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An Investment Worth Making: Financing the New American Dream


In her new book How the Other Half Banks, Mehrsa Baradaran, a law professor at the University of Georgia, tells the true story of three borrowers.

The first, named Tanya, is a single mother of two. She had to take off work to take care of her son after he had emergency surgery. She fell behind on her bills, and she didn’t have anyone to help her. She went to a payday lender and got just enough money to cover the bills. She couldn’t pay it back by the next payday, so she took out another loan. And another and another and another. Until she owed $2,000 in fees and interest. She was earning $11 an hour at her job.

The second borrower is named Thelma. She worked two jobs, lost one, pawned the gifts her grandchildren gave her, and still couldn’t pay her bills. She went to a payday lender and wound up in the same position as Tanya, taking out loan after loan, until she “lost her bank account and ruined her credit.”

The third is a much happier story. This borrower, named Steven, found himself in Tanya and Thelma’s position after the financial crisis. He lost a lot of money in the crash, and he couldn’t pay his bills. So he too went to a lender, but this lender was much more forgiving than Tanya’s or Thelma’s. They gave him low interest rates and lots of time to pay it back. They made sure he didn’t go deeper into debt, and he wound up paying it all back and becoming quite rich and successful in the process.

I like to call this the Parable of Steven, and it raises and important question: How do we turn predatory lending victims like Tanya and Thelma into success stories like Steven?

Well, in crafting an answer, it might help if I told you a bit more about these borrowers. Tanya and Thelma were low-income Americans, as you probably suspected, but Steven…well, his name wasn’t really Steven. And he wasn’t low-income at all. Steven was actually the big banks on Wall Street, and his generous lender was the U.S. government.

In my last post, I talked about the predatory lending schemes that ensnared homeowners during the recent bubble, and I argued that we can prevent another financial disaster by giving borrowers access to affordable credit that won’t bankrupt them in their quest for the American dream. Baradaran’s story shows that it’s possible.

We live in a world where people who need credit the most have the least access to it—a world where “the less money you have, the more you pay to use it,” says Baradaran.

In this world, interest rates vary from 20 percent up to 400 percent. The average borrower renews their payday loans at least ten times, paying the lender for 1999 days. The average title borrower gets a loan backed by their car and then proceeds to renew that loan eight times, “paying $2,142 in interest for $951 in credit.” Nonbank lenders, the kind who made the risky subprime loans that I talked about in my previous post, have taken over 20 percent of the market from the regulated banks since the Great Recession.

The greatest tragedy of all isn’t just the fact that these loans are risky. It’s that, in addition to the damage they do, they make policymakers and voters think that these borrowers can’t be helped. In the wake of the Great Recession, public debate seems to have convinced itself that low-income Americans can get either risky loans or no loans at all.

That leap of logic is both sad and untrue.

When I was at the Federal Reserve, the Congress  assigned us with the task of evaluating lending associated with the Community Reinvestment Act, which was passed in 1977 to encourage banks to lend to low-income communities. Our exploration provided answers that should cause everyone to question this view of low-income Americans where credit is concerned. Congress had passed We found that, after more than twenty years, the CRA was successful at getting banks to give loans to borrowers who had limited options—and the vast majority of those loans were profitable!

Low-income households, it turns out, can access the American dream. But only if they are given an affordable path.

So I shouldn’t have been surprised fifteen years later when my colleagues and I found that homeownership actually increased in the communities with the biggest influx of “nontraditional” mortgages during the housing bubble. Even after the bust, we found a slightly positive effect.

Unfortunately, these success stories have been overshadowed by the many tragic losses that roiled the global economy and devastated millions of homes. My colleagues and I are determined to find ways to foster the former without the latter.

One of my latest efforts, a forthcoming chapter with Anthony W. Orlando that will appear in a book being published by Cambridge University Press, reveals a long history of profitable lending to low- and moderate-income homeowners by American institutions.

We learn from John Creswell, who first had the idea for the U.S. Postal Service to open savings banks for all Americans—a successful 56-year experiment that attracted many millions of dollars in deposits with “virtually no bank withdrawals” from private banks.

We learn from the buildings and loan associations, or “thrifts,” which overcame the risk problem of lending to low-income homeowners by knowing the borrowers personally.

We learn from the South Shore Bank in Chicago, where a few inspiring bankers found that they could profitably invest in community development in low-income areas if they didn’t have shareholders demanding immediate returns.

Significantly, all three institutions either died or saw significant declines. The Postal Service closed its savings banks.  Deregulation drove the thrifts into risky lending that bankrupted most of them. South Shore Bank failed in the Great Recession. But these failures offer an important lesson: Our free market has never offered affordable financial services to all Americans without supportive public policies.

The Parable of Steven shows that even the big banks could not stay afloat without the collective action of the American taxpayer. I do not believe it is too much to ask that the same cooperative spirit be applied to the next generation of homeowners. Indeed, the evidence I’ve seen—and the consequences we have endured from the absence of affordable credit—suggests that it is one of the best investments we can make.


This article is written by Dr. Raphael Bostic. He is the Judith and John Bedrosian Chair in Governance and the Public Enterprise at the Sol Price School of Public Policy at the University of Southern California.


Home Matters is a movement that seeks to re-define Home and create a New American Dream.

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