Compared with the September 2010 survey, the second wave of our Community Indicators project highlighted concerns over diminished access to credit and banking services, both for households and for small businesses. Within the qualitative responses, three themes surfaced.
Figure 4: Credit for Small Businesses Decreases, Especially in Low- and Moderate-Income Neighborhoods
Source: Elizabeth Laderman and Carolina Reid, "The Community Reinvestment Act and Small Business Lending in Low- and Moderate-Income Neighborhoods during the Financial Crisis," FRBSF Community Development Working Paper 2010-05.
First, many respondents noted that the contraction of mortgage credit is hitting LMI and minority communities the hardest, restricting their ability to purchase homes despite the lower prices and the availability of affordable homeownership opportunities through the Neighborhood Stabilization Program. While FHA is playing an important role in keeping credit available, especially for first-time homebuyers, policies that raise credit score or downpayment requirements were seen as further limiting access to credit for LMI families, and compromising their ability to build assets over the long-term.
The second theme to emerge in the qualitative responses reflected respondent concerns over the growing proliferation of alternative financial service providers in LMI communities, and the effect that their products will have on the long-term financial stability of LMI households. Respondents expressed worries that as mainstream financial institutions restrict access to credit in LMI communities, predatory services will fill the gap, making it even more difficult for LMI families to recover from the recession and subprime crisis.
The third theme related to small businesses and their difficulties in accessing credit. Research conducted by the Federal Reserve Bank of San Francisco has documented large drops in small business lending, especially in LMI neighborhoods. (Figure 4) In 2009, on average, only one loan was made for every 28 small businesses in LMI neighborhoods, compared with one loan for every 10 small businesses in 2003. While the weak economy has dampened demand for small business loans and likely explains part of this drop, a respondent in California reported that tightened lending standards are making it difficult for small businesses to access credit from traditional lenders, and that mission driven lenders such as Community Development Financial Institutions (CDFIs) are seeing a resulting increase in small businesses coming through their doors for loans and technical assistance. Questions around the capacity of CDFIs to serve this growing clientele are of particular concern given the importance of small business development for job creation and economic recovery in LMI communities.
