Building Assets, Building Credit: Creating Wealth in Low-Income Communities

PART 5: Working toward Solutions

5 part Working toward Solutions ken wade In the 1970s, when the Neighborhood Reinvestment Corporation and its nonprofit NeighborWorks network were in their early stages, the driving issue in neighborhoods was redlining—lenders simply were not making loans available for buying or renovating homes predominately occupied by low-income and minority families. Across the country, hundreds of community development organizations formed to harness the resources of local governments, financial institutions, and community residents to create access to credit for underserved areas. Thankfully, the market has changed dramatically in the last twenty-five years. Through the efforts of the Community Reinvestment Act, along with advances in technology and innovative public-private partnerships, communities today have an abundance of capital available. But even in this environment, credit challenges remain critical to the work of the more than 230 NeighborWorks organizations. The explosion of aggressive loan products combined with automated underwriting systems, risk-based loan pricing, and third-party loan originations have created an almost bewilderingly complex marketplace. As a result, NeighborWorks organizations have shifted from helping families access capital to helping families understand when to borrow and how to get a loan at a fair price. In many ways, community leaders, policymakers, and regulators face more difficult—and more nuanced—challenges than ever before. The demands on community development professionals have expanded from creating affordable housing and lending to building personal assets and connect283 17 7409-5 pt05.qxd 7/7/2005 10:22 PM Page 283 ing underserved families to broader financial services. The recipe for vibrant neighborhoods today combines a broader set of products and services, beyond loan pools and “bricks and mortar” real estate development. The chapters in part 5 examine three significant issues related to the environment facing community development practitioners this decade: savings, financial services, and preserving homeownership. The first chapter, by Sherraden and Barr, reinforces a time-honored notion: savings matters. From buying a car needed for employment, to storing savings for emergencies, to investing for retirement, the importance of savings for lowincome households is obvious. Sherraden and Barr point out that policymakers, practitioners, and researchers have not placed enough emphasis on incentives for saving, or even analyzed how households save. The authors suggest while much effort has been expended to expand the credit side of the household balance sheet, the savings side of the balance sheet needs more attention. Many existing government programs and institutions targeted to low-income households in practice actually force families to spend savings to qualify for programs, rather than encourage asset accumulation. The authors suggest structures with restrictions, such as those common among retirement plans for middle- and upper-income workers, are critical for encouraging savings. The experiences of the NeighborWorks network buttress this view; programs such as Financial Fitness and individual development accounts are helping even very-low income families build financial assets. Sherraden and Barr emphasize policymakers and practitioners need to redouble efforts to encourage savings behavior. If more families increase their savings, communities would benefit from more opportunities to qualify for prime-quality credit, increasing opportunities for homeownership and even providing a cushion to preserve ownership for low-income families when emergencies do occur. Seidman and Tescher’s chapter focuses on an issue introduced by Sherraden and Barr—the role of basic banking services in building access to credit. Seidman and Tescher suggest there are more than 10 million households in the United States without any basic banking relationship. Without a bank account, individuals must conduct checking transactions outside of traditional financial institutions and have few options to store deposits. The article reviews the forces shaping the provision of basic financial services in the last decade, including the important role of government electronic benefit programs and new technologies . The authors suggest the growth of the so-called alternative financial services , such as check-cashing outlets and paycheck advance lenders, demonstrates the potentially profitable market for products and services targeted to lowincome consumers. The growth and popularity of alternative services should be instructive for policymakers. Stored value cards, credit cards, and ATM transactions are examples of products with still untapped potential in this market. Partnerships between government, nonprofit organizations, and the financial sector 284 working toward solutions 17 7409-5 pt05.qxd 7/7/2005 10:22 PM Page 284 are overcoming many of the challenges facing unbanked households. However, the regulatory system, designed for last century’s depository banking system, must rapidly adapt to the...