Noticeably absent from debate over President Bush's agenda is any discussion of a central question for equality of opportunity in the 21st century. Access to financial services is the passport to our modern economy, as former Treasury Secretary Lawrence Summers often said, but despite the enormous progress that has been made over the last decade, too many families in the United States still are left out of the financial services mainstream. There are five key opportunities that the Bush Administration, working with Congress and the private sector, can seize in order to continue to democratize access to financial services. These opportunities include: expanding access to capital under the Community Reinvestment Act, investing in New Markets, combating predatory lending, banking the unbanked, and building assets for the poor. 1.
As Hernando de Soto has so persuasively shown, access to capital and financial services is the key to economic growth both in advanced economies and in the developing world. 2. Today, the United States has one of the deepest, broadest, and most efficient capital markets in the world. Access to capital helps drive business formation and fuel economic growth, make housing affordable, and let consumers purchase goods conveniently. Despite the depth and breadth of U.S. credit markets, low- and moderate-income communities and minority borrowers have not enjoyed full access to those markets. This lack of access to credit has impeded economic growth in these communities. Yet enormous progress has been made under the Community Reinvestment Act (CRA), which encourages mainstream banks and thrifts to provide credit to creditworthy borrowers throughout their service communities. Continued progress on CRA, new targeted public investments to spur private investment of business capital, and greater attention to the problems of abusive or predatory lending in low-income neighborhoods can help make our financial system work better for all Americans.
Similarly, access to basic financial services - owning a bank account, managing household finances, and being able to save for the future - are critical to success in the modern American economy. Working families need bank accounts in order to conduct the transactions of daily life, but nearly 10 million U.S. households lack this basic financial tool. Account ownership is also critical to saving for short-term emergencies, and for establishing credit history to access consumer, home mortgage, and business credit. A bank account can help low-income families plan better financially and save for the future. Lack of a bank account can be quite costly to low-income families as they cash their checks and conduct transactions at alternative providers. Use of these costly alternatives impedes government initiatives to move families from welfare to work and to reward work with the Earned Income Tax Credit. In addition, low-income families need better mechanisms to foster savings for important life events, including buying a home, sending their children to college, or retirement. Yet few low-income workers have access to tax-preferred savings plans, such as Individual Retirement Accounts, that millions of middle- and upper-income families use today. New incentives are needed to transform the basic financial services landscape for the poor.
In the financial services context, there are five key objectives that the federal government should pursue to promote economic opportunity for low-income families and communities:
- Expand access to capital and financial services through mainstream banks and thrifts, particularly by ensuring that CRA remains effective.
- Provide incentives and better information to encourage investment in central cities and rural areas, "New Markets" that present untapped potential for economic growth.
- Combat abusive and predatory lending practices that threaten to undermine the enormous progress that has been made in democratizing access to capital.
- Bank the unbanked with innovative new private sector products and services, catalyzed by new incentives for financial services for the poor.
- Promote saving among the poor by catalyzing wide-scale establishment of Individual Development Accounts and other mechanisms that help low-income families save.
II. Expand Access to Capital Under the Community Reinvestment Act
Enormous progress has been made over the last decade in expanding low-income borrowers' access to capital for home ownership and other activities, in part due to the Community Reinvestment Act (CRA), a 1977 law that gained effectiveness under the regulatory regime and market climate of the 1990s. While other factors were also important contributors to recent gains (see below), a Treasury Department study found that between 1993 and 1999, depository institutions covered by CRA and their affiliates made nearly $800 billion in home mortgage, small business, and community development loans to low- and moderate-income borrowers and communities. 3. The number of home purchase mortgage loans made by CRA-covered institutions and their affiliates to these borrowers and areas increased by 94 percent between 1993 and 1999. Over this period, CRA-covered lender and affiliate loans increased the share of home purchase loans within their own portfolios going to these low- and moderate-income borrowers and areas from 31.5 to 35 percent, with nearly all of the gain in share coming after the 1995 revisions strengthening CRA regulations.
Minority families also saw significant increases in access to home ownership capital during this period. Table 1 shows that home purchase lending to minorities increased at much greater rates between 1993 and 1999 than did lending to whites, and helped to fuel significant increases in minority homeownership rates. In 1999, conventional home purchase loans extended in neighborhoods that are predominantly minority were up 17 percent over 1998, compared with 6 percent in other neighborhoods. The Treasury study found that minority share of CRA lending increased from 21 to 28 percent from 1993 to 1999, with most of the increase coming during peak fair lending enforcement years by the Justice Department, from 1993 to 1995.
Table 1. Minority Homeownership and Home Purchase Lending to Minorities, 1993 & 1999
| Race/Ethnicty | Homeownership Rate- 1993 | Homeownership Rate- 1999 | Change in Homeownership Rate 1993-99 | Increase in
home purchase
lending 1993-99 |
| White | 70.2% | 73.0% | 2.8% | 33.5% |
| Black | 42.0% | 46.1% | 4.1% | 91.0% |
| Hispanic | 39.4% | 45.2% | 5.8% | 121.4% |
| Source: Census Bureau; R. Litan et al., op. cit. |
The effectiveness of CRA is evident not only in growing access to capital for low-income and minority borrowers, but also in the success that the financial services industry has had in serving these markets. Banks and thrifts have found new profitable business opportunities, including new customers, additional deposits, opportunities for cross-marketing, and enhanced demand for capital that results from helping to build stronger communities. Under CRA, banks and thrifts have formed multibank Community Development Corporations (CDCs) and loan consortia to reduce risk and share information about low-income markets; they have invested in Community Development Financial Institutions (CDFIs) to develop specialized market knowledge, share risk, and explore new market opportunities; they have engaged in special marketing programs to targeted communities; they have experimented with more flexible underwriting and specialized servicing techniques to determine if a broader range of applications could be approved without undue risk; and they have funded credit counseling to improve the creditworthiness of potential borrowers. Many larger institutions have developed specialized units within their organizations that focus on the needs of low- and moderate-income communities. There is growing evidence that a virtuous lending cycle has begun in many communities: once lenders know tha