Low-to-moderate-income Research Articles

Machine learning Bureau score for Home Lending in an American finance company

Our client is a leading provider of mortgage financing, originating loans and lines of credit to consumers in the US. Currently, they receive applications where applicants provide personal information and a soft pull of their FICO score is requested. That score is used to evaluate the applicant’s credit worthiness and determine conditional approval and the type of product available for the customer, including conventional, FHA or other mortgage loans. After conditional approval, a formal application is initiated, and underwriters review the information to determine the final application decision. When evaluating applications below regulatory and business thresholds, the company has the intention to approve more applications and increase loan volume, and there is an expectation that through the enhanced credit assessment, our client will improve the percentage of Low to Moderate Income (LMI) population able to obtain mortgage loans. Both aspects have a direct impact on the reputation and economic profits of the firm, so they are of pressing importance to the company. This project aims to build an applicant-level bureau-only score based on upgraded bureau internal attributes. This score will eventually serve as the basis for evaluating a customer’s credit risk before any loan structure or collateral information is considered. It will be used as a standalone score that can be used in the initial customer evaluation to identify better leads (mortgage inquiries for preapproval) and as input to a future application-level model.

Community-centric distributed energy resources for energy justice and decarbonization in dense urban regions

Low-to-moderate income (LMI) households suffer from higher energy cost burden as they spend a larger portion of their income on electricity bills than higher-income households due to factors including limited access to renewable energy. Although distributed energy resources (DERs) can be owned by individuals, supposedly enabling energy justice, reality shows otherwise since it requires capital investment and property ownership. To mitigate these barriers, the paper proposes “Community Energy Cells” (CECs) which consists of a group of DERs and controllable loads in proximity, represented by a Cell Aggregator (CA) as a single controllable entity. CECs can operate independently during disruptions, deploy renewable energy to LMI households, and provide multiple value streams for their DERs, including the option to aggregate and sell in the wholesale energy market. A financial case study using National Renewable Energy Laboratory’s (NREL) System Advisory Model (SAM) was performed focusing on select buildings in West Harlem, New York City, with approximate 2.5 MW solar and 15 MW storage potentials. Considering that their CA benefits from investment tax credits, and the costs including installation and electricity purchase, it has a net present value of over $2 M, an internal rate of return of 35 % after 25 years, and sufficient cash flow to cover debt service. These returns are sensitive to key values: battery price and committed capacity for incentive programs for DERs and loads. The realization of CEC has interdisciplinary challenges that the paper elaborates on. Nevertheless, CEC is indispensable for tackling climate change and resiliency while attaining energy justice.

Whose Neighborhood Needs? Assessing the Spatial Distribution of Federal Community Development Funds

Local governments must balance their growth ambitions against needs arising from social inequities. The Community Development Block Grant (CDBG) program aims to redress these disparities by directing funds toward disinvested tracts. We ask whether a city's institutional design, public and private actor composition, and resource availability influence the decision to invest in communities with greater levels of social need. Utilizing a social equity framework, we connect place-level procedural fairness mechanisms with neighborhood-level access equity consequences. Combining U.S. local government survey data over two decades with census tract-level CDBG expenditures, we find that in neighborhood where 51 percent or more of the families are low-to-moderate income (LMI), its likelihood of receiving funds increases with its share of LMI population relative to the city's, but at a diminished rate compared to non-LMI tracts. Further, city-level factors moderate this relationship (e.g., including community development corporations in planning processes).

Does Giving CRA Credit for Loan Purchases Increase Mortgage Credit in Low-to-Moderate Income Communities?

Under the Community Reinvestment Act (CRA) banks can fulfill their affirmative obligation to meet local credit needs by lending in low-to-moderate-income (LMI) communities or by purchasing loans made by others. This paper evaluates whether giving CRA credit for purchases has had its intended effect of increasing LMI credit availability by making LMI loans more liquid. Analyses using a regression discontinuity design show that CRA increases loan purchases without affecting LMI originations. Instead, banks purchase loans that are temporarily diverted from the Government Sponsored Enterprises, which provides little benefit to the communities the CRA is meant to help.

The solar influencer next door: Predicting low income solar referrals and leads

Increasing the adoption of solar among low-to-moderate income (LMI) households remains an important policy goal because of its promise to simultaneously reduce energy burden and support the just distribution of benefits of renewable energy. However, scaling LMI solar remains challenging due to affordability and access issues. Most existing LMI adoption has occurred under public-funded programs, highlighting the importance of increasing the cost-effectiveness of these programs at scale. We develop a new household-level data set on LMI solar lead acquisition, referrals, and adoption to understand the processes through which LMI solar uptake has occurred in California. Then, we develop models to predict two sub-mechanisms in the solar adoption process: whether an otherwise qualified lead becomes “lost” i.e. non-responsive to outreach and, for existing clients, whether they refer solar to others. For the program analyzed, participants received their solar system at no cost, which deemphasizes economic drivers of solar adoption and could differ from other program experiences. Both models substantially improved the accuracy of prediction relative to a baseline. Overall, we find that peer effects and solar economics are important to predicting referrals, and household demographic factors in lead loss prediction. Finally, we find that referrals are both the highest quality and largest source of LMI solar leads, providing a promising mechanism to expand LMI programs further.

Color and credit: Race, regulation, and the quality of financial services

The incidence of misselling, fraud, and poor customer service by retail banks is significantly higher in areas with higher proportions of poor and minority borrowers and in areas where government regulation promotes an increased quantity of lending. Specifically, low-to-moderate-income (LMI) areas targeted by the Community Reinvestment Act have significantly worse outcomes, and this effect is larger for LMI areas with a high-minority population share. The results highlight an unintended adverse consequence of such quantity-focused regulations on the quality of credit to lower-income and minority customers.

More alike than different: Profiles of high-income and low-income rooftop solar adopters in the United States

The U.S. residential rooftop solar market has seen rapid growth in the last decade, much of it concentrated among higher-income households. To address inequities in solar access, a growing number of policies aim to put solar on the roofs of low-to-moderate income (LMI) households. As much of the extant literature on solar adoption is based on the behavior of wealthier and more highly-educated households, questions arise about how to best reach potential LMI adopters. Do the same factors guide their decision-making, or do LMI households have fundamentally different motivations and barriers? To answer these questions, this study surveyed over 500 low-income adopter households in California who received their PV systems for free through a nonprofit. Their responses were compared to those in an existing dataset of high-income PV adopters in the same state. Results suggest that high-income and LMI solar adopters are more alike than not. Both groups are drawn to novel goods and have strong pro-environmental norms, with LMI households scoring slightly higher on these measures. The relative importance of different motivations for and barriers to getting solar were also similar. Taken together the results suggest that even when PV is highly-subsidized, it may be most attractive to people who fit the profile of “early adopters.”

Color and Credit: Race, Competition, and the Quality of Financial Services

The incidence of mis-selling, fraud, and poor customer service by retail banks is significantly higher in areas with higher proportions of poor and minority borrowers and in areas where government regulation promotes an increased quantity of lending. Specifically, low-to-moderate-income (LMI) areas targeted by the Community Reinvestment Act have significantly worse outcomes, and this effect is larger for LMI areas with a high-minority population share. The results highlight an unintended adverse consequence of such quantity-focused regulations on the quality of credit to lower-income and minority customers.

Options for Short-Term Credit in the United Kingdom

Banks in the United Kingdom are unable to make profitable short-term, low-value loans to low-to-moderate-income (LMI) consumers because of increasing regulatory constraints, reputational risks, inflexible legacy information systems, and required investments in new technologies (such as mobile banking). We provide an empirical analysis of consumer loan products from various UK lenders and provide a model showing that the risks and costs associated with these products often outweigh the revenue derived from offering them. These findings show that alternative financial services, such as payday loans and home credit, are increasingly valued by LMI consumers and provide benefits to an under-served market, from which banks continue to exit. We present a bleak outlook for future participation by high street banks in the LMI market.

Improving College Progress among Low- to Moderate-Income (LMI) Young Adults: The Role of Assets

Little is known about the impact of assets on low- to -moderate-income (LMI) young adults’ college progress. In this study college progress refers to young adults who were currently enrolled in, or who have a degree from, a 2-year college or a 4-year college. Findings from this study suggest LMI young adults with school savings were more than three times as likely to be on course than LMI young adults without any savings or who had savings but had not designated any of it for school. In regard to net worth, we found no evidence to suggest that higher amounts of negative net worth were statistically significant; however, high positive net worth was associated with LMI young adults college progress. Findings suggest policy instruments designed to assist adolescents to save such as universal Child Development Accounts may be a simple and effective strategy for helping to keep LMI young adults on course.

Beyond Race and Gender: Financial Access to Low and Moderate Income Households

Checking accounts with an overdraft protection line of credit can be seen as the first steps in accessing credit for some households, specifically for Low- to Moderate-Income (LMI) borrowers. In this paper, we assess a lender’s decision to grant LMI consumers an overdraft protection line of credit for their checking account, and the extent to which LMI borrowers bounce their checks once approved for an overdraft protection. Based on a sample of over 19,000 households, we find that banks are more likely to deny credit to their current LMI customers, controlling for an individual's income and credit risk characteristics. Low and moderate income customers also receive about $1100-$1500 lower overdraft line of credit. However, based on their ex post performance, they are not significantly more likely to bounce a check than higher income households.

Just Keep My Money! Supporting Tax-Time Savings with US Savings Bonds

This paper reports the results of a 2007 experiment testing whether specific process simplification can foster increased take-up rates for savings products, particularly by low-to-moderate income (LMI) households. Tax refund recipients at certain H&R Block tax preparation offices were given the option to purchase US Savings Bonds with their tax refunds, augmenting the tax-site savings options offered by H&R Block. Those who received the savings bond offer were substantially more likely to purchase a savings product on-site than those who didn't, even after controlling for client demographics. Much of this take-up was directed at intra-family gifting, or asset building on behalf of children. (JEL D14, H24)

Just Keep My Money! Supporting Tax-Time Savings with US Savings Bonds

This paper reports the results of a 2007 experiment testing if specific process simplification can foster increased take-up rates for savings products, particularly by low-to-moderate income (LMI) households. Tax refund recipients at certain H&R Block tax preparation offices were given the option to purchase U.S. Savings Bonds with their tax refunds, augmenting the tax-site savings options offered by Block. Those who received the savings bond offer were substantially more likely to purchase a savings product on-site than those who didn’t, even after controlling for client demographics. Much of this take-up was directed at intra-family gifting, or asset building on behalf of children.

The informal financial sector in the U.S.: The role of remittances

We investigate the interdependence between being unbanked and the decision to remit. Using data from our survey of the low-to-moderate-income (LMI) Hispanic community in a major U.S. metropolitan area, we find that higher income, more education, and greater proficiency in English decrease the probability of being unbanked. A key result is the positive correlation between latent factors that affect the decisions to remit money and to be unbanked. The presence of both institutional and self-selection factors in the decision to not open a bank account sheds light on the kind of policies that need to be implemented to bring the unbanked into the financial mainstream.

Low‐ to Moderate‐Income Lending in Context: Progress Report on the Neighborhood Impacts of Homeownership Policy

This article presents an interpretive progress report on the neighborhood‐level effects of homeownership policy. The expansion of targeted lending initiatives has created unprecedented opportunities for ownership among low‐ to moderate‐income (LMI) families, racial and ethnic minorities, and other populations once excluded from the nation's mainstream housing finance system. The article uses a two‐stage strategy to provide a more accurate progress report on efforts to expand LMI homeownership. First, it uses home‐purchase data for the 40 largest metropolitan regions to identify a set of “best‐case” neighborhoods that experienced the greatest quantitative increase in LMI lending during the middle 1990s. Second, it assesses the nature of these places qualitatively. The approach allows one to evaluate the degree to which increased LMI lending provides genuine opportunities for affordable homeownership—or unleashes other processes that conflict with the goals of affordability and sustainable neighborhood development.