Housing and Access to Credit Are Two Sides of the Financial Inclusion Coin

Across my research on different areas of the financial system—mainly housing and credit—a common theme bubbles up: financial inclusion. While insufficient access to financial systems has long been understood as a problem for people with low incomes, I’ve been looking at how people of color and people in immigrant communities struggle for financial equity, independent of income levels.

I have experienced this paradox in my own life. I was raised in Wisconsin and Minnesota by my parents, who are immigrants from Argentina. To me, growing up in an immigrant family meant being bilingual, living far from family, and observing traditions that were sometimes different from our neighbors’. Thankfully, I never had to experience the financial challenges that I saw other immigrants—like some of my mother’s clients as a medical interpreter—face. Still, when I entered adulthood, I experienced a challenge accessing financial services related to my status as a second generation American: I couldn’t get a credit card.

I didn’t have a credit card during college. My dad told me not to worry about it until I graduated. I was on track to get a good job, so we figured I wouldn’t face any barriers. But after I graduated and got a good job, every credit card application I filled out was denied. I went to my local bank branch and asked for an explanation. It turned out I was being denied because I didn’t have a credit history.

What my family didn’t know, but some American-born parents knew, was that it’s easy to open an undergraduate student credit card and start building credit. When my brother went to college, I made sure he got a student credit card so he wouldn’t have to fight the same way I did.

An Early Focus on Asset Building

Growing up, I observed my mom’s work as a Spanish-language interpreter serving immigrants with low incomes. I saw the economic challenges many immigrant families face, and it motivated me to focus my own career on exploring and eliminating these issues. I want to make sure that people living in immigrant communities have the opportunities that I was fortunate enough to have.

When I was an undergraduate, the book The Hidden Cost of Being African American: How Wealth Perpetuates Inequality made a profound impression on me. I was shocked to learn that the wealth gap in America is much larger than the income gap. I wondered if similar research had been done about Hispanic people. I only found one or two papers on the wealth gap between Hispanic and non-Hispanic White Americans. So I made that the subject of my senior economics research project.

From that point on, I focused my research on how communities of color can build assets. Homeownership is the primary form of wealth accumulation in the United States. My passion for equity in building wealth led me to a series of engagements related to housing and homeownership: an internship at the Wisconsin Department of Commerce while pursuing my master’s degree in public policy; a stint working in both the public housing and community development divisions of the U.S. Department of Housing and Urban Development; a research assistant position at Harvard’s Joint Center for Housing Studies.

All this work helped me understand that equitable access to homeownership can play an important role in making wealth building more accessible. For most of us, the road to homeownership runs through the credit system. If you can’t secure a mortgage, you probably can’t buy a house.

So when I arrived at the San Francisco Fed as a senior researcher in Community Development and began studying access to credit and financial inclusion, this was in a way a continuation of my previous work. It turns out that people in immigrant communities and communities of color face very similar hurdles in getting small business loans, auto loans, and other types of credit as they do obtaining mortgages.

Rocio takes notes during an interview.
Rocio takes notes during an interview.

Barriers to the Financial System

A financial system that works for all Americans will help our country reach its full economic potential. Certain communities, including communities of color and low-income communities, lack equitable access to the traditional financial system.

Many barriers block access to financial services, including:

  • Physical access. If you live in a “banking desert,” there may not be a single bank branch in your neighborhood. Without access to an in-person location, it can be difficult to open an account, deposit cash, cash a check, or troubleshoot any problems that come up. For instance, when I had trouble getting a credit card, I was able to resolve it by talking with a banker face to face. If I lived in a banking desert, I may not have had that option.
  • Costs. Customers with less wealth on deposit tend to face higher account costs. Unstable income can also be a factor. For example, if you get paid irregularly, you may not have the number of direct deposits you need to avoid checking account fees, or you may get hit with overdraft fees. Recent research reveals that minimum balances and bank fees are among the top reasons people report being unbanked.
  • Legacy of discrimination. Before fair lending laws, it was legal to deny credit, including mortgage loans, based on race or ethnicity. These unfair laws are gone, but they left us with a legacy of communities who don’t trust the financial system—or who don’t have experience in the financial system. If your parents or grandparents weren’t legally able to access credit, they won’t be able to pass down knowledge gained from that experience. This history of discrimination can also interact with other barriers—communities of color are more likely to be in bank deserts and account fees can be higher in communities of color—and consumers of color still sometimes face disparate treatment from employees of financial institutions.

How Inequity Persists Even After Homeownership

In my dissertation for my PhD in City and Regional Planning at UC Berkeley, I examined the differences in the neighborhoods where Hispanic and White home buyers purchase homes. A portion of this research was recently published in Cityscape and I enjoyed writing a piece on the topic for the SF Fed blog, “How Do Homeowner Experiences Vary by Race and Ethnicity? Neighborhood Differences between Hispanic and White Homebuyers.”

When scholars and policymakers talk about the benefits of homeownership in the United States, it is often discussed in the abstract. One component that’s frequently missing in these discussions: where is that homeownership taking place, and how does that shape the nature of the benefit to homeowners?

Some benefits of homeownership will be constant no matter where you buy, such as the stability that comes with a fixed-rate mortgage that, unlike rent, can’t be increased at the landlord’s will. But other benefits, such as the wealth building potential of homeownership, depend on your local market. If you were a homeowner in Detroit or Cleveland during the 2008 foreclosure crisis, those markets performed much worse than other parts of the country and haven’t recovered as much since. The Bay Area housing market, on the other hand, also declined during this time, but prices recovered much more quickly. Additionally, metro-level trends can mask variations happening at the neighborhood level.

Using mortgage data from the Home Mortgage Disclosure Act, I found that the communities in which Hispanic and White families are buying look quite different—even when the buyers have similar demographic profiles and are buying houses of the same value, with the same type and size of loans.

The data show that Hispanics are buying in neighborhoods with the following characteristics relative to Whites: fewer White residents, higher poverty rates, lower median incomes, and lower median home values. The neighborhoods are also more likely to have experienced economic decline over time.

These discoveries reveal that mere access to homeownership doesn’t eliminate inequities in housing. Factors that we may not yet understand or can’t easily measure—like discrimination or the ways in which social and knowledge networks affect how we choose our homes—persist in producing unequal outcomes.

Inequity in the Paycheck Protection Program

When it became clear that the COVID-19 pandemic was threatening the existence of millions of small businesses, Congress created the Paycheck Protection Program (PPP) to disperse conditionally forgivable loans to small firms.

I found a correlation between neighborhood income and PPP loans received. Many more of these loans went to high income areas, even when controlling for the number of businesses.

While this research couldn’t tease out the specific reasons for the disparity, researchers, policymakers, and small business advocates have hypothesized that this was an example of inequitable access to the financial system. For example, in the early stages of the program, many banks prioritized their existing customers. Businesses in the communities I study are more likely to be very small businesses—sole proprietors and those with only a few employees—as well as business owned by people of color, women, or immigrants. Entrepreneurs in all of these groups are less likely to have existing business banking relationships. So when the lending institutions, overwhelmed with applications, focused on existing customers, business owners without existing banking relationships were left out.

Can Fintech Improve Access to the Financial System?

Vice President of Community Development Bina Patel Shrimali and I co-edited an issue of the Bank’s Community Development Innovation Review exploring the potential for financial technology as a force for financial inclusion and equity for people of color. We partnered with our SF Fed Fintech team and the Aspen Institute to bring together a number of voices and experts in the field to explore whether fintech can undo some of the legacy of exclusion within the financial system, using new approaches to issues such as digital identity, analyzing credit worthiness, and practical access to services.

The article I co-authored for the issue, “The Racialized Roots of Financial Exclusion,” outlines inequities across multiple domains over time that brought us to the uneven access we have today and introduces the potential for financial technology to reduce barriers.

Another article in the issue, “The Next Frontier: Expanding Credit Inclusion with New Data and Analytical Techniques,” exposes the limits in traditional credit scoring, which contribute to financial exclusion. Credit reports generally draw on data that some people—especially people of color and those with low-to-moderate incomes—often don’t have, such as years of regular mortgage and credit card payments. In the same way that the barriers I listed earlier can keep someone from getting that first credit card, a lack of credit history may also keep potential homeowners from acquiring a mortgage. One exclusion leads to the next. The traditional financial system is limited in understanding other ways people may have established their potential as safe borrowers, such as years of on-time rent and utility payments or a healthy positive cash flow. Some fintech companies are looking to tap other data sources to produce alternative credit scores. Machine learning also may hold promise for predicting future borrower behaviors based on limited available data.

Public-Private Partnerships for Rebuilding Small Businesses

There are potential roles for the government and the private sector in growing small businesses’ access to credit. I recently completed a case study examining an innovative public-private partnership: the California Rebuilding Fund.

In 2020, when so many small businesses in California were struggling to stay afloat due to the pandemic—and as I found in my research, many were unable to secure PPP loans—community development financial institutions (CDFIs) realized they would need additional funds for lending to these businesses. But if these institutions had each raised funds individually for this effort, the scope would have been relatively limited.

Instead, the state of California partnered with CDFIs and private investors, allowing the CDFIs to draw on their experience working in low-income communities and communities of color to identify good candidates for small business loans and to process those loans. The CDFIs then transfer a majority of those loans to the Rebuilding Fund. The Fund repays the loan balance to the CDFI, enabling the CDFI to make another small business loan. This program is creating liquidity in a time and place where it is badly needed and facilitating more lending than these institutions would be able to do in the absence of the fund.

Another aspect of the California Rebuilding Fund is risk shifting: the state agreed to take the riskiest position for these loans. This allows the program to attract more private capital and to keep the costs very low for the small business borrowers.

My case study analyzes the components that went into this innovative approach to pooling capital and risk and how it could be successfully replicated to improve access to the financial system for more small businesses. It also explores the challenges exposed by this program, which future innovators could learn from.

In my two years at the Bank, I’ve been able to engage in a number of projects exploring how low-income communities and communities of color access credit, and how the financial system could be more inclusive. Whether I’m studying housing, credit, or something else, I always center my approach around how to increase and equalize access to the financial system.

Access to the banking system and other financial services is critical to building wealth and even to just living our daily lives to the fullest extent possible. As San Francisco Fed President Mary Daly has said, eliminating inequalities is fundamental to “an economy that’s sustainable and works for everyone.” I couldn’t agree more. And I remain committed to revealing and breaking down the barriers that restrict people from fully participating in our economy.

Rocio Sanchez-Moyano is a senior researcher in Community Development at the Federal Reserve Bank of San Francisco.

This essay first appeared on the San Francisco Fed’s Medium channel.

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The views expressed here do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System.