The enduring impact of racism on your finances

In an era of “alternative facts” and the ongoing systemic persecution of Black Americans, Consumer Action felt it critical to dedicate our Fall 2020 Consumer Action News to the impact of race on personal finances. The latest free quarterly newsletter examines the areas of individual and household finances most affected by entrenched racism—from car and student loans to mortgages and auto insurance. In each area, Consumer Action explores leading proposals for dismantling these barriers to financial inclusion.

Published: Saturday, December 05, 2020

For generations (and to today), institutional racism has denied people of color access to the economic and educational systems that are, in our nation, the very building blocks of financial advancement. Upon returning from fighting in World War II, for example, white working-class and middle-income Americans were eligible to acquire mortgages in nice neighborhoods through federal loan programs, while Black Americans were systematically excluded from these opportunities (by their own government!).

The Impact of race on personal finances begins by addressing housing discrimination and redlining, a discriminatory U.S. government-mandated mortgage lending practice prevalent in the 1930s, ‘40s and ‘50s that left prospective Black homebuyers without access to credit to purchase homes and begin building wealth. For decades, Black and other minority consumers were barred from borrowing money to buy homes in neighborhoods that were deemed “hazardous” by government appraisers. Based on government maps that delineated non-white neighborhoods in red, the Federal Housing Administration (FHA) refused to insure mortgages in or near Black communities for fear that properties in those locations were too “risky” to finance. This practice of “redlining” effectively excluded many Black buyers from homeownership (and wealth building)—even if they could afford a loan.

Redlining has had serious ramifications—to this day impacting access to education as well as other opportunities. Without family financial support, Black students borrow up to twice as much, on average, as white students for college, and are less likely to graduate. Without a degree, workers typically earn smaller salaries that result in meager savings, which further limits the intergenerational transfer of wealth for Black families.

Even the car sales and auto insurance industries are rife with discriminatory pricing practices. Black male secret shoppers have been systematically quoted higher prices (more than twice the average car-dealer markup) than those offered to white male testers at car dealerships. And, despite the fact that discrimination based on race is technically illegal in every state, automobile insurers continue to charge Black drivers higher premiums to insure their vehicles than they do white drivers. Of course, lack of reliable, affordable transportation significantly narrows the path to better paying jobs and financial opportunity.

Being denied the opportunity to build a strong, secure financial future has lasting effects. In 2019, the average Black family had less than 15% of the financial cushion that white families had. Black households accumulated $24,100 in wealth versus $188,200 for the average white household, according to the Federal Reserve.

And today, the same neighborhoods that were intentionally deprived of loans and financial opportunities are linked to higher risks of poor outcomes from COVID-19.

The impact of systemic racism is undeniable. Today, a majority of Americans are prepared to recognize and address at least some of the enduring consequences of this unequal and unjust system from a policy perspective, with some making the case for cash reparations.

Proposals to help expand financial access and narrow the racial wealth gap include commitments by some of the nation’s biggest banks to invest in new mortgages and home refinancing, small business loans, personal lines of credit, and affordable rental housing in communities of color. Others are proposing new credit scoring models that reflect rent payments and bank transactions to help lower-income consumers build healthy credit scores and gain access to mortgages and safe rentals.

In addition, the federal government can take steps to reduce discriminatory and predatory lending by, for instance, reinstating borrowers’ payday loan protections, which were rescinded under Trump-appointed CFPB leadership. Learn more in the Impact of race on personal finances newsletter, available here.

 

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