In a move to try and make lending more accessible and transparent for moderate- to low-income individuals, the Dallas City Council approved Ordinance 3221, a “responsible banking ordinance” (RBO) that will allegedly hold certain banks “accountable” for the types of loans they make to people in these communities.
As reported by The Dallas Express, the RBO specifies that the financial institutions which currently are or want to be depositories for Dallas city funds must follow stipulations regarding their lending practices in certain demographics.
The ordinance reads, in part:
“In return for the privilege of safeguarding and investing the community’s wealth and doing business with the city, financial institutions have a continuing and affirmative obligation to serve the credit and other financial needs of all communities, including and especially minority and low- and moderate-income communities.”
In theory, RBOs are intended to leverage responsible loans, investments, and services from financial institutions receiving municipal deposits and other city business, according to a National Community Reinvestment Coalition report.
Lending is encouraged in all communities by federal law. Nevertheless, many banks choose not to service loans in some moderate- and low-income communities due to their higher risk profile on defaults, according to reporting by WFAA.
Lending money without properly checking affordability is known as irresponsible lending. To lend responsibly, a creditor must be confident that the recipient can repay the debt in full, on time, and without having to borrow more money.
Defaulting on a loan can damage more than just one’s credit score. For credit cards and personal loans, one can be taken to court, which could force repayment through wage garnishment, or a lien can be placed on their property, according to Leslie H. Tayne, a debt settlement attorney and founder of Tayne Law Group in New York.
“A default judgment is most likely if you ignore the lawsuit or don’t respond in a timely fashion,” Tayne said. “A judgment can happen even if you answer or respond to the suit but do not have a valid legal defense other than the inability to pay.”
The new ordinance is the first of its kind in Texas, and while it may be seen as a win for Dallas’ lower-income individuals in some ways, financial analysts suggest the measure also poses a risk to the bottom percentile of income earners. By extension, the financial institutions that lend to them must also assume risk.
With the recent 9.1% inflation report showing prices of food, gas, and rent rising, responsible borrowing becomes more difficult for lower-income Americans who typically turn to credit cards and financial loans to cover their growing expenses.
Consumers with low credit scores not only borrow more money but also default on their loans more often, a study by credit agency TransUnion found. In addition to half of credit card holders carrying a balance, many lower-income borrowers cannot keep up with payments. In June, personal savings rates for Americans hit their lowest level since the Great Recession.
“Many Americans already had a razor-thin financial margin for error,” said Matt Schulz, LendingTree’s chief credit analyst. “Thanks to skyrocketing inflation, any wiggle room those families had in their budget might just be gone.”
When lower-income Americans max out their credit cards, loans are the next place many of them turn.
In February, a record 8.8% of riskier borrowers — those with credit scores below 660 — were at least 60 days behind on a car loan or lease payment, and 11.3% of these borrowers were at least 60 days late for payments on personal loans and credit lines.
In April, riskier borrowers increased their usage of loans that do not require collateral. These borrowers’ balances rose 28% compared to the previous year. This riskier demographic now makes up 54% of all balances for unsecured personal loans, according to Moody’s economist Kyle Hillman.
Matthew Mish, head of credit strategy for UBS Investment Bank, argued that a “persistent rise in missed payments could lead banks and other lenders to pull back on lending to riskier borrowers.”
But, because of Dallas’ RBO, local banks wishing to house city funds would be hindered in their ability to do this.
Dallas City Council’s Economic Development Committee Chair Tennell Atkins was among those who supported the ordinance.
“We’ve got to invest in the southern part of Dallas,” he said. “Our bankers are big institutions to help us to trigger economic development in the southern part of Dallas.”
To date, 13 cities around the country have adopted similar RBOs. When Philadelphia enacted its own version of an RBO between 2008 and 2018, the city saw an 18% increase in low-income business loans.
According to the nonprofit Small Business Majority, previous opinion polling found that 90% of small business owners believed the availability of small business loans was a problem. More recent polling found that 77% of small business owners supported policies that would increase the amount of small business lending done by credit unions, and 62% supported policies that require banks to make investments in low-income communities.
The Dallas Express contacted Philadelphia’s City Treasurer Jacqueline Dunn to request additional information on the rate of defaults during the time it had an RBO but had not received a reply at the time of publication.