The wealth gap between white and black Americans is widening: Black families now have 10 times less wealth than whites. Sen. Tim Scott (R-S.C.) thinks he knows why, and he is trying to do something about it.
In spite of all of the strides people of color have made over the past 50 years in America, there has not been much real progress on many fronts in minority communities because the underlying issues of racial inequality have not been adequately addressed. It remains harder for minorities to get the credit they need in everyday life, for example, which makes it harder for them to make big purchases, like buying a home, which could help them build and pass on wealth.
Since the 2008 economic downturn, many Americans have had an easier time accessing credit. Restrictions have eased, and that has allowed millions to buy homes and start businesses. The recovery has worked well for Americans generally — except minorities.
Right now, minorities find it harder and harder to gain access to credit, especially when it comes to mortgages. The homeownership rate among minorities is on the decline: Homeownership among white Americans is more than 30 percentage points higher than among black Americans, according to Trulia.
In addition, a new study found that African-Americans and Latinos were far more likely to be denied conventional mortgages than whites, even when income, loan size and other factors were taken into account.
Black applicants were disproportionately turned away, as compared to whites, in 48 metropolitan areas. Latinos were turned away more often in 25 areas, Asian-Americans in nine and Native Americans in three. In Washington, D.C., the study found that all four groups were far more likely to be denied home loans than whites were.
What is happening is that ongoing racial inequality has led to credit inequality.
The current credit scoring model ends up eliminating many African-Americans, Latinos, and young people that are otherwise credit worthy, making them in effect "credit invisible." Credit invisibility leaves a person unable to access necessities, since, besides homeownership, credit is used when a person applies for health insurance, car insurance, and even employment. When a person is credit invisible, it becomes harder for them get started, or to move forward after and respond to life's challenges.
"There needs to be an alternative scoring model to judge credit-worthiness," says Scott. That's why he has introduced the Credit Score Competition Act, which would create an alternative model for credit-worthiness that would include consistent payments for rent, utilities and cell phones.
"With gentrification and an increasing shortage of affordable housing, no one can afford to be 'credit invisible.' Having access to credit is like having access to a better life and if minorities are being denied that because of the current system then other ways of ensuring access must be employed," he says.
The three major credit bureaus, Equifax, TransUnion and Experian, found that civil judgement and tax lien data was often being reported inaccurately and not being updated enough to serve its intended purpose. When listed on a credit report, these pieces of public information can be a major obstacle to obtaining credit. The bureaus have agreed to remove it from consumer credit reports and to stop reporting it going forward.
Access to mortgages remains one of the larger goals of this process. "Homeownership has always been a part of the American Dream," says Scott, "so this is an opportunity to make the system fairer for everyone."
The Mortgage Bankers Association agrees. "Increasing competition and providing a level playing field in the development and use of credit scoring models should ultimately result in more accurate modeling, which could potentially benefit a wide variety of under-served borrowers, particularly younger people and African Americans and Hispanics," says Bill Kilmer, Senior Vice President for Legislative and Political Affairs.
There is a direct correlation between the widening gap in wealth between minorities and white Americans and the increasing gap in homeownership. The fact that so many more whites own their homes is one of the reasons why white median family net worth is nearly ten times that of African-American families.
As Scott puts it, "it is imperative that minority applicants start to fare better when trying to gain credit. If a person is credit-worthy, they should have access to credit at the same rate as everyone else. It is the only way we can all move forward."
Jennifer Streaks is a financial and consumer news journalist who has written for The Huffington Post, Motley Fool and Black Enterprise and been featured on ABC, MSNBC, FOX Business and HuffPost Live, discussing money, business and consumer news. Find her on twitter @jstreaks.
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