|Volume 1, Issue 4, 2001||Federal Reserve Bank of Dallas|
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21st Century Demographics: Community Development and Financial Services
Remarks by Lautaro Diaz, Deputy Vice President for Community Development, National Council of La Raza, before the Federal Reserve Bank of Dallas conference "New Roads and E-Roads: Market Innovations in Community Development," Dallas, August 24, 2001.
I want to thank the Federal Reserve Bank of Dallas for their invitation to address my peers regarding the changing demographic profile of the United States and the implications to us as community developers or as financial institutions. I would be remiss not to spend a few minutes on the National Council of La Raza (NCLR) and what it is as an institution. NCLR's commitment, simply stated, is to do whatever it can to improve the lives of Latinos in this country. We do this using two general approaches. On the national level, NCLR conducts research and advocates on key public policy issues. NCLR's policy and research staff is highly respected; without their work, much of the information and messages I am going to put forth would not be possible.
At the local level, we support the work of NCLR's 259 affiliated organizations in 39 states and Puerto Rico by providing information, training, technical assistance and grant support. In the past 10 years, NCLR has developed strong community development programs, as well as health, workforce development and education programs that impact local communities. NCLR has created a $25 million community development financial institution (CDFI) to help its affiliates finance housing and facilities projects. In just over two years, the CDFI has awarded NCLR affiliates more than 35 loans, totaling more than $10 million, without a single 60-day delinquency. Associated with the CDFI is a team of community development professionals who act as consultants to affiliates as they plan and implement their projects. NCLR also supports the work of affiliates that provide homeownership counseling. In the last year, the 19 organizations in NCLR's network served over 15,000 families and produced more than 2,500 first-time Latino homebuyers. Recently, a particularly strong partnership with NCLR's education department has emerged that is fostering, among other things, the creation of charter schools across the country that focus on the needs of Latino students.
I've been asked to address results of the 2000 census and their implications for financial services and community development. I will start by summarizing the findings of the 2000 census and related surveys that describe what to many are dramatic demographic changes. Next, I will discuss some new approaches that NCLR is following with our affiliates to meet the mortgage financing needs of the Latinos and to increase access to capital for institutions serving low-income families.
The most publicized finding of the census is that Latino population has grown tremendously; Latinos and African-Americans are now the largest minority groups in the United States. Since 1980, the Latino population grew from 14.6 million to 35.3 million in 2000—a 142 percent increase. The African-American population grew from 26.1 million to 35.4 million, or a 36 percent increase. Comparatively, the white community increased from 180 million to 194.6 million—about a 1 percent growth rate.
Latinos are a diverse population, both in terms of ethnic and racial composition and history. Mexicans constitute the largest U.S. Hispanic ethnic group, followed by Puerto Ricans, Central Americans, Cubans and South Americans. The size and growth of the Latino population will increasingly push the private sector, public policymakers and community development institutions to craft strategies that address this community's concerns.
The increase in the number of Latinos in the United States over the past decade has generated much interest from the larger public, politicians and the media. At times the discussion seems to suggest that the presence of Latinos is a new phenomenon. Yet many Latino families have roots that go back centuries, which attests that the Latino presence in this country is clearly not new. Latinos have played an enormous role in America's history with their hard work, patriotism and commitment to family and communities. Research done by NCLR has led to a basic conclusion that Latinos share and, in many ways, reaffirm American values and principles.
An important characteristic of the Latino population is its relative youthfulness. Latinos are a huge portion of today's youth. More than one-third of the nation's 35 million Latinos are under 18 years old; half of all Latinos are under 26. By contrast, the median age for the entire U.S. population is 35.3. Combined, Latino and African-American youth make up 35 percent of the U.S. student population. The critical implication is that a substantial proportion of tomorrow's workforce and America's future taxpayers will be minority.
Overall, the data show that on important indicators of work and family, Latinos reaffirm traditional American values. For example, Latinos embody the work ethic on which this country was founded; Latino men continue to be the most likely of all male workers to be in the labor force. Currently 80.1 percent of Latino men are working or looking for work, compared with 78.8 percent of white men and 68.3 percent of black men. Latina women comprise a smaller percentage of the labor force—55 percent, compared with 60 percent of white women and 62 percent of African-American women. However, the Latina percentage is increasing rapidly.
One survey conducted in 1996 revealed that two out every five workers hired for new jobs were Latinos. Latinos made up 10 percent of the workforce nationally. In states like California and New York, Latinos were 27 percent and 12 percent of the workforce, respectively.
One concern is the relatively low income of the Latino population, although recent data show some improvement. For example, between 1998 and 1999 real median income for Latino households increased by 6.1 percent, from $28,956 in 1998 to $30,735 in 1999. In this same period, Hispanic poverty rates also declined from 25.6 percent to 22.8 percent. In 1999, the poverty rate for Latino married couples dropped to its lowest level since 1979—14.2 percent. However, it still remained almost four times that of similar white non-Hispanic families.
Probably the most significant demographic characteristics impacting financial institutions and community development involve assets and savings. While other groups experienced an increase in net worth over the past few years, the median net worth of Latinos has dropped. Between 1995 and 1998 the median net worth of Latino families dropped 43 percent, from $5,300 to $3,000. For white families, net worth increased from $65,200 to $81,700 over the same period. The median financial wealth (net worth minus home equity) for Latinos in 1998 was 0! This compares with $37,600 for whites and $1,200 for African-Americans.
The lower net worth is principally a function of lower savings and homeownership rates among Latinos. One critical barrier to savings is the generally lower income of Latino families. A second significant barrier is that financial institutions lack the products that appeal to and are worthwhile for low-income consumers. Also, financial institutions have not marketed their services effectively in the Latino community.
Even with these barriers, Latinos will have a major impact on the home-buying market. Recent immigrants especially are likely to have a big impact on homeownership. Every year approximately 1 million new immigrants enter the country—more than half of whom are Latino—and join the approximately 27 million first generation immigrants in America today. This is significant because a study conducted by Georgetown University and the Fannie Mae Foundation found that new immigrants would account for one-quarter of all future household growth, an important factor in residential growth. Also, the study found immigrants are three times more likely than the general adult population to rank home buying as their number one priority. Although Latino homeownership is lower than that of the nation as a whole, the growth in Latino homeownership rates from 1998 to 2000 accounted for 17 percent of the rise in homeownership, even though Latinos make up only 12.5 percent of the population. This indicates a desire to purchase when the right opportunity presents itself.
NCLR has identified several other barriers to savings and using the banking system. Many financial institutions, in an effort to increase revenue, have passed significant fees and other costs on to customer accounts. For many Latino families, this can be a considerable financial burden. With regular banking fees and the prospect of overdraft charges—typical for low-income, low-asset families—owning an account often can cost more than paying a fee at a check-cashing outlet. This explains in part the tenuous relationship that many Latinos families have with financial institutions. The Survey of Consumer Finances from 1998 indicates that 87 percent of all families had transaction accounts, yet only 70.3 percent of Latinos had one.
In addition, many U.S. banks have sought to appeal to customers primarily through "free" checking services. However, the Survey of Consumer Finances found the number one reason for not having checking accounts was because families did not write enough checks to make the account worthwhile. Besides trying to appeal to the unbanked market with ineffective products, many financial institutions have not marketed their services to the Hispanic consumer at all. For some Latinos, language and other barriers—like inconvenient hours and locations—deter them from approaching a bank. Like most Americans, Latinos may not take what they feel is a risk by depositing their money into the hands of an institution with which they lack a relationship. This is particularly important for Latino immigrants whose families experienced lost deposits in their home countries' banks because the bank went out of business or because of currency devaluations. Strategies like locating branches in Latino communities, supporting Hispanic businesses, employing Latinos and, when necessary, providing bilingual materials are all useful, but they are hardly universal.
Fortunately, some banks have developed specific strategies to serve unbanked Hispanics, both in California and here in Texas. Union Bank of California created a program that linked savings to other products and services through program known as "Cash and Save." Cash and Save is a network of nontraditional branches that attract low-income and unbanked customers—the majority of whom are Latino. Among other things, the bank provides "nest egg accounts" that link check-cashing services to goal-setting savings accounts. It also offers low-cost checking accounts to anyone, including people with a negative bank history. The account costs $1 to open, has a $3 dollar monthly fee and includes five free checks.
In Austin, Wells Fargo recognized the reticence of Latinos to produce identification to open an account. It now requires that customers show only any type of government photo ID, which the Mexican consulate in Austin can issue, to open a non-interest-bearing account. I might add that the practice of requiring documentation in excess of that required by law to open accounts is widespread and constitutes a major barrier for many Latinos seeking banking services.
Mortgage lending is impacted by the lack of interaction with financial services because many Latinos are unable to establish credit history, which is a standard evaluation tool used by the financial marketplace to determine access to credit. Others have flawed credit due to persistent economic hardship. Their resulting impaired credit history leaves them dependent on check-cashing outlets and unscrupulous, high-cost lenders, which further limits Latino families' ability to become economically mobile.
NCLR has published many studies and issued briefs on demographics, the workforce, access to financial services, savings and other issues I will not go into now, but you should check NCLR's web site, www.nclr.org , for more information.
I know CRA is the theme for one of today's discussions. Although it is not the only catalyst for effective community development work, I think it is fair to say that CRA has been an important incentive for banks to experiment with new approaches in serving low-income communities. The CRA mandate is important because lending in low-income communities is perceived as less profitable than mainstream lending. Our view is that regardless of the perception, lending to this market is profitable. A recent quantitative analysis, based on self-reported bank surveys conducted in 1998 by the U.S. Treasury Department, concluded that "although the data indicates that CRA lending is less profitable, it is profitable nonetheless." I believe the regulatory impact of CRA has encouraged banks to maintain services in lower income communities. It has also encouraged depository banks to approach credit access in new ways.
In addition to CRA incentives, the community's market potential is an inducement for banks to increase financial services to Latinos for three reasons. First, the size of the Hispanic market is large and growing. Second, although many Latino families have low incomes today, the future may be very different as this relatively young population moves into the middle class. Third, relationships started today can produce benefits for financial institutions in the future. The children of today's Latino immigrants will have the opportunity to earn incomes in excess of their parents' as they take advantage of the education and economic opportunities available in this country.
At NCLR, we believe that in addition to the "stick" of regulatory enforcement, other steps are needed for financial institutions to fully access the "carrot" of the growing Latino market. One such step—reform of mortgage underwriting guidelines to reflect actual creditworthiness—is well under way. There have been some adjustments in mortgage underwriting criteria over the past eight years that have made home buying more accessible to Latino families. But, as the low rates of homeownership indicate, much still needs to be done.
A second step involves improving the efficiency of the mortgage origination process. The low- and moderate-income mortgage market is full of contradictions for lenders. Originating loans can be perceived as very costly, relative to the fixed staff time required for smaller loan amounts. This is particularly true if the lender seeks to find ways to deviate from the typical homebuyer profile. The smaller dollar value of the loans, use of subsidy programs and a lack of a family's experience with financial institutions can complicate serving this market. Most lenders, along with the government service enterprises (GSE), have initiated approaches that ease underwriting guidelines to help families qualify for mortgages. Some have partnered with counseling agencies to develop a pool of qualified applicants for their loan programs.
While useful, such partnerships often end up being frustrating to both lenders and counseling entities. Issues related to the cost of originating a bankable loan and the difficulty in generating sufficient volume through a partnership with a counseling entity frustrate lenders and complicate the cost–benefit analysis for both parties. The counseling entities' frustration comes from inconsistent loan origination, processing and underwriting due to mergers and other changes in bank personnel and priorities. Banks complain that the business is more trouble than it is worth. There is truth in both points of view. The reality is that smaller loans mean lower fees and interest income per loan. Loan originators may be required to spend more time fitting the customer into one of the lender's bank products, which, because originators are paid on commissions, acts as a disincentive to provide quality service to the family. Lenders invest in programs to overcome these issues from time to time but often cannot sustain the effort. However, even these short-lived efforts are valuable because they help get families, who might not otherwise qualify, into homes.
Although easy solutions to this problem are elusive, NCLR is involved in one experimental response, based on the premise that computer technology presents an opportunity to lower loan origination costs and make loan origination more efficient. The project integrates the work of housing counseling entities, which have expertise and the mission to serve Latino low- and moderate-income buyers, into an Internet-based data management system that will allow online communication with real estate professionals.
A partnership of Freddie Mac, the National Association of Hispanic Real Estate Professionals and NCLR established the Hispanic Community Technology Initiative. The initiative has developed a data management tool that will enable organizations to manage client workflow more efficiently as well as provide more comprehensive analysis of a family's readiness to buy a home. It was designed jointly with counseling entities and is thus based on actual workflow, not a computer programmer's vision of what workflow should be.
As you all know, managing data effectively is a big part of the mortgage business. Within community-based counseling institutions, little or no investment has been made in upgrading the technological capacity. Scarce grant funds are spent on staffing and basic organizational needs. The scale of the investments needed to increase staff efficiencies through technology, if financed by the individual counseling institutions, is prohibitive and only very rarely done.
In addition to helping participating organizations manage client loads, the data management tool will also allow the counselor to populate the data fields of a basic mortgage application form that can be shared directly with the local lenders a family chooses. Thus, the project will allow counseling organizations to capture data elements while providing their counseling services and simultaneously generate a product valuable to mortgage lenders in the process. This tool recognizes what happens in the best counseling entities—a family is qualified for a mortgage loan within a counseling relationship the family trusts. Since the data is sent over the Internet, it can come in a format that allows the lender to immediately begin loan underwriting, thereby lowering the cost of origination and loan processing. NCLR believes this approach begins to address the question of efficiency in loan origination.
Finally, there is a need to increase commercial financing and technical assistance for community-based, housing and community development projects that target Latinos. Many nonprofit institutions that serve Latinos lack the experience or access to information related to financing their real estate projects and to their working capital needs. This has led to enormous difficulty in obtaining required capital. Latino community-based organizations have highly variable experience in utilizing debt financing and, more to the point, understanding how lenders evaluate risk.
We have been providing financing to our affiliates through our CDFI, the Raza Development Fund, for more than two years. One thing that has become clear to us is that loan underwriting encourages self-reflection on fundamental operating issues that have profound implication for the health of the CBO. These issues have previously been avoided many times or have not been recognized. For instance, a large amount of current assets in the form of receivables 90 days old or more could indicate billing procedures or funding relationships that need to be adjusted. Or the inability to deliver interim financial statements could indicate poor cash management and underinvestment in the organization's accounting system. In some cases, the mere fact that debt financing is considered adjusts the perspectives of the organization's board.
Interestingly, we have found a clear nexus between assisting our affiliates with commercial lending and our affiliates servicing families with homeownership counseling. The nexus is the role NCLR plays in its commercial lending and the role counseling entities play in preparing families for homeownership. In both cases, there are applicants who easily qualify and those who are more difficult to qualify for a loan. In both cases, whether it's the affiliate borrowing from the Raza Development Fund or the family being served by the counseling entities, applicants are required to carefully evaluate their financial condition. The factors that create barriers to borrowing become highly apparent in the process, and strategies to address the issues can be developed jointly. Ultimately, if everyone has been diligent and sufficient time has been provided to address issues, a bankable loan emerges at the end of the process. Inevitably, NCLR's affiliates, community development staff and Raza Development Fund staff spend lots of time reviewing—and debating—conclusions emerging from the underwriting process. It is a process I like to describe as "participatory underwriting." We value greatly the time and effort an affiliate puts into requesting a loan and feel it is imperative to share the observations revealed during loan origination and underwriting, thus creating the opportunity to jointly think through appropriate solutions. From our perspective as a lender, that is the minimum service we can provide for those taking the time and effort to approach NCLR for capital.
Quite frankly, it is a service that too few financial institutions make an effort to provide to their customers. In our case, we are driven to do so because we are accountable to our constituency of community-based affiliates. Given the nation's rapidly changing demographics discussed earlier, it is time for more financial institutions to view the Latino community as a key constituency and take the steps necessary to provide this community with the level of service it deserves.
I will leave by stating that new approaches to old problems are essential in planning community development activities and offering financial services to the ever-changing demographic base. Whatever the catalyst—whether it's a regulatory requirement or a market opportunity—new approaches are needed. As a civil rights organization, we continue to support vigorous enforcement of CRA, fair lending and other policies. But my colleagues and I at NCLR are also eager to work with you in identifying opportunities in the Latino market that can simultaneously increase our community's access to financial services while offering the industry a fair rate of return. Thank you for your attention.
e-Perspectives, Volume 1, Issue 4, 2001