All Low- and Moderate-Income Areas Are Not Created Equal

By Mike Eggleston

This article was originally published in the Federal Reserve Bank of St. Louis’s quarterly newsletter, Bridges.

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Mike is a Senior Community Development Specialist with the Federal Reserve Bank of St. Louis. In this role, he provides financial institutions, community based organizations and government entities tools to effectively address community development issues affecting economically vulnerable individuals and communities. Mike serves on the Board of Directors at the Incarnate Word Foundation.

There are stark disparities in consumer credit in low- and-moderate-income (LMI) neighborhoods across United States metropolitan areas (MSAs), and their full impact on residents’ access to opportunity is not currently accounted for under the Community Reinvestment Act (CRA). Consider George, who lives in Montgomery, Alabama, and Francine, who lives in Madison, Wisconsin. Both live in an LMI neighborhood, where the median income is 80 percent of the average median income in the metro area or state. Each is looking to buy a car, to reduce their commute time to work and to allow them more child care options for their young children.

Like many in his neighborhood, George has poor credit. As a result, he is not able to secure financing from a financial institution to buy a car. Francine, however, is among the vast majority of people in her neighborhood who have good credit—so she has no trouble securing a car loan from a bank.

This story plays out among MSAs across the country in over 200 areas where data is available. Boulder, Colorado is on one end of the spectrum, where 35.9 percent of the population in LMI neighborhoods is credit constrained: that is, they have poor, fair, or no credit history. On the other end in Memphis, Tennessee, nearly eight out of every 10 people in LMI neighborhoods are credit constrained. This disparity has big implications for both neighborhood residents and the regulated financial institutions that serve them, thanks to the obligations these institutions face under the Community Reinvestment Act (CRA).

Before going further, it’s worth noting some additional observations. LMI neighborhoods where residents have better credit tend to have a larger percentage of white occupants. They are usually located in the East, West, and parts of the upper Midwest, and tend to have relatively low poverty rates. LMI neighborhoods where residents with poor credit predominate tend to have a larger share of African-American occupants. They are usually located in the South and tend to have relatively high poverty rates. In fact, among the ten MSAs where people living in LMI neighborhoods have the poorest credit, the average poverty rate is 68 percent higher than the average poverty rate of the ten MSAs where people living in LMI neighborhoods have the best credit. Jackson, Mississippi, Shreveport, Louisiana, and Montgomery, Alabama all fall into this category.

In sum, the credit profiles of people living in LMI neighborhoods across the country vary significantly. Why should that matter? There are at least two groups for whom this matters a great deal.

A good credit profile can be the make-or-break detail that determines someone’s ability to get a mortgage, car loan, or student loan. It can also be a factor in whether someone can rent an apartment, in how much insurance costs, and in securing employment. In short, good credit can signal whether someone’s financial situation is on the right track. This can be especially powerful for someone living in an LMI neighborhood, where opportunities to improve life circumstances can be scarce. That’s why many nonprofit organizations throughout the country—sometimes in partnership with bank representatives—work with people to improve their credit profiles. It’s also why some community-based organizations (like Justine Petersen, headquartered in St. Louis) view credit as an asset.

Depending on their size, regulated financial institutions are required to comply with the CRA by meeting certain thresholds for investments, loans, and service in LMI neighborhoods. Currently, the credit profile of a bank’s assessment area—which may include an entire MSA or just part of it—is not weighed as a factor when determining whether a bank is meeting CRA obligations. But maybe it should be. As the data illustrates, a bank operating in Madison, Wisconsin will have a much easier time finding qualified borrowers in LMI neighborhoods than a bank in Memphis, Tennessee. A bank operating in both metro areas must work twice as hard to find qualified borrowers in Memphis.

This raises important questions about the appropriate role of the CRA in promoting fair and impartial access to credit in underserved communities. Should extra weight be given to loans and investments made in LMI areas where more people are credit constrained? How can the CRA’s service test better encourage credit building in LMI areas where more people are credit constrained? Can other measures, such as the poverty rate, complement area median income to select CRA target populations?

For the first time, consumer credit data for LMI areas in 200-plus MSAs is publicly available via the Consumer Credit Explorer, thanks to Equifax and the Federal Reserve banks of Minneapolis, New York and Philadelphia. Using this data, researchers will soon be able to better understand why LMI neighborhoods in one MSA have drastically different credit profiles from LMI neighborhoods in other MSAs. Until that is sorted out, LMI neighborhood residents like Francine in MSAs such as Madison, Boulder, and San Jose will have a much better shot at accessing credit—and opportunity—than LMI neighborhood residents like George in MSAs such as Montgomery, Memphis and Jackson.

Data: FRBNY Consumer Credit Panel/Equifax Data (12/1/2015), tabulated by the Federal Reserve Banks of Philadelphia and Minneapolis and accessed via the Consumer Credit Explorer.

Articles in “From the Field” represent the opinions of the author only and do not represent the views of the Community Builders Network of Metro St. Louis or the University of Missouri-St. Louis.