Vermont Credit Unions Try to Reduce Racial Bias

The May 25 killing of George Floyd at the hands of Minneapolis police and the growing support for the Black Lives Matter movement inspired discussions in Vermont last summer about “how to make underwriting less racist.”

Participants included area banks, community loan funds, Opportunities Credit Union of Burlington, Vt. ($49.9 million in assets, 6,088 members) and Vermont State Employees Credit Union of Montpelier, Vt. ($931.1 million in assets, 69,295 members).

Kate Laud, president/CEO of Opportunities, said the group produced a white paper that questions how some classic principals of underwriting are applying and suggests ways to give weight to new values.

“We’re all on the same page that we want to open up the discussion, and bring more people into our underwriting processes,” Laud said.

In mortgage lending, the federal Home Mortgage Disclosure Act makes lenders accountable by requiring loan-level reports that are rendered anonymous but include data about race and ethnicity, income, and loan denials and approvals. The data is available to the public, although federal agencies have removed tools in the last two years that made access easier for those without sophisticated software.

Despite the strict regulations, many studies have shown that Black borrowers end up with higher interest rates than white borrowers, even when all other factors seem equal.

A LendingTree study released in September found black borrowers were more likely to receive high-cost mortgages than the overall population in all 50 of the nation’s largest metropolitan areas.

Laud said the persistence of implicit bias is not a mere artifact of flawed systems, but of attitudes of those who administer them.

“We’re dealing with people here,” she said. “You have people on your staff who might or might not be racist.”

In the white paper, the issue is addressed in the context of business lending, where U.S. Small Business Administration programs require regular audits and credit reports for each borrower.

Those credit reports often buttress loan denials, but beg the question of whether credit reports are also measuring decades of cultural practices and unequal abilities in disputing charges or requesting items be removed.

“When a person experiences an unexpected hardship it can start a downward spiral,” the report said. “For example, when a business owner loses a license to operate, borrows from predatory lenders or buys car insurance weekly, that can start an avalanche of financial headaches that only get worse.”

Some minority communities might have strong institutions to communicate best practices, while others might need more outreach and coaching.

Half of board members at Opportunities are minorities: 30% Black, 10% Asian American and 10% immigrants. And about 17% of the staff are immigrants.

It granted $11.2 million in total loans in the second quarter, up 248% from 2019’s second quarter.

So far this year, Opportunities has originated 100 mortgages, with 36 of them to recent immigrants, most of them from Nepal, Bhutan, Iraq, Mali and the Congo. About a third of the mortgages were to first-time homeowners.

“A high percentage of our mortgage borrowers are immigrants and refugees,” she said. “It’s a delightful, unexpected consequence of this lower-rate environment.”

During the pandemic, the credit union has originated many loans to women business owners, mostly through the Paycheck Protection Program.

Altogether, Opportunities helped about 50 businesses receive PPP loans, supporting 451 jobs. Now the credit union is helping those members apply for loan forgiveness from the SBA, which is administering the program.

On the other hand, those involved with underwriting have a duty to protect their financial institution. “We owe it to our members, many of whom are African American,” Laud said.