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COPYRIGHT 2005 President and Fellows of Harvard College, through the John F. Kennedy School of Government
Introduction
The factors barring Latinos from adequate participation in U.S. financial markets are complex. Language barriers, low financial literacy, distrust of financial institutions and broader cultural norms related to saving and investing are commonly mentioned reasons. These issues do play some role in influencing the relationship that Latinos have with the U.S. financial market. But individual experiences, language skills and cultural attitudes mask the more deep-rooted structural barriers that persist. These impediments prevent many Latinos from full participation in mainstream financial markets where the best and most affordable financial and asset-building products are bought and sold.
Increasing wealth and ownership among Latinos in the United States is not a narrow special interest. There are now more than 41 million Hispanics in the United States, compared to 35 million in 2000. Clearly, Latinos constitute a growing portion of the nation's future workers and investors. National economic prosperity will increasingly depend on the extent to which wealth is shared more widely among the U.S. population.
Currently, a staggering wealth gap exists between Latino and White households. The median net worth of Hispanic households in 2002 was just $7,932, which was only 9 percent of the median net worth of White households (Kochhar 2004). Narrowing the wealth gap between Latinos and Whites demands a comprehensive strategy. An effective Hispanic-focused, wealth-building approach must move beyond tackling the easily observable cultural challenges to addressing the more significant but less visible structural problems that exist in the marketplace. These challenges limit the financial potential of the burgeoning Latino community, but can be remedied by development and implementation of effective industry and government policies.
This article describes broadly how structural and economic barriers limit the ability of Latinos to navigate successfully through the U.S. financial marketplace. The article also illustrates how these challenges work within four distinct areas of the financial marketplace and suggests several possible remedies.
Cultural Versus Structural Barriers
The difficulty that Latinos experience in establishing and maintaining a strong relationship with a mainstream financial institution are complex and span throughout the financial marketplace. Mainstream institutions such as banks and credit unions often offer the lowest-cost financial services and products. A strong relationship with these institutions is essential to successful long-term family wealth building.
Nevertheless, Latinos face significant and widespread barriers to participation ranging from accessing basic retail banking services to securing affordable credit. While the hurdles within financial markets vary in terms of size and scope, the experience of Latinos suggests several prevalent categories including cultural or experiential, economic and structural barriers (Seidman 2005).
On balance, efforts by industry and government to address access- and participation-related issues for Latinos within financial markets has centered on addressing experiential or cultural barriers. Unfortunately, the emphasis on these factors to the exclusion of all others has rendered many of these efforts fruitless.
Cultural or experiential barriers for Latinos include limited English-language proficiency and--particularly in the case of some Latino immigrants with past negative experiences in their native countries--lack of confidence in financial institutions (Osili and Paulson 2005). For recently arrived immigrants, some simply do not understand fully how banks or credit unions operate or how financial products work, or they are concerned about privacy issues (Caskey 2002). These factors can explain, to some degree, why many Latino immigrants lack a relationship with a financial institution or are "unbanked." But while experiential factors play a role, the evidence suggests that bank fees and identity requirements are more prevalent barriers to the financial marketplace.
With respect to personal savings, Latinos demonstrate a strong willingness and ability to save, but the use of savings accounts in particular is limited. Economic incentives for financial institutions to develop and offer specialized savings products for low-income individuals are often weak and go unrealized. The market fails to adequately supply the type of accounts that would increase participation on the part of Latinos and immigrants. Moreover, the ways in which government policies encourage and enable individuals to save money fail to work effectively for low-income families. Tax and other savings and investment incentives--ranging from the purchase of mortgage products to pension participation--become stronger as an individual's asset holdings rise. Low-income workers and families must contend with eligibility rules for antipoverty programs that effectively discourage savings among the poor (Orszag and Rodriguez 2005).
Within credit markets such as mortgage and auto lending, other structural impediments bar many Latinos from full integration. For example, studies show that Latinos are more likely than Whites and African Americans to have no credit history or a thin credit file. According to a study by the Center for Community Capitalism, 22 percent of Hispanic borrowers had no credit score compared to 4 percent of Whites and 3 percent of African Americans (Stegman et al. 2001).
Economic efficiency has driven creditors to rely more on automated, less flexible systems to measure a borrower's creditworthiness and set prices for financial products. In theory, automation should produce cost savings for borrowers. However, automated systems and credit-scoring models are generating striking cost differentials for financial institutions between serving traditional and nontraditional borrowers. Consequently, many nontraditional borrowers are channeled into areas of the marketplace that charge more to collect and analyze information to determine creditworthiness. This is a form of credit rationing because the lowest-cost financial products are often reserved only for those with a good and easily verifiable credit history. Latino borrowers who may pose a low risk of default are denied access to the best-priced loans or denied credit altogether. Even Latinos acting financially responsible and avoiding debt are forced to pay more than necessary for credit or resort to "fringe" financial agents to gain access to money. These issues have more to do with the structure of the financial marketplace than with whether or not Latinos speak English or understand how compound interest works.
Finally, Hispanics, even those with good credit and a permanent relationship with a financial institution, face discrimination in credit markets. This can occur by direct and intentional discrimination against Latinos or as a result of lender policies that produce statistically uneven service levels depending on an individual's...
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