By: Alec Gorynski
Vice President of Community Development and Corporate Philanthropy
First National Bank
Credit is an important and powerful tool for consumers and businesses alike. Access to the capital that credit provides facilitates the purchase of critical assets that otherwise would not be possible or even logical. Think of how your personal life would be different if you were unable to obtain a mortgage, student loans, or even a credit card. For most middle class Americans that would mean we could not own a home, send our children to college, or have access to cash in emergencies. Likewise, imagine how a local bakery would be affected without a loan to purchase baking equipment, a line of credit to buy ingredients, or be able to expand a booming business.
While credit is a necessary tool that can also be leveraged to make our lives possible, access to credit is not a reality for everyone. The 2015 FDIC National Survey on Unbanked and Underbanked Households (FDIC, 2015) revealed that 28 percent of households do not use credit and that 8.2 percent of households use nonbank credit such as pay day loans. The survey also concluded that lower-income households, among other demographic groups, were more likely to use nonbank credit such as a payday loan or not use any credit all. Denied credit applications, feeling discouraged about applying, or falling behind on bills were the primary drivers of this disparity.
The scenario is similar for low-income entrepreneurs who have dreams of owning their own businesses. Data shows that an unmet need for bank credit among aspiring entrepreneurs in predominately underserved communities forces business owners to obtain more expensive loans that eat up their profits. Even more discouraging is that many fail to meet the criteria to qualify for financing in the first place.
Access to credit is a critical tool that can help strengthen our communities, especially when it is available to all citizens. When used responsibly, credit enables individuals and businesses to build wealth and improve financial health. Research shows that the main driver of wealth for everyday Americans is their ability to own their own home. When one is able to qualify for a mortgage loan to purchase their home, they are reinvesting in themselves by building equity each time they make a mortgage payment. As property values tend to increase over time, the equity increases even more, creating a positive effect on net worth. When one has a sense of wealth, they are more likely to spend money on their needs and wants while fueling the local economy. Homeownership has a compounding impact on the neighborhood as a whole; homeownership fosters greater stability brought forth by improved maintenance, longer tenure, and a collective improvement in property values. On the flip side, if an individual who wishes to own a home and experience the benefits of home ownership is only able to rent, they won’t have the opportunity to build the equity that will positively impact their net worth. And since the incidence of homeownership, on average, decreases at lower income levels, many of these families are less likely to build the wealth necessary to help their children exit the cycle of poverty. Neighborhoods then do not experience the stability and growth seen by those with higher homeownership rates, and they will continue to deteriorate.
As a mortgage helps build wealth, lines of credit and credit cards help us deal with life’s inevitable ups and downs. Responsible use of a credit card enables individuals absorb negative impacts of an unexpected expense or take advantage of a purchase opportunity that would otherwise not be possible when relying on liquid cash available or without dipping into savings. Credit cards enable people to pay for the expense over a period of months. When access to credit is used responsibly over a period of time, it helps to build an individual’s credit score. A good credit score enables people to continuously obtain more credit and can even help them obtain employment. This reality is not always the case for individuals and families on the lower end of the income spectrum. When in a bind, these individuals will turn to alternative sources that ultimately cost more and are difficult to repay. When caught in this repayment cycle, it consumes cash that could otherwise be saved or used to cover future expenses.
An entrepreneur or small business owner can also be impacted by the ability or inability to access credit. Credit is a necessity for businesses to operate and grow as it can support purchasing equipment and supplies, it can fund the proper management of inventory, it can allow businesses to improve technology to enhance operations, or even purchase real estate. When a businesses in unable to access the credit, they are unable to get started, operate, and grow.
Banks are critical institutions in providing the credit necessary to help consumers, businesses, and communities realize its positive effects. Deposits in banks enable them to provide the loans that ultimately result is growth, economic activity, wealth creation, and community success. Where banks are unable to provide credit, generally due to regulation or risk concerns, there are multiple nonprofit organizations that can either improve an individual’s credit profile, or even provide direct access to credit in the interim. These include credit counseling organizations and Community Development Financial Institutions to name a few:
Rebuilding damaged credit is much harder than building established credit. Years of delinquent payments or even identity theft can take twice as long to repair. Many nonprofit organizations offer credit counseling services which provide individuals with the direct assistance and personal coaching necessary to build or improve credit as well as saving, spending, and money management skills. Operation Hope, a national nonprofit that provides economic empowerment for adults and youth, offers credit counseling in partnership with local bank branches. Here, clients can boost their credit score which will help them reap the benefits of good credit, such as employment or access to loans.
A consumer loan, such as a home loan, auto loan, or a small dollar loan, can mean the difference between owning a home or not, or even paying a bill or not. Access to credit from a traditional financial institution is not always feasible. Nonprofit Community Development Financial Institutions (CDFI) fill a gap and satisfy credit needs at lower income thresholds. As a result consumers across the income spectrum are given the chance to own a home and build equity, or just help cash flow in times of need. Here in Omaha, NE, for example, Omaha 100 provides home mortgage loans to low-income borrowers with sub-prime credit scores. Since originating its first mortgage in the late 1990s, Omaha 100 has disbursed more than $65MM in home mortgages to more than 1,000 low income families. Similarly, the Community Loan Center in Brownsville, TX offers low-interest, low-fee personal loans to consumers in need of cash in crunch time; times in which families with access to credit would use a credit card or a home equity line. These loans offer reasonable terms that enable the family the repay the loan. In addition to providing credit, these institutions often report to the credit bureaus. As a result, the use of these CDFIs can also help improve credit, moving the individual closer toward a banking relationship with a traditional financial institution.
Small Business Lending
Much like in the consumer lending space, small businesses are sometimes unable to secure the capital needed to start or expand. A lack of business history or financial challenges makes it difficult for traditional lenders to provide credit. Again, enter the Community Development Financial Institution (CDFI). In the small business arena, CDFIs provide loans to purchase equipment, manage inventory, or just start-up operations. The impact is not only realized by the business owner, but also by the community when jobs are created and income generated. The Colorado Enterprise Fund, for example, provides business loans from $1,000 to $500,000 to low-income entrepreneurs starting or operating a small business. Since its inception the Colorado Enterprise Fund has originated $73MM in loans resulting in the creation or retention of over 19,000 jobs.
It is evident that credit is necessary for both our short-term financial health and long-term financial success. With the ability to improve credit scores, or have access to the loans necessary to improve financial success, low and moderate income families can make significant strides in exiting the generational pull of poverty. Financial institutions are in a unique position to expand on their purpose of providing credit for their local communities by providing support for these important community institutions. There is obviously a belief in and passion for the power of credit, and the challenge comes is being able to provide loans when regulation limits certain activities. Partnering with nonprofit organizations that engage in credit counseling and issue loans in places financial instructions can’t is a genuine and impactful way to distribute credit to every corner of the community. Partnership can mean any number of things, each adding their own value. Banks should consider:
- Making investments or loans to Community Development Financial Institutions: while CDFIs can lend, they cannot raise deposits. Leveraging the balance sheet of local financial institutions is a great way to raise the capital necessary to provide loans in these critical areas. It’s important to consider alternative loan terms, so that the CDFI can have flexibility to lend over an extended period of time. Philanthropic foundations are also a great ally of CDFIs, providing Program Related Investments (PRI) directly into the loan pool. CDFIs are quality lenders, and due to the relationship and supplementary support they provide to their borrowers, repayment rates are high and losses low.
- Awarding donations or grants to credit counseling programs: as is the case with most nonprofit organizations, credit counseling and other financial empowerment organizations rely on donations and grants to be able to operate. When a bank provides financial support to these organizations, they are making a philanthropic investment into the future of their company. With these resources, credit counseling organizations have a track record of improving credit scores. As a result, their clients will be more likely to be a successful bank customer in the future.
- Volunteering: Like donations, volunteers are necessary resources for our nonprofit partners. Credit counseling organizations and CDFIs are unique in that they need volunteers with knowledge, skills, and abilities in personal and business finance. Bank employees are valuable assets when they serve on loan and credit committees, or even teach courses on various financial topics.
- Using your operations: For a bank, servicing a loan or even having an office is not a tremendous burden or at least one that can be reasonable absorbed. Due to their size and dependence on financial support, CDFIs and other nonprofit financial empowerment organizations would greatly benefit from the pro-bono support of local banks. Stepping up to service a loan portfolio or providing an office for a local credit counseling organization would go a long way in maintaining the stability and ultimately the impact of these necessary community partners.
Credit is a powerful tool that can play a significant role in the success and individual, and company, and the community at large. It opens doors for individuals and businesses to build wealth, manage through rough patches, and reach financial goals. When each individual and company has the ability to thrive, the entire community succeeds. The inability to obtain and/or manage credit responsibly can contribute to a vicious cycle of poor financial health, failed businesses, and poverty. In turn, the entire community suffers. Banks and their nonprofit partners have the ability and a responsibility to create proprietary and partnership solutions that ensure all members of a community have the access to credit they need in order to live prosperous lives.
About the Author:
Alec Gorynski serves as the Vice President of Community Development and Corporate Philanthropy for First National Bank and President of the First National Community Development Corporation, both located in Omaha, Nebraska. First National Bank is the largest privately-owned bank in the United States, with over $20BB in assets across 7 Midwestern states. First National Bank reinvested over $26MM back into its local communities in 2017, with an active portfolio of over $88 million in investments, much of which is focused on building financial health and credit with CDFIs and other nonprofit partners. In his role he heads the bank’s efforts to be an agent of positive change in its footprint communities through philanthropy, investing, leadership, and the use other bank tools across its seven-state footprint. Complementing his professional experience Mr. Gorynski is a co-founder and board member of Spark – a community development intermediary; past-president and Treasurer of Omaha 100 – a nonprofit CDFI; and holds board and sub-committee positions with the Nebraska Arts Council, the Omaha Community Foundation, and InCommon Community Development. He holds a Masters of Public Administration from the University of Nebraska at Omaha, and Bachelor of Science degrees in Psychology and Criminal Justice from Peru State College.