Brenda Muñiz^*

The gap in wealth continues to widen between Latinos and other Americans with potentially serious social and political ramifications. To highlight the disparity, in 2000 the gap in net worth - or assets minus debt - between Hispanic and White households was 8 to 1 ($9,750 vs. $79,400) and increased to 12 to 1 ($1,850 vs. $22,566) if home equity was excluded.ⁱ These figures illustrate that the community is asset poor, which ultimately leads to greater levels of financial vulnerability and dependency for Hispanic families.

Savings are the key to building assets and wealth, and to improving net worth. The accumulation of assets - the linchpin to long-term financial security - continues to elude a majority of Latino families. Despite high workforce participation rates, there remain several obstacles to saving and building wealth and achieving financial security. As outlined below, the most commonly cited barriers to savings and wealth-building are:

• Low Incomes. Low income is a serious deterrent to saving. In 2002, 21.8% of Latinos lived below the poverty level compared to 10.2% of Whites.ⁱⁱ Not surprisingly, more disposable income is commensurate with greater savings since saving money first requires making money. However, many low- to moderate- income Latino families live paycheck to paycheck, in part because Latino workers are concentrated in the sectors of the workforce with the lowest paying jobs. For many of these families, saving is only possible if several family members live together and implement a collective saving system by pooling their wages or rotating savers within a family.

• Poor or No Credit. Low income coupled with low savings can lead many families down a road of debt. Credit can easily be compromised by a late payment or by too many outstanding obligations, such as a new car. However, for some Latino families, a low credit score or a thin credit file may be attributable to debt avoidance. These families, many of whom are immigrants, are often unaware of the importance of credit, especially the need for a credit history, to be eligible for loans and major purchases. In fact, Latinos are more likely to have no credit history or a thin credit file. This not only affects their access to affordable credit but, given the ubiquitous and ever increasing role credit plays in the U.S., seemingly unrelated issues such as insurance premiums and employment opportunities, may also be adversely affected. According to one study, 22% of Hispanic borrowers had no credit score compared to 4% of Whites and 3% of African Americans.ⁱⁱⁱ

• Utilization of Alternative Banking Services. The number of unbanked Latinos without access to basic financial services, which has led to increased reliance on fringe banking providers, proves there is a significant need for mainstream financial tools, such as bank accounts. This is especially true for Latino immigrants who have never had a basic bank account in the U.S. or in their country of origin. Thirty-five percent of Latinos surveyed reported that they did not have a bank account, and that number rises to 42% for foreign-born Latinos.^iv Limited access to mainstream financial services has resulted in the disproportionate use of fringe banking providers among Latinos. Despite the fact that it is easier for immigrants to open bank accounts in some markets where financial institutions accept foreign identification, such as the Mexican matrícula consular, and have conducted extensive outreach in the Latino community, fringe banking providers have proliferated in communities where Latinos work and reside. For example, the check cashing industry has doubled in size over the last decade with 11,000 outlets across the nation.^v

  Despite their unscrupulous practices, these entities are often very accessible, are located in the community, and commit substantial marketing resources - activities not always observed in mainstream financial institutions.

• Cultural Barriers. Depending on the country of origin, many new Latino immigrants may distrust financial institutions because, in their experience, banks were unreliable havens for savings in Latin America during economic downturns. In the U.S., banks do not always employ bicultural, bilingual staff who can meet the diverse needs of Latinos, especially immigrants. High staff turnover can also make it difficult for Latino community-based organizations (CBOs) to update financial institutions about their programs and clients. Overall, these cultural barriers can discourage Latino families from placing their money in a bank or credit union.

While the aforementioned barriers present difficulties in improving Latino net worth, Latino families can and do save when they have access to savings tools. For example, if properly expanded and linked, Individual Development Accounts (IDAs), which are matched savings accounts that allow families to put enough money aside to purchase their first home, pay for post secondary education, or start a small business, could be a promising asset development vehicle for Latino families. The Federally funded IDA grant program is a demonstration project created under the Assets for Independence Act (AFIA) in 1998, which established approximately 10,000 accounts and requires reauthorization.

Despite the fact that approximately one-third to one-half of all Hispanic families could be eligible for an IDA, only a few are participating, in part because few Hispanic-serving community-based organizations (CBOs) are currently implementing IDAs. At the same time, 2002 American Dream Demonstration (ADD) data, which evaluated 14 IDA programs, on Latino participants in the IDA system are encouraging and reveal the following^vi:

• The average monthly deposit for Latino and White participants was $23, compared to $13 for Black participants.

• On average, 67% of Hispanic participants saved the maximum amount eligible for a match, compared to 57% for White and 38% for Black participants.

• Hispanic participants made regular deposits 45% of the time, compared to 52% of the time for White participants and 43% of the time for Black participants.

The evidence suggests that, given the chance, Latinos are well-suited to take full advantage of economic and financial opportunities afforded to them through the IDA network. However, at this time there are too few opportunities for community-based organizations working in Latino communities to engage in these efforts and, consequently, few Latino IDA accountholders nationwide. The main factors that appear to contribute to lower participation by Latino families and institutions include: limited program funding; low levels of knowledge among the broader Latino community with respect to savings issues and programs; limited program capacity among Hispanic-serving institutions; and cost issues associated with IDA program startup.

Any upcoming debate on AFIA and other IDA-related measures will need to implement certain structural and technical changes to the program in order to allow more Latino-serving CBOs to participate.

^* Brenda Y. Muñiz is a policy analyst for the National Council of La Raza (NCLR), the leading national Hispanic research and advocacy organization in Washington, D.C. Ms. Muñiz works with NCLR's Asset Development Initiative, which seeks to increase asset accumulation, wealth, and net worth for Latino families.

At NCLR, she is responsible for planning, preparing, and coordinating policy analysis, legislative, and advocacy activities related to the economic and financial security of Latinos. Her work covers a wide range of issues, including banking, financial services, financial education, pensions, predatory lending, homeownership, and tax policy.

Prior to joining NCLR, Ms. Muñiz worked as a legislative assistant for Congressman Ciro D. Rodriguez where she handled financial services, trade, education, judiciary, immigration, labor, and veterans' issues. Ms. Muñiz holds a Bachelors degree in History from Texas A&M University and a Master's degree in Public Administration from the University of Houston.

ⁱ Orzechowski, Shawna and Peter Sepielli, "Net Worth and Asset Ownership of Households: 1998 and 2000," U.S. Census Bureau, May 2003.
ⁱⁱ Data from the Current Population Survey, U.S. Census Bureau, 2002.
ⁱⁱⁱ Stegman, Michael, et.al, "Automated Underwriting: Getting to 'Yes' for More Low-Income Applicants," Center for Community Capitalism, University of North Carolina-Chapel Hill. Presented before the 2001 Conference on Housing Opportunity, Research Institute for Housing America. April, 2001.
^iv Pew Hispanic Center/Kaiser Family Foundation, "2002 National Survey of Latinos," Washington, D.C., 2002
^v Bair, Sheila, "Improving Access to the U.S. Banking System Among Recent Latin American Immigrants," Multilateral Investment Fund, Washington, D.C., 2003.
^vi Center for Social Development, Washington University in St. Louis, "Final Report: Saving Performance in the American Dream Demonstration," S. Louis, 2002.