This column contains a correction.
The financial crisis has changed the way many Americans view the financial system. In a 2014 Gallup poll, only 26 percent expressed having “‘a great deal’ or ‘quite a lot’ of confidence in banks,” down from 41 percent in 2007 and a high of 60 percent in 1979.
That Americans deeply distrust the financial sector is not surprising given the scope of the crisis, during which 5 million families lost their homes to foreclosure and households lost trillions of dollars in wealth. Many families doubt their own basic financial security, with nearly half of all Americans unable to come up with even $400 in an emergency without borrowing or selling something, according to a recent Federal Reserve survey. The crisis had even more catastrophic effects on people of color: The relative wealth gains in communities of color during the 1990s and 2000s were largely reversed, with median net worth among African Americans and Latinos now only one-13th and one-10th that of white households in 2013, respectively.
Yet historically, the financial sector, coupled with effective public policy, has demonstrated great potential to help families move up the economic ladder. Following decades of relatively stagnant homeownership, New Deal-era housing policies led to an increase in the homeownership rate from 44 percent in 1940 to 62 percent in 1960. Many of these same policies, however, largely excluded communities of color and held them back from experiencing the same gains, contributing to the wealth gap that persists today.
In the wake of the financial crisis, new laws and regulations have brought about more sound financial practices. Since its creation in 2010, the Consumer Financial Protection Bureau, or CFPB, has taken nearly 800,000 complaints and provided more than $11 billion in relief to more than 25 million wronged consumers. Credit card reform alone has saved consumers more than $16 billion in fees, while keeping credit available to borrowers.
Regulators and policymakers should continue to prioritize responsible lending practices and consumer protections, despite repeated calls to weaken the CFPB and unfounded claims that new regulations are to blame for the decline of small banks. At the same time, they should examine the role of public policy in creating a more inclusive financial sector. To that end, here are five trends to watch over the coming years:
- The continued prevalence of wealth-stripping financial products. As the Center for American Progress noted in its 2015 report, “Lending for Success,” the hallmark of responsible lending is ensuring that loans are made with the expectation that borrowers have the ability to pay them back, without hidden fees or deceptive marketing. Postcrisis regulation has successfully ended many of the mortgage and credit card lending practices that violate this principle. Yet sound lending practices have not taken hold across all markets, such as auto lending and forms of small-dollar credit such as payday and auto title loans. And even as families accumulate wealth, they run the risk of losing their savings gradually through excessive investment fees or conflicting financial advice.
- The needs of an increasingly diverse population. By 2044, the United States will be a majority-minority nation. Yet communities of color have often fallen behind in both basic financial access—roughly one in five Latinos and African Americans, for example, lack bank accounts entirely—and aggregate resources. Between now and 2020, the majority of new homeowners are expected to be Latino. At the same time, potential young homebuyers face increasing wage stagnation and student debt. Financial products need to address a variety of financial needs. And they need to be culturally competent in order to build—or, in many cases, to rebuild—trust with the financial sector.
- Greater use of technology to access financial information and services. In nine states and the District of Columbia, more adults have access to cell phones than to bank accounts. These developments have the potential to expand access to services even in an era of shrinking bank branches. Meanwhile, online nonbank lenders and peer-to-peer networks have challenged the traditional roles of borrowers, lenders, and investors.
- A continued crunch in mortgage and small-business credit. Homeownership and starting a business have long been avenues to build wealth and upward mobility. Yet a recent Urban Institute study found that if mortgage lenders had followed the relatively moderate credit standards of 2001, prior to the boom and bust, 5.2 million more mortgages would have been made between 2009 and 2014.* Instead, entrepreneurship has fallen based partly on the decline in home equity—a traditional source of capital—and the limited availability of loans to small and microbusinesses.
- A more complex landscape of financial providers. Instead of relying on a single, local financial institution for all financial needs, consumers now face a bewildering array of choices, including prepaid cards that function like bank accounts and online loans from lenders located virtually anywhere. This landscape is governed by a complicated set of regulations and regulators or, in some cases, virtually no regulation at all. Consumers deserve consistency, transparency, and accountability when considering financial products; policymakers should consider how to support innovation while regulating based on what products do, not simply how they are structured.
As Americans’ financial lives and the products they use become increasingly complex, it is crucial that policies toward consumer finance continue to arc toward greater opportunity and mobility moving forward. Policymakers must take these trends into account to improve consumer confidence and once again make financial services a tool to help families move up the economic ladder.
Joe Valenti is the Director of Consumer Finance at the Center for American Progress.
* Correction, February 23, 2016: This column has been updated to reflect that 5.2 million more mortgages would have been made between 2009 and 2014 if lenders had followed the credit standards of 2001.
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Director, Consumer Finance