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Excerpted From: Kim Vu-Dinh, Black Livelihoods Matter: Access to Credit as a Civil Right and Striving for a More Perfect Capitalism Through Inclusive Economics, 22 Houston Business and Tax Law Journal 1 (304 Footnotes) (Full Document)


KiVuDinhIn the summer of 2020, an African-American man named George Floyd was detained by the Minneapolis police for allegedly using a counterfeit $20 bill at a convenience store. He was pinned at the neck by a white police officer while in the presence of other officers, which ultimately resulted in his death. The event was captured on video and sparked protests nationwide with slogans “Defund Police” and “Black Lives Matter” (BLM), the latter of which was first coined in 2013, following the acquittal of the man who slayed Trayvon Martin, an unarmed African-American teenager. Often referred to as the BLM movement, activists for this decentralized cause most often focus their messaging on police reform to prevent physical violence against African-Americans. Others apply the concept more broadly, for example, in terms of economic justice and redistribution, calling for reparations and a reform of the tax code.

At the heart of the event that took Floyd's life was his tragic history of disenfranchisement, a fate shared by many other African-Americans, rooted in racial injustice in a number of different facets of everyday life. This history includes unequal access to safe, affordable housing or adequate education, combined with an early introduction to the criminal justice system and the prison industrial complex. Indeed, the inequality fought by activists in the BLM movement is no less present in other avenues of American life as they are in the culture of American policing. In this article, I focus on systemic racism in the American banking system, which has kept many African-Americans under the tyranny of intergenerational poverty in a manner just as ubiquitous as police brutality--if not moreso. In short, I argue that black livelihoods matter, and through inclusive economics and the principles set out by civil rights leaders, we could be one step closer to reaching true equality.

American households of color have long suffered from discrimination in lending. Too often, this phenomenon is explained away with the indisputable fact that, on average, people of color have lower incomes and credit scores than whites. However, this retort does little to address the following facts: 1) overtly racist lending practices have historical roots in the U.S. slave era, 2) overt racism in lending continued to flourish through redlining and other discriminatory lending practices, long after the abolition of slavery, and 3) people of color continue to be targeted by predatory lenders with exploitative credit products, disproportionately and significantly more so than white households with similar incomes and credit scores.

Racial discrimination in lending has been overt in the past but continues today in more subtle forms. Though guised as economic efficiency, these practices have the opposite effect: such barriers to access leave a large segment of the U.S. population unserved or under-served; and thus, reliable, credit-worthy households of color are precluded from meeting their full economic potential because they have little to no access to the type of credit that could help their households and communities prosper and stabilize.

Profit maximization in modern capitalism has come to stand for the principle that it is economically efficient for each commercial transaction to yield as high of a profit margin as possible. While the labor and infrastructural costs to service a loan do not differ from one loan to the next, regardless of the size of the loan, banks often perceive there to be an opportunity cost in servicing smaller loans. Accordingly a bank prefers the lion's share of its portfolio to be comprised of fewer, larger-sized loans. As a disincentive to borrowers of smaller-sized loans, a larger fee is imposed, and often, a larger interest rate. A parallel situation exists in other banking products, such as depository accounts. Most banks prefer to service customers with larger deposits rather than smaller deposits, even though servicing one customer requires no more resources than servicing another. This preference exists because banks are able to lend based on a percentage of their account holdings.

Accordingly, all things being equal, banks prefer to service wealthier customers over poorer ones, even before considering the customer's reliability, or before considering the customer's ability or willingness to repay a loan. Indeed, use of the credit score in lending is shrouded in mystery. While credit scores are a factor in the banks' decisions, the algorithms behind the FICO process (and most other credit score calculations) are trade secrets that are unregulated by any government entity. The 2008 recession indicates that one's ability to repay a loan was--and still is--a minor factor. While banks may have increased the required credit score, there is no indication that it weighs more heavily in the underwriting process.

Furthermore, credit scores do not measure the financial reliability of unbanked individuals, those who work in the informal economy, or those who do not otherwise fit within the narrow demographic of the Anglo-Saxon family unit. Instead, banks shorthand the process of eliminating those smaller loans simply by targeting customers of color with more costly loans and banking products, thereby setting up such households for failure. This shareholder capitalist thinking has been criticized by policymakers and academics alike as short-termist, but those critiques fall short of recognizing the broad spectrum of concrete solutions that have already been piloted and could be deployed strategically to eradicate inequality in access to credit.

A more macro-economically efficient economy would have financial products that are more inclusive. Such products would take into consideration the reliability of the borrower through criteria that recognize the diversity of the U.S. population and the different lifestyles that have been built within communities of color to provide solid infrastructural and financial support within a family. A more inclusive economic policy would recognize a broader set of stakeholders, a diverse population of consumers, and litigation strategies and financial products that would protect and serve such interests.

This article examines these issues and provides a survey of tools that have somewhat haphazardly been experimented with in the past one hundred years, and which could be used to increase access to credit for the disenfranchised.

Part II of this article evaluates the history and importance of credit, Part III discusses credit in the context of civil rights, Part IV summarizes the racist roots of credit in the U.S., Part V discusses the overarching role of short-termism and shareholder capitalism in racial discrimination in economic rights, Part VI summarizes the existing tools created to address this injustice, Part VII describes successful policy measures, and Part VIII proposes new solutions needed as viewed through a lens of inclusive economics. Finally, the article concludes by arguing that inclusive economic approaches to lending are not only the constitutionally correct outcome, but also superior from a macro-economic perspective.

[. . .]

Though not often considered a civil rights issue, in modern America, access to credit has a critical impact on one's ability to find shelter and employment, and accrue intergenerational economic stability. In the lives of the disenfranchised, systemic barriers to access continue to serve as one of the most effective tools enshrining segregation and inequality today. From Gandhi to Martin Luther King Jr., economic rights have been on the agenda of major civil rights leaders and activists, and limited legislation has created some enforceable rights through the CRA, the FHA, the ECOA, and the CARD Act. However, the enforcement of such litigation has been lackluster, in large part due to the limitation of the enforcement mechanisms and remedies created by the statutes. Alternative litigation strategies through constitutional principles should be explored to enforce these civil rights for inclusive economic opportunities. In addition to litigation, policymakers should adopt strategies of inclusive economics that incorporate more targeted, inclusive underwriting; widely accessible, high-quality financial literacy programming; increased access to low-cost banking; and choice architecture that enables low-and middle-income households to obtain access to credit that is comparable to the quality of financial products available to the privileged and the wealthy and even their white counterparts. Enforcing the civil right to enjoy meaningful access to credit could be transformative in bringing about true equality to the historically disenfranchised in a novel and important way and give meaning to the principle that black livelihoods matter.

Assistant Professor of Law, Director of the Business Innovations Legal Clinic, Bowen School of Law, University of Arkansas at Little Rock.

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