Banking the unbanked

Published: Sunday, January 16, 2005 at 6:01 a.m.
Last Modified: Sunday, January 16, 2005 at 1:37 a.m.
The Florida Credit Union ATM drive-through kiosk that stands like a lone sentinel in the parking lot of a small shopping plaza on NE 16th Avenue is something of an oddity.
It's true that ATMs are a ubiquitous fixture of modern life. But they remain relatively rare fixtures east of Main Street.
Rarer still, nonexistent in fact, are bricks-and-mortar banks.
While it sometimes seems that a new branch bank opens nearly every month in Gainesville, they are far more likely to pop up west of 34th Street than east of Main.
One might assume that banks, S&Ls and credit unions cluster on the west side of town for the same reason that Willie Sutton robbed banks - because that's where the money is.
But that assumption doesn't hold water.
"There is plenty of money in east Gainesville," insists Vivian Filer, chair of the Springhill community association. "We have homes that range from $250,000 on down. People do invest. They get a home loan from somebody, but none of these banks are on the east side of town. We have thriving businesses. We do have spending power."
That the "poor side of town" lacks easy access to financial services most of us take for granted is hardly a Gainesville phenomenon. Last summer, at a Knight Foundation-sponsored seminar on urban issues for journalists, James Carr, a senior vice president with the Fannie Mae Foundation, talked at length about the disconnect between the mainstream financial services industry and low-income neighborhoods, and the consequences that disconnect can have on urban redevelopment efforts.
Although this nation has invested billions of dollars in affordable housing, the inability of many low-income families to qualify for mortgage loans remains a major stumbling block to home ownership.
And home ownership, Carr argues, is the key to successful communities.
"Vibrant neighborhoods are made up of people who are financially secure, who take responsibility for their homes because they own them," he says. "Distressed communities tend to have people who are not connected to the banking system in a meaningful way, who are not building wealth."
Home ownership is the way "America does wealth creation," Carr said.
At its most fundamental level, "the community investment cycle" begins with a savings account, which leads to a checking account, which establishes a credit history, which leads to loan eligibility and home ownership, which builds financial security, which helps sustain healthy neighborhoods.
"Rising property values are the most important single indicator of a successful community," he said.
Which is not to say that the spending power of African-Americans is neglected. Banks may be rare on the poor side of any city, but the businesses that make up what Carr calls the "fringe lending industry" are much more prevalent.
Storefronts that make advance loans on paychecks or auto titles, rent-to-own operations, pawn shops and the like are an $80-billion-a-year industry in America. They charge higher interest rates than banks but offer their customers little opportunity to establish credit histories, engage in financial planning or begin savings accounts - all steps that can lead to home ownership, starting a business or financing a college education.
"Loans keep rolling over," Carr said. "People end up paying more on the debt maintenance then the loans themselves. These businesses beat a lot of banks on return on investment, it's a very good market.
"And they will tell you 'We're only there because the banks aren't,'" Carr said.
Bruce Katz of the Brookings Institution calls it the "parasitic economy."
"The disconnect between working families without bank accounts and mainstream financial institutions carries a huge price," he wrote recently. Treasury statistics, he said, show that "a worker earning $12,000 annually pays about $250 of that to cash paychecks at a check-cashing store, not including additional fees for money orders or wire transfers.
"While credit card interest rates range from the mid-single-digits to about 20 percent, payday loans carry an average annual percentage rate of 474 percent."
Last year, according to a Brookings Institution study, the "working poor" in America received $32.4 billion in Earned Income Tax Credit refunds. Of that, nearly $2 billion was eaten up by tax preparation charges and filing fees.
Ironically, the Earned Income Tax Credit - which can offer refunds of up to $4,000 a year depending on one's income - offers one of the best opportunities for working-poor families to begin the investment cycle: to start savings accounts, establish credit histories and, eventually, qualify for home ownership. But to the extent that recipients use advance check-cashing stores or similar businesses to file for and receive their refunds, that money tends to melt away quickly.
Carr argues that banks and other mainstream institutions ought to be designing financial services specifically geared toward encouraging low-income workers to use their EITC refunds, child care tax credits and similar tax benefits to start saving and building equity.
And because community redevelopment is so closely tied to home ownership, Carr adds that "local governments have a real vested interest" in promoting and supporting "financial outreach campaigns."
And, increasingly, they are. Last year, Miami-Dade's "Prosperity Campaign" helped low-income residents receive $62 million in EITC. The campaign is sponsored by a coalition of government, businesses and civic organizations that recruited and trained volunteers to prepare and file tax returns.
Miami's campaign has spurred similar efforts in other Florida cities. Gainesville's Heart of Florida Prosperity Campaign helped residents receive $150,000 in EITC refunds last year. This year, the goal is to bring half a million dollars back from Washington to Gainesville families.
"This community has the potential to receive more than $8 million in EITC refunds alone," says Patricia Lee, executive director of the East Gainesville Development Association. "One thing we want to do is discourage people from using predatory lenders" for help in getting their refunds. "It's very expensive, people are borrowing their own money."
The Heart of Prosperity Campaign will begin at 5 p.m. on Friday, Jan. 21 at Eden Park Apartments on NE 39th Avenue. After that, volunteers who have been trained using IRS software will be visiting sites around the city and preparing tax returns until April 15. (Volunteers are still needed. Those interested in helping should contact the campaign at 377-1911.) Bringing that money back to the community is important. Just as important is the campaign's effort to convince people to use at least part of their refunds to begin a savings account and start planning for their financial futures.
"We're asking people to enroll in financial empowerment classes," said Lee. "We want to teach them that their money matters and how they use it matters."
And there are encouraging signs that banks are beginning to buy in as well. The Wachovia Foundation is helping to fund the Heart of Prosperity Campaign, Bank of America is involved in the campaign's financial empowerment program and Florida Citizen's Bank has designed a checking account geared toward people with a poor or no credit history.
"One of our long-term goals is to get a bank branch started in east Gainesville to make it more convenient for people to take advantage of banking," says Lee. "People may be poor, but they do have money."

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