Communities of color need financial protections

May 19, 2010

– Jose Garcia is associate director for research and policy at Demos. He is responsible for providing statistical and policy analysis for Demos’ Economic Opportunity Program on issues such as household debt and assets. –

As the days heat up, so too has the debate in Congress over what type of consumer protection to include in financial reform legislation. Detractors have moved to take the bite out efforts to crack down on abusive lending practices while advocates try to hold the line. Should there be an independent Consumer Financial Protection Agency? Or should it be housed in the Federal Reserve? And what authority should it have?

The debate has taken place at a time when debt continues to undermine the economic mobility of many American families and how Congress resolves the issue in the next couple of weeks will be critical to the future of those families, particularly consumers of color. It’s no exaggeration to say the creation of an independent agency may be the only means for addressing generations of abusive lending that has saddled communities of color with unmanageable debt.

A new report by the Institute on Assets and Social Policy at Brandeis University shows that over the past two decades, African-American families with low asset levels — unfortunately, a disproportionate number of African-American families — have increasingly relied on credit to make ends meet. Examining longitudinal economic data collected from the same set of families over 23 years, the study found that when you subtract total debt from total assets, one in 10 African-American families owed at least $3,600 in 2007 — nearly double their debt burden, in real terms, in 1984.

The growth in debt among previously credit-starved minority communities surged as markets were deregulated and paved the way for high-cost lending, including securitized subprime and predatory loans, payday loans and check-cashing stores, the study said.  With greater numbers of families struggling with growing debt that far outstrips their income and savings, many low-income and minority households have had no choice but to turn to costly lending products for immediate but expensive solutions to pressing needs.

Minorities and low-income consumers resort more frequently to credit card debt and other forms of high-cost debt in the absence of assets. An analysis of Survey of Consumer Finance data in 2004 by Demos, the public policy research and advocacy organization, found that 84 percent of African-American cardholders carried balances, compared to 79 percent of Latino cardholders and 54 percent of white cardholders. On average, minority and low-income borrowers are more likely to carry high interest and fee-laden credit cards. Another study commissioned by Demos found that four groups — low-income individuals, African Americans, Latinos and single women — are much more likely to pay interest rates above 20 percent on their credit cards.

This segmentation of the lending markets has exacerbated disparities in wealth and asset accumulation. Studies show that property values in predominantly African-American neighborhoods are lower than those in similarly situated white communities. Today, less than half of African-American and Hispanic households own their own home compared to three quarters of white households. In times of economic distress, where the use of home equity can help a family weather the gap between income and expenses, housing wealth remains elusive for a majority of African-American and Hispanic households. This diminished asset-building potential has a range of implications: families have no “nest egg” for emergencies, higher education or retirement. A vicious cycle of declining opportunity takes hold.

A Consumer Financial Protection Agency will not cure all of these ills. But a strong and independent agency that can actually monitor and restrict abusive products and encourage fair and productive lending products for all Americans, including communities of color, would be a great step forward.

Congress needs to make that happen.

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The problem is that social scientists believe we, the common citizens, need to be protected from ourselves by government through “regulation”. Government regulation of the economy in reality means that the burden will ultimately be on the taxpayer through taxes and inflation. Those involved in unethical business practices whether individuals or corporations will always find a way around any regulation requiring even further regulations. This becomes a vicious cycle that chips away at our basic freedom. Unethical business practices should be resolved in the court of public opinion. Government best serves to educate people against potential economic predation not by choking free enterprise. You can parade all the reports and data showing how we are being taken advantage of by the financial world but it all boils down to individual fiscal responsibility. People should realize that morality and ethics begins with our individual actions. A proper government should concern itself with the education of it’s citizens in basic financial practices. Securing credit should not be seen as an opportunity to collaborate in unethical or fraudulent practices because we are assured access to easy money that government (taxpayers) will be there to serve as “bailers of last resort”.

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