Credit Scores & Indians: Recent Evidence on the Prevalence of Low Scores & Borrowing

Low-income individuals are less likely than their wealthier counterparts to invest in long-term assets and educational attainment. To some extent this might simply reflect the preferences of this population. On the other hand, it may be indicative of significant obstacles that prevent poorer individuals and households from creating wealth for themselves and ultimately their communities. Borrowing and access to capital is an important means by which most individuals and households are able to buy homes, automobiles and send their children (and themselves) to school. While it is quite well documented that American Indians residing on reservations tend to be poorer than the average American citizen, we know very little about the use of credit and creditworthiness of this population.

Recent research by Dimitrova-Grajzl et al (2015) provides a useful examination of credit scores and the types of borrowing that occurs for residents of American Indian reservations. Their research uses confidential-use Equifax data that indicates both credit scores and types of outstanding loans at the US Census Block level. In the figure below, they show that the average Equifax Risk Score (“credit score”) for individuals living completely within the borders of an American Indian reservation is about 30 points lower than individuals living in adjacent, nearby or regions that straddle the reservation areas. Importantly, they note that the average credit scores is almost always below 660 over the years in this dataset.  That threshold indicates that an individual is a sub-prime borrower and often faces significant obstacles when applying for loans of any type.

Source: Dimitrova-Grajzl  et al (2015)

In other analysis, the authors control for the characteristics of the Census blocks using data from the US Census and the American Community Surveys. The authors include measures of average education level, employment level, income level. They find that these measures do not always have a strong effect on credit scores. Additionally, when they control for the percent of the Census block that is American Indian, they find that this variable has a statistically significant and negative effect on average credit scores. This is some suggestive evidence that there may be other things at work in determining credit scores for individuals residing on reservations other than pure economic measures. While the authors are not able to establish discrimination as the reason for the observed results, it remains a possibility.

From a policy perspective, the research indicates the importance of existing Community Development Finance Institutions (CDFI) which tend to work within American Indian and other Indigenous peoples’ communities. These organizations are often operated by American Indian organizations; the CDFIs fill a role that is often unmet by commercial banks or lending institutions. These organizations provide a means for those residing on reservations that face several economic and financial obstacles to borrowing to gain credit and borrowing experience. In the US today there are over 68 CDFIs serving Native American communities that have average loan sizes below $30,000 suggesting that these institutions are serving the lowest end of borrowers. Additionally, there are over 18 Native-owned banks in the US. If discrimination persists in borrowing and lending, these institutions may play an important role in remedying this problem for Native Americans seeking credit.

Tribal governments have already undertaken direct lending and loan guarantee programs themselves that serve their tribal citizens. These programs are important in helping reservation residents establish credit as well as providing access to credit. Coupled with training programs in financial literacy (as those offered by Oweesta Corporation) these opportunities should improve the credit history and credit scores of those residing on reservations. Tribal leaders and policy makers interested in expanding opportunities for Native American asset creation would do well to increase their support for Native CDFIs and training opportunities.

Dimitrova-Grajzl, Valentina, Peter Grajzl, A. Joseph Guse, Richard M. Todd. 2015. “Consumer credit on American Indian reservations.”Economic Systems, 39, pp. 518-540.

Randall Akee (Native Hawaiian) is an Assistant Professor in the Department of Public Policy and American Indian Studies at UCLA. Dr. Akee completed his doctorate at Harvard University. He also spent several years working for the State of Hawaii Office of Hawaiian Affairs Economic Development Division. He has conducted research on several American Indian reservations, Canadian First Nations, and Pacific Island nations in addition to working in various Native Hawaiian communities. Follow me on twitter at: #indigenalysis

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Bankruptcy numbers down but other debt options increase

This is despite the bankruptcy term falling from three years to one year from January 29 last.

The Insolvency Service said there was a rise in other debt options, which people may have opted for instead of seeking to be declared bankrupt.

In the first three months of this year a total of 111 people were declared bankrupt.

This was down from 162 in the same three-month period last year, and a decease on the 142 who were adjudicated bankrupt in the final three months of last year.

The fall in bankruptcy numbers comes as there was a 26pc surge in new applications for personal insolvency applications (PIAs), the solution designed to keep people in their family home.

Changes in the law mean that homeowners that have had a PIA voted down by their bank can now appeal this to the courts.

Director of the Insolvency Service Lorcan OConnor said: The 26pc growth in PIA applications is likely due to the newly introduced court review process, sometimes referred to as the removal of the bank veto.

He said the fall in the number of bankruptcies may reflect the fact that indebted people are instead opting for other insolvency deals, such as PIAs.

Some 169 PIAs were approved in the first three of this year. This is up 31pc on the same period last year.

And there was a rise of 40pc in the number of debt settlement arrangements (DSAs) to 60 in the January to March period. A DSA is a settlement with lenders to repay a portion of unsecured debt over a five-year period.

However, there was a fall in the number of debt relief notices (DRNs) to 71 in the first three months of this year. A DRN provides for the write-off of up to EUR35,000 of unsecured debt over a three-year period.

Meanwhile, personal insolvency practitioners (PIP) have been successful in a number of appeals of personal insolvency arrangements that were vetoed by lenders.

Pip Kerry ONeill of R Hendy and Co got the high court to overturn a insolvency arrangement rejected by Pepper, as agent for Pentire Property Finance.

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Evanston provides a year of free protection services, monitoring to employees after mishandling tax information

Evanston will provide free, year-long identity theft insurance and credit monitoring to employees whose tax information was accidentally revealed in the mail.

Marty Lyons, Evanston’s chief financial officer, told members of City Council’s Administration and Public Works Committee on Monday that in addition to the employees’ social security numbers being displayed through the envelopes’ windows, the envelopes themselves were not properly sealed and were even unsealed in some cases. Lyons said he received one of these unsealed envelopes.

Employees who were impacted will have the chance to sign up to receive free credit monitoring and insurance to make sure nobody is accessing their information, Lyons said. Employees can sign up until  April 7, 2017.

“We hope (employees) take advantage of the offer to employ the security services,” Lyons said.

David Ellis, a retired Evanston firefighter and paramedic, told council members at the meeting that as a result of the exposed information on the tax forms, there were attempts to hijack information from some active firefighters and establish credit under their names. Ellis urged city officials to find a backup protection service to safeguard employees’ information for future instances.

Retired Evanston police officer Timothy Schoolmaster also received an envelope displaying his social security number, and he expressed his “dismay” toward the city’s handling of the forms at the council meeting later Monday night.

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Beleave (C.BE) wraps up PP and debt settlement

Beleave (CSE: BE, Forum) bolstered its books when the company announced today that it had completed a private placement financing for gross proceeds of $439,300.90 on the issuance of 1.46 million units with each unit consisting of one common share and one common share purchase warrant.

According to the news release, the common share purchase warrants are exercisable at a rate of $0.50 per warrant for a period of two years after closing. A company director has also participated in the financing.

The release went on to note that the company also closed a shares-for-debt transaction with related parties and other parties of the company where Beleave will issue common shares at a price of $0.30 per share for the settlement of the amounts owing to such creditors. As a result, the company has settled $261,297.50 of existing debt with the issuance of 870,992 debt settlement shares.

Certain creditors are directors and/or officers of the company. All issuances are still subject to regulatory approval.

Shares in the Flamborough, Ontario-based company were down 2.63% on minimal trading.

Currently there are 17.3m outstanding shares.

FULL DISCLOSURE: Beleave is a Stockhouse Publishing client.

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Payday Lending: Will Anything Better Replace It?

Fringe financial services is the label sometimes applied to payday lending and its close cousins, like installment lending and auto-title lending–services that provide quick cash to credit-strapped borrowers. It’s a euphemism, sure, but one that seems to aptly convey the dubiousness of the activity and the location of the customer outside the mainstream of American life.

And yet the fringe has gotten awfully large. The typical payday-lending customer, according to the Pew Charitable Trusts, is a white woman age 25 to 44. Payday lenders serve more than 19 million American households–nearly one in six–according to the Community Financial Services Association of America, the industry’s trade group. And even that’s only a fraction of those who could become customers any day now. The group’s CEO, Dennis Shaul, told Congress in February that as many as 76 percent of Americans live paycheck to paycheck, without the resources to cover unexpected expenses. Or, as an online lender called Elevate Credit, which offers small loans that often have triple-digit annualized interest rates, put it in a recent financial filing, “Decades-long macroeconomic trends and the recent financial crisis have resulted in a growing ‘New Middle Class’ with little to no savings, urgent credit needs and limited options.”

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Why Getting Money Back on Your Taxes Is a Bad Idea

Many folks get excited about tax time for the sole purpose that they know theyll be receiving a big refund check.

But is getting a refund on your taxes really in your best interest, or is it just taking money out of your pocket?

Here are three reasons why its a bad idea to get a tax refund, and how you can manage your paycheck deductions in a way that better serves your financial needs and wants.

1. Youre Allowing the Government to Borrow Money from You Interest-Free

Yes, you heard that right. Every time you situate your tax deductions to where youre receiving a refund in the spring, you are lending your money to the government interest-free. Most banks dont allow such a generous business deal with your mortgage or personal loans, and you shouldnt either.

By lowering your deductions and receiving more money in your paycheck each week, you can put that money to better use and budget it to help increase your personal wealth.

2. Youre Missing Out on Wealth-Building Profits

By lowering your deductions so that you come out even at tax time, you are putting more money in your pocket each week that can be used to build wealth. How can you use that extra money to increase your net worth?

  • To pay down debt. Every time you pay down debt, you reduce the amount of dollars youre paying in interest each month to lenders, putting more money in your pocket.
  • To automate savings. Whether you put it in a retirement account such as a 401(k) or IRA, or into a non-retirement mutual or index fund, by taking the money that was being loaned to Uncle Sam and investing it, youre increasing how much money you have working for you each month.

Instead of setting up your paychecks to get a large tax refund, lower your deductions and use the extra money each month to invest in growing your net worth.
3. You Could Be Tempted to Spend That Money Frivolously

When getting a large windfall such as a tax refund check, its very easy to view those dollars as extra money and make plans to spend it on nonnecessities such as a vacation or recreational purchases.

The stress of working all year and the winter blues can coax your mind into believing that the best use for a tax refund is some fun in the sun or a new and shiny something.

Instead of being tempted to blow that money on nonessentials, break up the extra cash by putting it back into your paycheck where it belongs and use it for something that will benefit you for the long term.

When a Large Tax Refund Can be a Good Idea

In very rare cases, situating your deductions so you get a large tax refund can be beneficial. If you have a hard time disciplining yourself to set up an automatic savings plan and are certain youll blow the extra money in your paycheck that comes when you decrease the amount of tax money youre paying in, you might be better off receiving a refund, but heres the caveat:

Its only worth receiving a large tax refund if youre certain youll use that money for wealth-building moves like paying down debt or investing wisely.

If you cant be certain you wont blow the money on nonnecessities, youre better off receiving the larger paycheck and coming out even at tax time.

It all comes down to knowing yourself well enough to know what your level of discipline is. From there, you can adjust your tax deductions in a way that balances your self-discipline with your desired level of wealth growth.

How to Adjust Your Income Tax Withholding Amount

If you work for an employer, you can adjust your tax withholding amount by making a quick visit to your companys Human Resources department or, in some cases, by visiting your online benefits website.

If youre self-employed, simply reduce the amount of money you send in with your estimated quarterly tax payments.

Its important when adjusting your income tax withholding amount that you dont over-adjust and end up paying in at the end of the year, however. So when making those adjustments, be conservative and then reduce the amount youre paying in taxes by even more the following tax year if you find youre still getting a bigger tax refund than youd like.

You work hard each day for the income you earn, so its important to make sure your money is working just as hard for you. One way to be sure thats happening is to situate your tax withholding dollars in a way that ensures you keep as much money in your wealth-building arsenal as possible.

The more cash you have each week to reduce debt and build wealth, the faster youll reach your financial goals.

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Pratt High students learn about the financial future

If high school juniors and seniors have a plan for the future, it may stop at the next level of education or the career that follows. Last week at Pratt High School, however, some students showed they have a longer term in mind theyre already thinking about putting away money for retirement, or maybe they were prompted to do so at a financial literacy workshop.

Several community bankers, insurance agents and financial representatives met in small groups with students to discuss a variety of topics that are important to them now or will be in the future.

Marsha Taber, branch supervisor at Central Kansas Credit Union, talked about car loans. Everyone wants a car fast, red and sporty, she suggested so students were interested and a few had some knowledge about how to make ownership a reality.

One young man in her session is a co-signor on a loan with his mother, who is an employee at a local bank. Thats an important step for him; hes beginning to establish credit, Taber said.

The sessions building a budget, obtaining a credit card, building credit, insurance, investments and student loans are extremely important to students near the end of their high school years. The conversations need to begin at home, Taber said, but workshop leaders brought a level of expertise parents may not have.

The first credit card is a good way to build a credit history, but if you dont treat it right, it wont be a good history. Brian Schrag, senior loan officer at The Peoples Bank, taught two sessions: one on building credit and another on building a budget.

He gave the students some numbers for the budget that would be representative of a family, and kept it tight enough they had to make choices between needs and wants.

Do you want a cell phone that will just let you make calls, or all the bells and whistles? The basics in TV service or all the sports channels?

They all seemed to understand how little a paycheck is and how hard you work for it, Schrag commented.

Dakota Holtgrieve, financial advisor for Edward Jones, commended David Schmidt, curriculum director for USD 382, who put the workshop together and suggested that next year, the students come to the businesses, rather than representatives going to the school. They would get a better feel for the work environment if thats a career interest, and he has resources at the office that he didnt take to the commons area of the high school.

He talked to the students about a very defined process in planning for the future and the need for discipline. In the United States, the average retirement account balance is $20,000 and on average, one person in a marriage will live to be 90. That means a lot of people are living on Social Security.

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Hot on the Lot: Leasing a Used Car

Lower used-car prices will eventually dent new-car pricing power, analysts said.

As auto makers continue to subsidize car payments with discounts, reduced interest rates and cheap lease terms, car owners are turning in relatively new vehicles that could be attractive to those in the pre-owned market. But these products are out of reach for many buyers due to the size of monthly payments on a nonsubsidized vehicle loan.

This is where leasing comes in, particularly on vehicles with low miles and high sticker prices. The finance company estimates the vehicle’s value at the end of the term and sets a rate based on that residual. The lease takes risk and repair bills off the table.

“[When] buying a used car, what is the No. 1 concern?” Mr. Harrington, who is president of Longo Toyota and Lexus, said. “Fear of the unknown–has the dealer told me everything?”

Mr. Harrington wasnt leasing used Lexus products at the beginning of the year. By March, 10% of his pre-owned sales came from leases.

Sales managers historically avoided used leases because they were difficult to calculate, but greater access to auction results and real-time sales data is changing dealers’ attitudes. Mr. Harrington, for instance, has developed his own software to aid the process.

More lenders also are getting in the game. Ally Financial Inc., one of the nation’s largest lenders and a former subsidiary of General Motors Co., started offering used leases in March.

The company’s auto-finance president, Tim Russi, estimates eventually one-third of the 20 million-plus used-car purchases that are financed annually could be leases. If this increases demand for used cars, it could bolster their market value.

“I think this is good for the holistic system,” he said.

One of Ally’s clients is Bermont Motors Inc., a used-vehicle dealer near Philadelphia. It has a 2014 Jeep Wrangler on its lot that would cost $544 monthly with a five-year loan, for example. Agreeing to a shorter-term lease would push the payment down to $364 monthly.

Ale Resnik, co-founder of Beepi Inc., an online used-car retailer, said the Silicon Valley company will start leasing later this month as a result of its Ally partnership. His service, which started selling cars two years ago, is aimed at younger buyers typically looking to establish credit.

“Data shows millennials are the ones driving car sales growth in new and used vehicles, and they need more options that enable their freedom,” Mr. Resnik said. Leasing accomplishes that.

The typical used-car lessee has a 635 credit score, 80 points lower than a new-car buyer, according to Experian PLC, which produces credit reports. While only 3.8% of vehicle leases written in the fourth quarter of 2016 were on used vehicles, that number is up a half percentage point compared with the second quarter of 2015.

More than 16% of vehicles purchased–new and used–in the final three months of 2015 were leased, compared with 11.5% in the same period in 2012. Used-vehicle supply was extremely thin four years ago following a sales drought during the financial crisis.

The bet on leasing could turn sour if used vehicle prices take a dramatic turn. But, lenders like Ally, say they are prepared to handle the downside especially because used cars don’t depreciate as fast new ones.For customers, it is a no-lose situation, said Mr. Harrington. “Here’s the beauty of a lease: It’s not your car.”

Write to Gautham Nagesh at gautham.nagesh@wsj.com and John D. Stoll at john.stoll@wsj.com

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Argentine lawmakers clear debt settlement deal

Americas
Argentine lawmakers clear debt settlement deal

Argentine lawmakers approved a settlement with bondholders, in the latest development in the countrys 15-year litigation battle with creditors over defaulted bonds worth nearly $100 billion ($90 billion).

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Next REIF forum will feature noted economist

Mining will be the featured topic and Toby Madden will give the keynote address. He is a speaker, author, consultant and the founder of Power Parametrics LLC, a boutique financial advising firm that uses statistical models and surveys to forecast the economy. Madden is the author of the book Club Fed, which takes an inside look at the good, the bad, and the fixable of the Federal Reserve. He also published numerous articles for the Federal Reserve Bank of Minneapolis. He worked at the Federal Reserve Bank of Minneapolis for over Twenty Years.

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