Biden, Democrats aim to close racial wealth gap with new credit bureau

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Americans could see the formation of a new federally backed credit bureau if former vice president and presumed Democratic presidential candidate Joe Biden is elected in November, thanks to the efforts of a task force appointed by Biden and Vermont Senator Bernie Sanders in May.

This week, the Democrats’ task force presented Biden with a 110-page document of policy recommendations. NBC News first reported on the political wishlist on Wednesday. While the document contains a wide range of initiatives ranging from healthcare to immigration, the policy recommendations have also focused on ways the United States can work to close the racial wealth gap, including by creating a more level playing field when it comes to credit.

“We have seen with horrific clarity the cost of systemic racism,” Biden said in a speech Thursday in Pennsylvania. “We need a dedicated program to close the wealth gap.”

During the most recent economic downturn, black families saw a 44.3% drop in their median net worth, almost double that of white households, which only saw a 26.1% drop. according to the Brookings Institution.

To help close the gap, the political roadmap proposes to create a public credit assessment agency housed within the Consumer Financial Protection Bureau. This federally-backed credit bureau “would provide consumers with a government option that seeks to minimize racial disparities,” according to the document.

The federally backed credit bureau would be required to ensure that the credit rating was not discriminatory and that the algorithms used for credit scoring would include non-traditional sources of credit data such as credit history. rental and utility bills.

Once established, all federal lenders would be required to use and accept the rating of the Federal Credit Agency, including for programs such as Federal Home Loans, PLUS Loans, and other loans guaranteed by the Federal Credit Union. US government.

“There is a persistent and pernicious racial wealth gap that holds back millions of Americans, the typical white household holds 10 times more wealth than the typical black family,” the document said.

How Credit Ratings Play in the Racial Wealth Gap

Credit reports play a major role in the racial wealth gap, experts say. While the major credit bureaus, Equifax, Experian, and TransUnion, say their ratings do not take into account age, race, gender, income or geography, several studies have shown that black Americans have consistently lower credit scores than white consumers. Earlier this year, the Urban Institute found that while more than 50% of white households maintained a FICO credit score above 700, only 21% of black households were able to achieve the same result.

Not only were the scores lower, but 1 in 3 black households did not have enough credit information to generate a credit score (called having an “end” credit report), while only 18% of white households had. a thin file.

This lack of credit, or less credit, is a key factor in why black Americans have a harder time getting approved for auto loans, credit cards, and mortgages. A 2018 Center for Investigative Reporting analysis found that even controlling for income, loan amount, and neighborhood, African Americans and Latinos were more likely to be denied conventional mortgages than white households.

The reason these racial disparities exist in credit scores is due to historical and current discrimination, says Chi Chi Wu, an attorney at the National Consumer Law Center who specializes in consumer credit issues.

Until about 50 years ago, many American banks participated in a practice known as redlining, denying black Americans access to credit and financial services. This has caused many black households to go unbanked or to turn to alternative lending options, such as payday loans, auto title loans, and pawn shops.

The fallout from these policies continues to this day. Federal disaster loans are distributed in a racially disparate fashion because they are primarily based on the applicant’s credit rating, recent studies have shown. Additionally, incarceration status affects credit scores, according to a study recently released by the Washington Center for Equitable Growth. Black American incarcerated Americans surveyed in Baltimore had FICO credit scores nearly 50 points lower, on average, than white Americans who had faced jail time.

But again, incarceration only explained part of the score differences. Research found that despite having more assets and less debt, black Americans without a history of incarceration still had FICO scores 77 points lower on average than those who were incarcerated and whites.

It’s a “vicious cycle,” Wu says. If a black family struggles to keep their bills under control, when they are having difficulty, they don’t have the same cushion as a white family who is more likely to. have assets like a house. If their credit rating goes down because they miss a payment or two, then it is more difficult to get a mortgage and become a homeowner themselves. “You are excluded from home ownership, so you are excluded from the very thing that would give you the cushion to survive financial hardship,” Wu said. “Credit scoring, unfortunately, perpetuates vicious circles.”

If you have a tool with built-in racial disparities that is used to decide whether to give people credit or a job, black families are going to suffer more, says Wu. “The common mantra is that credit scores are objective.” Wu said. “Yes, it is an objective measure. But when you use them, you perpetuate the racial prejudice that they measure.”

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