The dream of a new life filled with opportunity and prosperity in the United States is what beckoned my family when they sought refuge from their war-torn home in the 1980s. Now—nearly 40 years later—they are renters in one of the most expensive areas in the country, unable to purchase a home despite decades of working and saving. Their inability to become homeowners has not been for lack of hard work or financial responsibility, but rather a testament to how the system does not serve low-income families of color like mine.

In 2012 when home prices and interest rates were lower, we were excited to find homes for purchase with mortgages that were the same as the rent we were paying. That excitement quickly turned into frustration after we were unable to qualify for a loan because we could not afford a significant enough down payment for an affordable mortgage.

Of course, my family’s situation is not unique. Researchers and advocates continuously find gaps in homeownership for communities of color and low- to moderate- income communities. Common barriers these communities face include the high cost of down payments, and inequitable access to credit and banking. This is the direct result of the legacies of redlining and discriminatory lending by financial institutions which, for decades, prevented communities of color from accessing loans that would have allowed them to establish and build credit. Redlining also meant communities of color were denied the wealth-building opportunities associated with homeownership.

Contemporary predatory lending practices–like excessive or hidden fees, unfair loan terms, and high interest rates– exacerbate these disparities by making it more difficult for borrowers with less access to capital to repay debts and build credit.

In the recent report I co-authored with Greenlining’s Associate Director of Economic Equity Rawan Elhalaby, Home Lending to Communities of Color in California, we analyzed home lending data financial institutions are required to disclose through the Home Mortgage Disclosure Act. According to the most recent HMDA data from 2021, we found that communities of color continue to not access home mortgage loans at rates comparable to white communities. Additionally, research conducted by the National Community Reinvestment Coalition (NCRC) found large gaps in Black and Latino small business ownership compared to White and Asian business owners. While race-specific small business lending data is not yet publicly available, it is clear that marginalized communities continue to face an uphill battle in accessing home mortgages and small business loans.

Financial institutions have a responsibility to do their part to narrow the homeownership gap they helped establish, and create opportunities for disinvested communities. As policymakers, regulators, and financial institutions work towards meeting the credit and lending needs of these communities, lending tools and products with more accessible underwriting criteria could create financial pathways to homeownership that help narrow the gap.

As policymakers, regulators, and financial institutions work towards meeting the credit and lending needs of these communities, lending tools and products with more accessible underwriting criteria could create financial pathways to homeownership that help narrow the gap.

What is a Special Purpose Credit Program?

Special Purpose Credit Programs are tools that cater to the needs of economically disadvantaged communities. They are targeted lending products designed to meet the needs of underserved groups that share a common characteristic such as race, geographical location, or income level. For example, through special purpose credit programs, financial institutions could introduce a mortgage or small business product specifically for Black and Latino borrowers, or individuals that live in a particular neighborhood. When designed thoughtfully and with equity in mind, special purpose credit programs can help reduce barriers to accessing home mortgage or small business loans. Special purpose credit programs lower barriers to credit access by lowering the minimum credit score and down-payment criteria, allowing for higher debt-to-income ratios, and instating lower income limits. While lenders and other stakeholders have expressed concerns over the legality of lending products that target by race, federal regulators have repeatedly expressed the validity of SPCPs. For one, the Equal Credit Opportunity Act (Regulation B) explicitly recognizes the legality of SPCPs. And according to the Consumer Financial Protection Bureau, lending programs that extend access to credit to applicants on the basis of race or gender are not in violation of the Fair Housing Act, the Civil Rights Act, or any other federal antidiscrimination statutes. In order to address the discrimination concerns of lenders and establish the permissibility of SPCPs, including race/people-based programs, the CFPB published an extensive Advisory Opinion to address uncertainties regarding Regulation B and offer a guide to establishing a SPCP.

What do lenders mean by “alternative credit”?

Using alternative credit presents an opportunity to consider alternative data—such as rent payment history and bank account information—to determine a consumer’s creditworthiness, rather than the traditional means of credit history and proof of income that disproportionately negatively impact borrowers of color.

Consumer credit data shows that on average communities of color have generally higher rates of subprime credit scores when compared to majority white communities. Again, this is because of historical discriminatory practices such as redlining that have prevented the development of generational wealth and economic opportunity in communities of color. In California, as of 2021, 19.7% of communities of color had subprime credit scores whereas in majority white communities only 10.9% had subprime credit scores. Factors that influence this trend include payment history, unpaid debt, mix of credit, and length of credit history. Adoption of alternative creditworthiness metrics can create opportunities to build wealth through means of homeownership and small business ownership.

Lenders like Upstart (an AI lending platform offering personal loans) are already beginning to ditch traditional creditworthiness metrics by creating their own algorithms to determine personal loan eligibility. Current borrower requirements include a minimum credit score of 300 or insufficient credit history, a debt-to-income ratio of 50%, and no reported bankruptcies in the past 12 months. As repayment and delinquency data progresses, we will soon have a better understanding of the implications of alternative credit frameworks and how they can be used to build wealth in marginalized communities, if used responsibly and with regard for safe lending practices and reasonable, non-predatory ‎Annual Percentage Rate (APR).

Reimagining Credit Criteria

When considering small businesses loans, the five Cs of credit is a prevalent underwriting system that lenders use to determine creditworthiness. The system looks towards character, capacity, capital, collateral, and conditions to determine an individual’s eligibility for a loan. Greenlining’s Sr. Program Manager for Economic Equity, Mercedes Gibson, found that in order for small business loans to be more accessible to communities of color, the five Cs must be revised to create more equitable standards

As it stands, the five C’s framework fails to recognize the nuanced needs of small business owners of color. Many entrepreneurs from marginalized communities do not have the resources to complete the preparation required, making loans less accessible. Formerly-redlined communities were denied opportunities to build credit and continue to be denied opportunities, while being susceptible to predatory loans, making credit history irrelevant because it is such a biased metric. We recommend that lenders emphasize character and merit over collateral as disinvested communities often have less ability to provide sizable down payments or history of profit.

New and innovative ideas and frameworks help us increase access to lending and increase wealth in low-income communities and communities of color. Special purpose credit programs and methods of determining alternative creditworthiness lower the barriers communities of color face in gaining opportunities to buy a home and create generational wealth. The Greenlining Institute urges financial institutions to establish Special Purpose Credit Programs and alternative credit programs that are designed with community input to meet the programs that meet the real credit needs of our communities.