Academic journal article Harvard Journal of African American Public Policy

Social Finance in Black Geographies: A Statistical Analysis of Locations in Los Angeles County

Academic journal article Harvard Journal of African American Public Policy

Social Finance in Black Geographies: A Statistical Analysis of Locations in Los Angeles County

Article excerpt

Background

In the wake of the Great Recession, the wealth gap has widened in the United States, particularly between Black and White communities.1,2,3 The rise of "banking deserts"-areas where there are just one or no banks-has been part of that diminished financial stability, particularly in low-income and ethnic minority neighborhoods.4 In 2013, 7.7 percent of households in the United States were without a banking account.5 Creating more equitable neighborhoods requires the capacity to absorb and distribute capital-an effective and fair financial sector being a critical element toward economic inclusion. Credit unions-a mission- and memberdriven financial institution-have historically played a role in expanding banking services to marginalized markets both in the United States and internationally. However, there is little sustained attention in academic and popular literature on the local impacts of credit unions, especially in low-income and majority-minority areas.

Since 2012, the National Credit Union Administration (NCUA) has ramped up its efforts to support credit unions by automatically qualifying institutions with a voluntary low-income designation (LID). The LID unlocks a host of economic and organizational benefits for credit unions that can "demonstrate that a majority (at least 50.01%) of its members are low-income as defined in Section 701.34 of the NCUA Rules and Regulations (earn 80% or less than the median family income for the metropolitan area where they live or national metropolitan area, whichever is greater)."6 The benefits under this policy include the right to accept nonmember deposits from any source, increased maximum borrower limits, eligibility to apply for the NCUA's Community Development Revolving Loan Program, technical assistance by NCUA's Economic Development Specialists, and more. This creates an exploration-worthy policy environment wherein opportunities for investment and future credit union expansion could lie, especially in geographies like Los Angeles where inequality is high.

Literature

Racial Segregation, Poverty, and Lending Discrimination

Historically, in the United States, racial discrimination and metropolitan segregation led to economic deprivation in majority-minority urban cores, with financial institutions playing a significant role in that disinvestment. While blatant credit discrimination is often linked to the era before 1970s fair lending legislation passed,8 scholars have found evidence through the late twentieth century. In a five-part report on racial redlining, spatial analysts documented "prima facie evidence" of sixty-two discriminatory lending patterns against minority neighborhoods in sixteen US metropolitan areas using a dataset of over 1.2 million mortgage loans by major banks in 1990-1991.9 But even as communities segregated by race and income began to be approved for loans, scholars have found higher rates of subprime lending between 2002 and 2005, the primary culprit for the Great Recession.10,11

Beyond exclusionary practices, there are lending institutions that regularly profit on credit-constrained, minority neighborhoods (e.g., payday lenders, check cashing) by charging high fees, euphemistically called alternative financial service providers (AFSPs). In 2013, 20 percent of US households (24.8 million people) were "underbanked."12 While they owned a bank account, they also frequented AFSPs despite "payday loans" being one of the "most predatory products commonly offered today."13

The Spatial Void Hypothesis and AFSPs: Varied Findings

Because of the well-established negative association between social distress and banking access, some posit that AFSPs offer a viable alternative in areas with high proportions of under- and unbanked households and/or ethnic minorities. The idea that AFSPs fill an unmet need in either low- or working-class neighborhoods is known as the spatial void hypothesis (SVH). However, this concept has been contested both empirically and popularly. …

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