Big Banks Taking Big Swings – and Misses – in Minority, Underserved Markets

By Shirley Senn 

Homeownership in the US climbed over the last decade to 65.5% in 2020, according to the National Realtors Association. But some Americans benefited more than others. Even as home ownership grew by 2.6 million households between 2019 and 2020, homeownership declined for Black Americans (43.4% in 2020 v 44.2% in 2010).

To help counter the situation, large banks like Bank of America and Chase are offering $0 down payment mortgages in areas predominantly inhabited by Black and Hispanic people. The way BoA’s works is the bank provides a grant to cover the down payment and closing costs, and new homeowners receive equity immediately. It requires no mortgage insurance or minimum credit score. Applicants are scored based on timely rent, utility bill, phone and auto insurance payments.

The program sounds great, except…

There’s More to Serving Underserved People

Even during this housing boom and historically low interest rates, Black homeownership was at its lowest in about 50 years. Reversing that requires a long term, consistent, committed effort – not just, 'Hey, we've committed $30 billion to do this over the next five years.'

Character based lending is the story telling. Sometimes you have to go beyond what artificial intelligence and algorithms can't get you. A credit union, and especially a CDFI, is probably more apt than the big banks to say, 'We understand. Your interest rate may be a little bit higher right now, but after a certain period of time, we can evaluate things again.’

For some, buying a home does not make sense in their area or their particular financial situation. Most of the time, the big banks aren’t going to sit down and take the time to figure that out, whereas credit unions will. Credit unions are interested in reaching one more member with one more way to help, not just closing a loan and moving on to the next. They may not have the big money that a BoA has, but they have the big hearts.

And credit unions are meant for collaboration – not just throwing money at problems. Where credit unions, especially those certified as Community Development Financial Institutions, can be successful in the financial empowerment nurturing process is really developing community partnerships and understanding what the true challenges are, for the individuals and households that truly need it. That takes time.

There’s More to Being Underserved

As many credit union leaders are aware, it’s expensive to be poor. Financial services options may be limited and pricey. According to the Federal Reserve Bank of New York, the average credit score for low-income people is 658, well below those of moderate income at 692. Loans that are available to them are going to come with a higher interest rate and additional fees. The reasons behind how people get into a poor credit position need to be addressed, and it's something that credit unions are really good at, especially CDFIs.

For example, the Fed found that single women have “more intensive use of credit and have experienced more difficulties repaying their debt in the past,” than single men. The report hypothesized that economic circumstances, labor market experiences, different attitudes toward borrowing, financial literacy levels, and the potential difference in how men and women are treated by the credit market and institutions could all be factors.

Additionally, the Fed noted that divorces might impact women’s financial situation more than men’s standing. Add to that the fact that more black women were divorced than married in 2018, per Bowling Green State University. Conclusion: Black women, who already don’t make as much for the same work as their male and Caucasian counterparts, are hit with a double whammy when it comes to their financial situation, and therefore, are more likely to face limited access to and higher costs for credit.

And what of the survivors of domestic abuse? They're more difficult to identify and quantify, especially by an algorithm, yet they’re no less underserved when it comes to financial services. Nearly all domestic violence survivors have experienced financial abuse, such as being prevented from working or forced into taking on debt, which tanks their credit. For consumers in these situations, no fancy algorithm is going to fix their financial scenario. Only people.

From a credit union standpoint, working in underserved communities can increase their bottom line and their penetration  into their community. That’s not something large banks are thinking about on a daily basis. However, the typical credit union leader will be asking, ‘What can I do for that one family over there?’ And it might not be to give them the burden and responsibility of a mortgage.

What about the most discriminated community?

One of the things CU Strategic Planning has discovered in our Diversity, Equity, Inclusion, Belonging and Accessibility practice is that one of the most discriminated against segment of the population are those with disabilities. Data from the National Disability Institute bear this out as it pertains to financial services. People with disabilities are less likely to have savings and checking accounts and tend to use money orders, check cashing establishments, refund anticipation loans, title loans and other alternatives. Not only are these options expensive, but they generally have a negative impact on credit and move those with disabilities farther away from financial empowerment.

And, what about rural areas?

To take advantage of BoA’s zero-down payment offering currently, individuals must live in major metropolitan areas to be eligible – Charlotte, Dallas, Detroit, Los Angeles or Miami. The bank is going where it can make the most noticeable impact in a short period of time in an attempt to prove its underserved minority bona fides.

Minorities in the cities do have great need, but what if the big banks targeted areas to revitalize that they’ve left to rot on the vine?

I’m referring to the rural and small-town banking deserts these same banks created, which also had a huge impact for a smaller number of people. According to a National Community Reinvestment Coalition (NCRC) report, since March 2020, banks have closed more than 4,000 branches across the US, with most of these closures involving the biggest names in banking. Further, one-third of closures in the past five years have been in low to moderate income and/or majority-minority neighborhoods, “where access to branches is crucial to ending inequities in access to financial services.” A CDFI credit union might remain, struggling to stay afloat and serve more people who’ve been abandoned by these “altruistic” banking behemoths.

For example, when we're talking with CDFI credit unions that are sitting in the Delta regions of Louisiana and Mississippi, we're talking with them about working collectively with small town Main Street. We look at data of those banks that have closed in banking deserts, and the great news is that some credit unions are buying the branches, a critical service element when it’s the only one for 50 miles in any direction and internet access might be poor.

Plus, more people of color are moving into rural areas. Nearly one-quarter (24%) of rural Americans were people of color in 2020, according to Brookings. Although rural areas remain less diverse than the U.S. overall, they are diversifying. Between the 2010 and 2020 census, the rural minority population grew 22%, most likely because they can’t afford to live in the larger cities, and it doesn’t make sense to get a mortgage there.

While CDFI credit unions toil away in anonymity serving truly underserved communities, BoA and the like get to make a big virtue-signaling splash with massive dollar amounts. What is really needed is long-term commitments to dig in and become part of these communities to earn trust and help the with a hand up – not a hand out and then cut and run. Transformative work cannot be performative.

Credit unions have always understood the heartbeat of our communities. We must continue to build meaningful relationships with people to unpack their needs and fears and respond with tangible solutions. We can change the lives of many from the inside.