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Las Vegas, Nev. — More than 30 years after Congress passed Community Reinvestment Act (CRA) legislation to encourage financial institutions to meet the credit needs of the communities in which they operate, 17 million adults remain without a checking or savings account.

The lack of financial services, particularly for low- and moderate-income households, prevents many Americans from entering the financial mainstream and represents a significant untapped market for financial institutions, Janneke Ratcliffe, associate director of the UNC Center for Community Capital, told attendees Nov. 10 during a panel discussion at the 2010 CRA and Fair Lending Colloquium in Las Vegas, Nev.

“When we look at the data, it strikes us that there has got to be valuable business there for banks but, as it stands, the CRA service test doesn’t seem to encourage you to figure out how,” Ratcliffe said. The service test evaluates a bank’s record of helping meet the credit needs of the communities it serves.

“Something just doesn’t connect,” she said. “As we have written previously and as our research indicates, the service test is too subjective and needs to be more objectively measured.”

Ratcliffe was among invited panelists speaking on the changes to the services test at the annual colloquium hosted by Wolters Kluwer Financial Services. The event focused on CRA, Home Mortgage Disclosure Act and fair-lending compliance. It featured industry and regulatory experts speaking on topics related to compliance in the post-crisis environment, guidance on regulatory reform, new procedures for expanding requirements and details on rising enforcement actions.

Ratcliffe’s remarks followed her testimony before federal regulators in August recommending that they refocus CRA requirements to ensure broader access to financial services for low- and moderate-income consumers.

“Access to basic banking services is the gateway to financial opportunity that can eventually lead to homeownership and entrepreneurship, but it starts with basic savings, transaction accounts and consumer credit,” she said.

A Federal Deposit Insurance Corp. survey of 49,000 households in December 2009 reveals disturbing statistics, Ratcliffe said:

  • 7.7 percent of households (17 million adults) are completely unbanked, with no checking or savings account. That includes 22 percent of black households, 19 percent of Hispanic and 15 percent of Native Americans, compared to 3 percent of whites. Black households were seven times more likely as white households to be unbanked.
  • Another 18 percent of households have a bank account but rely on alternative financial services, such as non-bank money orders, check cashers, payday loans, rent-to-own outlets and pawn shops. Blacks and Native Americans were about two times as likely as whites to be underbanked; Hispanics about 1.5 times as likely.
  • One quarter of all U.S. households are un- or underbanked. That includes more than half of all black households compares to 18 percent of white households (although there are still more un/underbanked whites than blacks).
  • An estimated 35-70 million Americans lack sufficient credit history to have a credit score.

“Underserved households are disproportionately low- and moderate- income households, the target market for CRA services,” Ratcliffe said. “These are clear indicators that there is a lot of need in the communities left to be met. So, consumers are turning to services that are often very costly and undermine their financial potential through high fees and traps.”

Meanwhile, banks are missing out on a significant potential market for their services.

“When we look at that data, it strikes us that there has got to be valuable business there for banks, but as it stands the CRA service test doesn’t seem to encourage you to figure out how. Something just doesn’t connect. As we have written previously and as our research indicates, the service test is too subjective and needs to be more objectively measured,” Ratcliffe said.

As communities and households struggle to recover from the financial crisis and build financial security, research on consumer preferences, behavior and experience is informing the adoption of more effective paths to expand financial services in ways that will bring more Americans into the financial mainstream, a win-win for consumers and financial institutions, she said.

View Ratcliffe’s remarks.

Mortgage finance is a key area of study at the UNC Center for Community Capital, the leading center for research and policy analysis on the transformative power of capital on households and communities in the United States. Part of the College of Arts and Sciences at the University of North Carolina at Chapel Hill, the center offers data and analysis that helps policymakers, advocates and the private sector find sustainable ways to expand economic opportunity to more people more effectively. For more information, visit www.ccc.unc.edu or call (919) 843-2140.


Topics(s): Affordable Homeownership, Mortgage Finance
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