Every year, Community Development and Policy Studies (CDPS) researches issues that affect low- and moderate-income (LMI) communities in the Seventh District that relate to, among other topics, economic/worker mobility; access to competitively priced credit and financial services; small business development; health disparities by socio-economic cohort; bank closure/consolidation; and affordable housing availability. For example, in previous years survey respondents raised the issue of the mismatch between skills required by companies looking to hire and of prospective workers in their labor markets. Respondents also discussed local approaches by businesses and educational institutions to address these issues. In 2016, CDPS will again engage individuals whose work in LMI communities can help to address the challenges faced by lower-wealth, lower-income populations. One way in which CDPS will accomplish this is through online surveys. Our surveys will address workforce development, student loan debt, small business credit availability, mortgage credit availability, and affordable rental housing, among other topics. Survey respondents represent a broad range of voices from private and public sectors. This blog summarizes responses from the latest CDPS survey.
The first survey of 2016 had two questions that related directly to credit availability for small businesses and for people with low credit scores seeking mortgage credit. Almost all respondents agreed that business owners in economically struggling communities presently have difficulty obtaining traditional small business loans, and that mortgage credit is not available to prospective home buyers with marginal/below prime credit scores.
In response to the first question, two contacts pointed to Community Development Financial Institutions as organizations that can help small businesses obtain loans at reasonable rates. Most of the other contacts noted that small businesses would have to pay higher rates for financing and consider nonbank lenders because their business would be considered too “risky.”
Last year, the Chicago Fed published an article, Measuring Small Business Financial Health, that identifies “key drivers that are associated with businesses in a state of strong or weak financial health.” The paper’s objective was to explore a set of reliable metrics to determine financial health of businesses and raise awareness of information resources for entrepreneurs. The research revealed three key characteristics of financially strong businesses: 1) thorough knowledge of financial products available to small ventures; 2) ready access to credit through either banks, vendors, or otherwise; and 3) (longer) tenure, (larger) size, and (degree of) planning expertise.
For the second question, most contacts agreed that prospective home buyers who have marginal credit scores are unable to find mortgage credit. However, one contact mentioned that there are some lenders catering to borrowers with lower credit scores. Varying reports from trade journals indicate that borrowers with lower FICO scores (620 is often the lower limit for many lenders) may be able to obtain FHA mortgages or work with niche lenders that offer mortgages to higher risk borrowers.