Right now in America, millions of consumers are considered “distressed borrowers.” These are people who can’t qualify for a credit card, get a mortgage to buy a home or take out an affordable personal loan to cover an emergency expense. And because the options that are available—typically, payday or car-title loans—don’t report to major credit bureaus, these borrowers have no way to improve their financial standing by building a positive credit history. Instead, they remain shut out from mainstream credit products, with no way to escape predatory lenders or the debt traps they set.
Like most problems rooted in systemic poverty, the plight of distressed borrowers is more than a matter of simple economics. It is deeply influenced by social and cultural factors including race, ethnicity and, in this case, a tacit acceptance of lender bias. It’s no secret that these challenges disproportionately plague communities of color. The home-mortgage industry is a prime example, rife for decades with discriminatory policies that charged African Americans and other people of color higher interest rates and fees than their white peers and effectively locked them out of certain neighborhoods altogether through redlining.
Too many families of color, subjected to sustained discriminatory practices and unable to hold on to their wealth, have been forced into downward spirals resulting in financial ruin. Once there, it’s hard to escape. The payday-loan industry is notorious for trapping vulnerable borrowers in high-cost cycles of debt, and these businesses have been shown to actively target communities of color.
In one recent analysis of payday lending in Florida, African-American and Latino neighborhoods were found to be more than twice as likely to have storefront payday lenders as the state’s white neighborhoods. Nationwide, research from the Pew Trusts shows the share of consumers who have used a payday loan is three times higher for African Americans than it is for whites.
So what can be done? On the mortgage-lending front, the Justice Department and Consumer Financial Protection Bureau recently took joint action against Bancorp South for its alleged engagement in discriminatory practices, and the CFPB has introduced new rules for reining in the predatory payday industry. Civil rights and advocate groups are also doing important work, efforts I had the opportunity to contribute to during my time at the NAACP. I’m particularly proud of the progress we made to end predatory payday lending products in Arizona, sue major banks that targeted people of color with predatory loan products and launch a financial freedom center focused on financial literacy.
In my role as an investor, I’ve come to realize that the private sector—and Silicon Valley in particular—has an equally important role to play. CFPB Director Richard Cordray has himself noted the “great promise” financial technology companies have in increasing financial inclusion, something I’ve seen firsthand in several of the promising startups my fund has invested in.
Take LendUp, a startup focused on providing socially responsible alternatives to payday lending that, in addition to eliminating high-cost rollovers and hidden fees, makes credit-building, access to increasingly better loan rates and free financial education a central part of its lending model. In two short years, LendUp has moved customers with credit scores in the 300s from high-annual-percentage-rate single-payment loans to sub-36-percent personal-installment loans and, in many cases, to a credit card with a 0 percent APR if they pay off the balance at the end of each month.
One other startup my firm has invested in, LendStreet, helps families get out of debt and then repair and rebuild their credit scores. Another, called EarnUp, helps consumers manage their debt by automatically withholding money from their bank accounts and directly paying back monthly loans. A new company called eCredit Hero is not within our portfolio but is also doing exciting work with credit repair.
These are just a few examples of the power that technology can have in augmenting and advancing the groundwork laid by nonprofits and policymakers. They are disrupting subprime lending for the better and outcompeting entrenched predatory players.
If we are truly serious about improving the options available to distressed borrowers, then we must bring private-sector innovators with market-based solutions to the table with nonprofits and governments to collaborate on meaningful change. Reversing decades of predatory and discriminatory practices will take time, but with an all-of-the-above approach combining advocacy, smart policy and market-driven solutions, I know we can make great strides.
The Root aims to foster and advance conversations about issues relevant to the black Diaspora by presenting a variety of opinions from all perspectives, whether or not those opinions are shared by our editorial staff.
Benjamin Todd Jealous is a partner at Kapor Capital and former president and CEO of the NAACP.