Black History is American History and how can we leverage that history to improve lives. (Car Loans and Credit Scores).
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Since I have been posting on LinkedIn and other platforms, ?I have noticed a recurring theme: Tradition, history, and progress from that history. This seems to be most apparent when I read stories about people being the third, fourth, fifth and sometimes, six generation in their families to have owned something or attended a university as a legacy family member. By contrast, 3 generations ago in my family, my ?maternal grandfather was a sharecropper. ?These stories are thought of as being part of the American fabric. These stories typically begin with a family member, typically White, talking about when their ancestor(s) landed in America as an immigrant.
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Yesterday, a very good friend, Suneeta Eisenberg, posted a story about EVs and how African Americans own only 4.6% of all EVs in the state of Washington. Black/African Americans make up 4.6% of the more than 7.5 million people who live in Washington. This might be misleading in that EVs tend to be accessible to those in higher income brackets with higher credit scores. So, what is the process of buying a car and what are some of the barriers?
Since the 1970s, there has been a steady decline in Black homeownership in King County. ?King County is the largest populated county and most diverse with a Diversity Index of 65%[1]. The homeownership percent has fallen from a high of 50% in 1970, to 28% for the Black population in King County and the numbers are not that much better for Indigenous and Latino people. Additionally, the median value of homes is ?$200,000 less for Black and Latino homeowners verses White and Asian, but the value difference is even greater for Indigenous people, more than $400,000 less[2].
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How are home equity loans determined? First, the loan seeker must own a home: single, multi-family, condominium, and manufactured. The lender wants to know the value of the home, loan amount and the balance owed. The loan applicant’s credit score, employment status, ?and history of any bankruptcy in the past 3 years. ?A credit score of 720 or greater is considered excellent[3]. ?
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Credit scores are determined by two systems: ?The FICO ( Fair Isaac Corporation) score was founded in 1956 and has expanded to over 90 countries[4]. ??This score ranges from 300-850. This score gives heavier weight to homeownership and does not consider rental or utility payment history. The average FICO score for the US White population is 734, for the Asian population ?745, ?Latino is 701, and for Black/ African Americans it is 677. Since White and Asian people have higher homeownership rates, their FICO scores are higher, and since Black, Latino, and Indigenous people have lower homeownership rates, their FICO scores are lower on average[5].
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The other score is the Vantage Score.? This is a new consumer credit scoring model. This newer credit rating score competes with FICO.? FICO has an international reach and is listed on the New York Stock Exchange. This newer score was introduced by the three credit reporting agencies (Equifax, Experian, and TransUnion) in 2006 as an alternative to the FICO score. ?This score is also between 300-850. This score is said to use “machine learning” techniques to arrive at a more predictable and accurate score or picture of the consumer’s creditworthiness.? This score is based on 6 factors: Payment history weighted at 41%, Age/mix of credit at 20%, Credit Utilization at 20%, Credit Balance at 6%, and Available credit at 2%[6]. ?By comparison, the FICO score is calculated by looking at 5 factors: Payment history is weighted at 35%, Amounts owed at 30%, length of credit history at 15%, and credit mix and new credit at 10%. ?The Vantage score gives greater weight to payment history and less to credit utilization compared to FICO. Now, missing a payment can have a greater impact on the Vantage score and not as much on the FICO score. When applying for a car loan, the FICO score is the auto industry standard.
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Now, a credit score of? 400 or higher will allow the consumer to buy a car.? However, a score of 600 or better provides better financing options and the car can be purchased, in most cases, without a down payment[7]. A FICO score of 680 or higher gets the loan applicant a better interest rate, lower payments, and a smaller down payment; remembering that the average score for Black people is 677. The auto industry uses an adjusted range for the score that is 250-900 called the FICO Auto Score. This score focuses specifically on your ability to pay back debt. When buying a new car, a FICO Auto Score of 601-660 has an average interest rate of 9.29%, a score of 661-780 as an interest rate of 6.88%, and a score of 781 or higher has an interest rate of 5.61%. Scores between 300-500 have an interest rate of 14%. Now Super prime loan applicants, these are applicants with a score of 781 or higher, can have a 0% interest rate extended to them[8]. ??According to the National Consumer Law Center, the auto loan lending industry is riddled with disparities and problems for people of color. “… African American and Latinx consumers who purchased cars in person paid more than other consumers, and that 45% of the difference in price cannot be explained by income, education, or other traits.”, ?also, “A study by the National Fair Housing Alliance found that 62.5% of the time, the study’s test borrowers of color who were more qualified than their white counterparts received more costly pricing options from auto dealers, and that these borrowers would have paid $2,662.56 more over the life of their loan than the less-qualified white testers”.?and that ?“In a 2020 lawsuit, the FTC ?(Federal Trade Commission.)? took action against Bronx Honda for instructing salespeople to charge African American and Latinx consumers higher fees[9].” So, how can this information be leveraged to bring about greater change and access for Black Americans and people of color as a whole.
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In 2010, the Consumer Financial Protection Bureau (CFPB) was authorized as an extension of the Dodd-Frank Wall Street Reform and Consumer Protection Act. ?The CFPB? was created to “make consumer financial markets work for consumers, responsible providers, and the economy as a whole. We protect consumers from unfair, deceptive, or abusive practices and take action against companies that break the law. We arm people with the information, steps, and tools that they need to make smart financial decisions[10].” Additionally, one of its core functions is ?“Enforcing laws that outlaw discrimination in consumer finance[11].” If this is the case, then the home and car loan industry need drastic reform.? This has been known for decades and have seen very little movement to have equity and non-discrimination centered in the process. ?This agency could build a data base that consumers could use to have a better idea about what to expect , on average, when apply for a car or home loan.? They could place their income, FICO score, and car information, and down payment, along with the city and state where the car dealer is located. This data base would then be able to give the consumer an idea of what to expect in terms of the cost of the car, interest rates, and duration of the loan (3-6 yrs). ?Also, every voter/citizen of color should be screaming at elected leaders to take this discrimination head on and apply laws and/or plans to combat this and to not just agree that it is a problem because it has been a problem forever. Elected leaders at the state level should be challenged with coming up with a plan that actively combats this level of discrimination from the auto loan industry and banks.
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?The FICO score has been around since the late 1950s. It was designed and geared to give White citizens an edge. This was before the Civil Rights and Voting Rights Acts became law. The FICO score must have an equity lens applied to it.? What is stopping legislators from mandating that rental history and utility payments be included as part of this score and MUST be reported to all 3 credit reporting agencies and giving the CFPB regulatory authority to enforce these rules? Ultimately, one of the biggest ways to address this is to make the District of Columbia (D.C) a state. This would be the first time in American history that Black citizens are at the table with full bargaining power.? It is, in many respects, the true 40 acres and a mule and the subject for another article this month.
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It is hard to image buying an Electric Vehicle (EV), let alone a standard vehicle, when Black people must face this level of discrimination and racism in the process. It is time to truly start centering equity into these scores and auto loans. Right now, it simply cost more to own a car if you are Black in this country. How can the prospect of owning an EV ever be a reality if the process works against ownership from the start.
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The consumer agency, having rightly asserted its authority over nonbank auto lending, must now use its enforcement powers to put an end to abusive car loans.?Editorial Board, The New York Times. (2015)
Human Resources and Social Justice and DEI advocate
1 年How easy is it to buy a car and what does it cost? Well it cost more to buy a car, new or used, if you are Black.