Posts filed under ‘Financial Reform’

Impact of Unemployment on Wealth Retention in Black Communities

As we have covered in the past, this economic recovery has not affected all communities equally.  The general fact is that the recovery is helping those high earning families, while failing to help the lower-income and minority communities. In fact, the recession caused the wealth gap between whites and minorities to increase by 20%, as reported by the Pew Research Center.  This drop caused the largest wealth gap since the government began tracking this information. 

The enormity of the wealth gap is in part due to the compound effect unemployment is having on our minority communities.  Thanks to the Bureau of Labor Statistics, we can see that this recession has left more minorities unemployed than whites.  As of the most recent numbers released for January 2013, the unemployment rate for Blacks was 13.4%, where the white unemployment rate has dropped to 7.0%.  Over the last year, the unemployment rate for Blacks is usually about 6% higher than for whites.

Due to this inequity in the unemployment figures, Blacks are more likely  to have needy relations than whites.  One recent study found that “Middle-income blacks are more than twice as likely as middle-income whites to have a poor sibling and more than four times as likely to have parents below the poverty line.”   This same study found that Black households are more likely than White households to give money to struggling relatives, and as they earn more money they give a higher proportion of their income to their needy family and community.

Thus, even when Blacks can find the opportunity to succeed and generate wealth, this wealth is usually used to help support their families in ways that are not demanded of white families.  A lack of generational wealth significantly stops the ability of individuals to reinvest into their communities and/or start a business. In fact, the U.S. 2012 Economic Census reports that 60.3% of small businesses are funded at least in part by personal savings.  Without this personal wealth, Blacks small business owners and community leaders are left without the capital necessary to assist their communities; exactly what is necessary to start creating wealth and end the current unemployment gap.


February 20, 2013 at 12:56 pm

States Losing Possible Revenue to Tax Havens

The organization U.S. Public Interest Research Groups (PIRG) released a new study this week looking at the impact of offshore tax havens on state revenues and budgets.  Tax havens is a term used to refer to countries or jurisdictions that attract corporate interest through their minimal or non-existent tax codes.  This allows companies to reduce their tax bill in their home country. For more on how tax havens can be created, listen to this Planet Money episode where the staff created their own Offshore company as a tax haven.

The difficulty in studying tax havens is due to the general nature of their existence.  They are created through the loopholes created in federal and international law, which makes it hard to determine when a tax haven is created.  At the moment, researchers can only estimate on what the impact of these practices are on international economies.  What is unique about the PIRG research is that it estimates the impact of these laws not only on federal revenues, but also on each individual state.  PIRG estimates that “states lost approximately $39.8 billion in tax revenues” in 2011. Of this $39.8 billion, they estimate that North Carolina alone lost $1.049 billion in taxable dollars. That is the ninth most for an individual state.

As legislature over the country look at ways to balance their budgets and reform their tax codes, U.S. PIRG suggests that states work independently to reduce the impact of this financing loss.  States have the power to do things like require increased financial disclosures from corporations’ with foreign presences, start to shore up loopholes in their own tax code, work with federal representatives to encourage a more global approach to tax evaluation, and other suggestions.

February 8, 2013 at 12:09 pm

More evidence that small businesses support accountability & transparency

Small Business Majority has a new poll out that provides even more evidence that small businesses support regulations on our financial sector, especially after the Great Recession. According to the poll, 80 percent of small business owners agree that Wall Street financial firms need tighter regulations and should be held accountable for their role in the financial crisis. The table below shows that two-thirds of small businesses believe that government oversight on Wall Street should increase or is sufficient the way it currently is.

The poll also found that a growing number of small business owners– six out of 10 in this survey– are using credit cards to finance their companies. This means that their personal and business credit are becoming more intertwined.  For whatever reason, they are not using traditional  loan products. From our own research we know that access to affordable capital is increasingly difficult for many entrepreneurs. This finding points to the persistent gap in financing available for small businesses.

As we’ve pointed out before, the issue of what small  businesses think or need is a highly politicized issue– and one that is claimed by advocates on both sides of the aisle. These findings fly in the face of another recent poll that we posted about, claiming that small businesses want less regulation and more federal spending cuts. Interestingly, this new poll shows that small businesses from  both political perspectives share this view. Seven out of 10 Republican small business owners believe that we need tighter rules and standards for the financial sector. A little more than half of the survey respondents identified as Republican, about one-quarter identified as Democrat, and the rest as independents. As John Arensmeyer, CEO of Small Business Majority, puts it, for small businesses  “this isn’t a party line issue for them. It’s a bottom-line issue, plan and simple, meaning it impacts their capacity to grow and hire.”


February 6, 2013 at 11:27 am 1 comment

New mortgage rules could help credit unions & small banks

Yesterday, we blogged about the new “ability-to-repay” mortgage lending rule announced by the Consumer Financial Protection Bureau. The rule sets forth stipulations to help ensure that borrowers can actually afford the loans that they qualify for. Again, it’s just common sense. But some in the banking industry warned that some of the stipulations, particularly those regarding “qualified mortgages” would tighten the credit market and make getting loans harder for certain borrowers like first-time buyers and  low-income people. But in fact, the new rule creates an exemption for small lenders, which may open up the market.

CFPB’s rules state that to be a certified qualified mortgage, borrowers must be evaluated on a range of criteria, including their income, credit history, debt, and others. The loan can’t have any of the more risky features like balloon payments or interest-only loans. In exchange, the lender would gain greater protection from consumer lawsuits. The biggest sticking point seems to be that the borrower must not have a debt-to-income ratio of more than 43 percent. This is a measure of how indebted borrowers are, comparing their income with the debt that they already have prior to taking on a mortgage. Banks say that this will significantly restrict the pool of eligible borrowers, and thus will tighten the credit market.

The catch is that there is an exemption for small banks and lenders with less than $2 billion in assets. If banks and credit unions that are below this threshold, and keep loans on their books rather than selling them, they could get the exemption to the stipulations laid out for qualified mortgages. Smaller lenders also have more flexibility with the types of loans that they can make.

What this means is that, while the larger banks may find that their pools of eligible borrowers shrinks, other lenders will be able to step in. This makes sense. For low-income and underserved borrowers, the type of hands-on financial counseling and training that credit unions and smaller banks and lenders provide is critical. Community banks, credit unions, community development financial institutions (CDFIs), and other lenders are better positioned to take on the risk associated with these borrowers, as they are designed to provide additional support to ensure borrowers’ long-term success. As discussed in a report we released last month, community lenders like CDFIs step in to fill gaps in lending and financial services, reaching individuals not served by the financial mainstream. With the new mortgage lending rules, these lenders will continue to do so.

So in the end it seems that the concerns expressed by some in the banking industry may be a bit over stated. The market will no doubt shift. The new rules create a new playing field that all providers will have to adjust to. But as some consumers find that they no longer can access credit at the major banks, other lenders will step in to create new pathways.




January 11, 2013 at 11:42 am 2 comments

CFPB announces new “ability-to-repay” mortgage lending rule

Today the Consumer Financial Protection Bureau (CFPB)announced a new “ability-to-repay” rule, which is aimed at making sure that lenders do not saddle borrowers with loans that they can’t afford.  In order to qualify for a loan, the borrower must have enough assets or income to pay it back, they must provide financial information that is verified by the lender, and the lenders have to assess the borrower’s ability to pay over the long term, including both the principal and the interest. CFPB also announced a few proposals: to exempt designated nonprofit lenders and homeownership stabilization programs, and to create a new category of “qualified mortgages” for small creditors like community banks and credit unions. Qualified mortgages are meant to reduce the amount of risk in mortgage lending by eliminating risky features, such as negative amortization and interest-only mortgages, and offer borrowers more protection. In exchange, lenders that make certified qualified mortgages will be protected from consumer lawsuits.

The ability-to-repay rule seems like common sense, but the fact that it has to be spelled out points to just how far banks and lenders had gone in making loans to people who could not afford them. Lending standards had become so lax that people were qualifying for loans without even providing validation of their income, credit history, or even showing an understanding of the terms that they were agreeing to. Previous rules issued by the CFPB, which will be finalized this month, were meant to increase transparency with mortgage lenders and provide consumers with timely and accurate information. Borrowers need to be provided with the information they need to make sound decisions. This new rule, which will take effect in January 2014, will take it a step further. Now lenders and borrowers will have to provide some assurance that they will, in fact, be able to pay the loan. Here’s how the Chicago Tribune sums it up:

For all types of mortgages, to help determine a borrower’s ability to repay, lenders must look at eight factors. They include current income and assets, employment status, credit history, the mortgage’s monthly payment, other loan payments associated with the property, monthly payments for such things as property taxes, other debt obligations and a borrower’s monthly debt-to-income ratio.

Some banks have expressed concerns, particularly around the criteria for qualified mortgages. According to the rule, borrowers’ debt-to-income ratio is capped at 43 percent. The American Bankers Association says that this may be too low and might unnecessarily tighten access to credit. Banks will be encouraged to follow the qualified mortgage lending criteria due to the protections it offers, but the result, they claim, may be fewer borrower who can qualify for loans– in particular, low-income or first-time homebuyers.

Though the new rule may contain some tighter standards, the mortgage lending industry had run so amok that it is not surprising that the process of reigning it in is causing some consternation. Whether the debt-to-income ratio will have a significant impact is yet to be seen, and the industry has a year to adjust to the new regulations. The rest of the rule, however, is simply common sense. Banks and lenders should not be making loans to people who can’t afford them. For those who are excluded under the new rules, such as low-income families seeking to build up their assets, perhaps adjusting the rules and providing hands-on financial counseling to ensure their financial success can help balance out the equation.


January 10, 2013 at 12:20 pm 1 comment

Index Shows Slight Increase in Large Bank Small Business Lending

The Thomson Reuters/PayNet Small Business Lending Index was released yesterday (January 2, 2013).  The report tracks the lending actions of more than 200 leading U.S. lenders, accounting for more than 17 million current and historic contracts.  The report showed that there was a slight increase (1%) in November over lending actions in October, and an overall 3% increase from 2012-2011.

This news is really a mixed result for the economy.  According to a white paper published on the Small Business Lending Index by Thomson Reuters and PayNet, the index is strongly correlated to short and long-term growth in the economy, and can be used to predict major changes in other leading economic indicators in the next quarter or two.  These results show sluggish growth, nowhere near the pre-recession levels.

However, remember that this information only shows a part of the market – the interests and records of loan originators from leading U.S. lenders to businesses that currently have borrowed less than $1 million from these mainstream lenders.  These figures do not track any origination handled by a smaller or community based lender.   As shown in The Support Center’s recent study on North Carolina’s lending market, Community lenders play an important role in providing lending to lower-income areas. With such a small increase, it would be interesting to see how this index correlates to lending patterns by smaller or community based lenders.

Additionally, other news reports on the report seem to be interpreting this material in an interesting fashion. Publications by CBS Money, Reuters, and others are reporting that the founder of PayNet takes this index to indicate that small businesses are making the choice not to seek additional funding, to grow, or hire additional employees.  However, the only data they collected is from the view-point of the lender, and this information does not include any indication of the number of small business loan applications or inquiries, or any input on the behalf of small business owners.  Other reports, such as the SBA Small Business Lending Report for 2010-2011,  are showing that it is the lenders which are withdrawing from this market and small business owners are still trying to hire and grow.  More work should be done to show how this conclusion was reached and whether the information provided by the lenders matches the reality for small business owners.

January 3, 2013 at 11:28 am

Gender Wage Gap Closing in North Carolina?

Yesterday the Department of the Administration released a summary of their upcoming report on the status of women in North Carolina.  The report found that women in North Carolina are now earning 83 cents for every dollar a man earns.  This number shows progress since 2000, where women in North Carolina earned 78 cents for every dollar.

However, there is a problem with calling these numbers progress.  The simple fact is that these numbers, showing a 5% increase over 12 years, do not control for what type of job these women are working.  The study found that when you compare women and men who work the same job, women earn an average of 71 to 76 cents on the dollar.

This observation is also back by another study conducted by the Institute for Women’s Policy Research showing the national gender wage gap controlled by industry sector.  Their study found that women were making gains in less skilled positions, but were suffering huge losses in positions as CEOs and managers.  This is best illustrated by a graph created by the Economist earlier this year.

The executive summary also seems to hint at the idea that the wage gap may also be an urban/rural issue.  The study published a table demonstrating the regional differences in the gender wage gap.  By this table, the Metropolitan Statistical areas on average have a greater gender wage gap than the rural areas. In this light, it will be interesting to hear what the final findings of this study are when they are published in January of 2013 and whether women are really making progress in today’s economy.

October 12, 2012 at 11:06 am

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