions (CDFIs) emerged from the Community Reinvestment Act (CRA) to tailor financing services to the needs of low income communities. CDFIs include mission-driven funds and credit unions that are required by law to meet a minimum threshold of service provision to low income communities. Many provide home mortgages, auto loans, and banking services to families, as well as business loans and other forms of investing in communities of color.
Recognizing the connections between racial inequity and low income communities in America, some CDFIs have voluntarily begun tracking demographic data in order to uncover hidden forms of inequity that may unintentionally exclude certain groups from service provision. Below is an evolving list of examples.
- Self-Help Credit Union provides responsible and affordable financial services to individuals in North Carolina, South Carolina, California, Florida, Virginia and greater Chicago, with a focus on low- and moderate-income consumers, including people of color. Read here how Self-Help and MacArthur Foundation stepped in support Chicago's Little Village.
- Community Loan Center (CLC) is a collective of nine member banks that provide financial products and development services to the the Rio Grande Valley, Texas, particularly for affordable housing and as affordable alternatives to payday and car title loans, which disproportionately affect communities of color. All earnings are reinvested into the program for expansion and lending capital. 88% of their borrowers are people of color. W.K. Kellogg Foundation provided a $1MM PRI (private debt) in 2017 to CLC, to help CLC provide small dollar loans in their communities.
Student Debt: Offering Better Alternatives for Low Income Student Borrowers
Studies have shown that students of color carry more student debt and are also more likely to default, preventing them from building assets at the same rate over the long term.
- SixUp Community Fund provides students with responsible, cost-efficient, and culturally competent debt options for students who come from households that can’t cover the cost of attending four-year colleges. In 2017, W.K. Kellogg Foundation made a $4 million mission-related investment ($3 million in debt and $1 million in equity) in Sixup. Notes Sixup founder, Sunwoo Hwang: “The Sixup team shares the DNA of the students we serve. We grew up in single-parent, low-income families. We were immigrants and the first in our families to go to college. We had no options but to hack our own financing and mobility within a system biased against us. We built Sixup to level the playing field for the next generation, so we can scale and lift undervalued, deserving human capital into education, workforce and upward mobility.”