calculator and coinsBy Elizabeth Zach, RCAC staff writer

Before the 1990s, banks based home and business loan approvals on an applicant’s perceived character. Community bankers and loan officers knew neighborhood residents, and those seeking loans didn’t have to worry about a credit score or assets.

But the FICO credit scoring model used today, according to some analysts, can fail to measure a person’s credit worthiness. It doesn’t, for example, take into consideration the typical items that lower-income families have to pay for, such as rent and utility bills.

Neither system is flawless.

“Many white families began their asset ownership with their first home in a [community banking] system,” says Kevin Smith, the president and CEO of Community Ventures, a community development financial institution (CDFI) in Kentucky. “African Americans, at the time, were almost entirely prevented from participating in that system through redlining and Jim Crow laws.”

Large banks nowadays rarely make loans based on character, but some CDFIs have used them, and have also reviewed nontraditional credit like rent payments, to evaluate a loan applicant’s creditworthiness. Community Ventures, which covers urban and rural areas in Kentucky, and the Opa-locka Community Development Corporation in Miami-Dade County, Florida, have each approved loans based on an applicant’s character, and representatives from each CDFI hope to continue expanding that model for future loan opportunities.

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