Can a Public Bank Redress the Private Banking Industry’s Harms to Chicago’s Residents? An Analysis of the Consumer Financial Protection Bureau’s Complaints Database
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By Terri Friedline and Ameya Pawar
Introduction
To participate fully in the economy, people need financial products and services made available by banks to pay bills, send money to friends and relatives, buy a house, and start businesses. These products and services such as bank accounts, credit cards, home mortgages, and business loans should be easy to access and inexpensive.
Unfortunately, private banks and lenders often provide products on expensive and exploitative terms—especially to people who are poor and racially marginalized. For instance, in 2021, 40% of households without a bank account did not have enough money to meet minimum balance requirements while another 30% report that account fees were too expensive. Private banks profit from these account fees, which are getting more expensive, and collect $12 billion to $15 billion in overdraft fee revenue annually. Private banks’ total profits rose 315% in the first quarter of 2021, compared to the same quarter in the prior year.
The terms that private banks and lenders set for credit cards and mortgages are also notoriously expensive and exploitative. For example, banks and lenders base their credit card interest rates on the prime rate, which is a rate determined by the Federal Reserve that guides banks’ own borrowing and lending. This means credit card interest rates fluctuate and people’s credit card balances can grow quickly and unexpectedly. Case in point: The Federal Reserve raised the prime rate at least six times in 2022, and credit card debt is increasing precipitously. In the last 18 months alone, the total value of consumer debt from credit cards and revolving loan plans issued by private banks and lenders has risen 19%. Sizeable percentages of poor and moderate-income Black (34%), Latino (40%), and White (60%) households use credit cards. The implications of the rise in credit card debt for poor families is worrisome, especially since economic relief initiated at the beginning of the COVID-19 pandemic has expired, inflation is rising, and student loan debt payments are set to resume in January 2023. Many people may continue relying on expensive credit card debt to survive.
The trend in mortgage debt is similar. A declining number of people have mortgage debt; though, mortgage debt is becoming more expensive. The total value of mortgage debt has increased 9% in the last 18 months and interest rates have also increased during this time frame. The average interest rate that banks and lenders charge on a 30-year fixed rate mortgage has risen from about 3% in 2020 to 7% in 2022. This means that borrowers are paying significantly more to purchase a home today than they would have paid only a year or two ago. And, banks and lenders still engage in subprime lending—a practice of charging higher interest rates and offering worse terms on mortgages to borrowers with lower credit scores. Banks and lenders disproportionately target Black and non-Black borrowers of color for subprime mortgages even when they qualified for better terms.
In Chicago, people experience the consequences of private banks’ and lenders’ expensive and exploitative terms. In part, these consequences can be observed in the percentage of residents that use private banks’ and lenders’ products and services. The percentage of residents in the Chicago metro area that do not have bank accounts is higher than the national average—5.4% compared to 4.5%. Access to bank accounts is tenuous and intermittent for 40% of the city’s Black and Latino residents. Twenty-three percent of residents have credit scores below 660, putting a sizable percentage of the population at risk for receiving expensive credit cards and mortgages. Moreover, the racial disparities in Chicago’s homeownership rates are some of the most severe in the nation. Seventy-four percent of White metro residents own their homes, compared to 39% of Black metro residents. Seventeen percent of residents with incomes below the federal poverty level live in owner-occupied housing.
Public banking is one idea for mitigating the harms and problems Chicago residents experience from private banks and lenders. In this case, a public bank is a locally and democratically governed institution that can serve as the city’s fiscal agent. A public bank can support a variety of retail banking products and services (e.g., bank accounts, credit and mortgage lending) and also invest in the types of development that communities need. For instance, local governments struggling to respond to rising housing costs could benefit from a public bank that finances the development of affordable housing. Whereas a private bank, concerned about slimmer profit margins, might decline these types of investments, a public bank could affirmatively respond to communities’ needs.
It is useful to evaluate how Chicago residents experience harms and problems from private banks and lenders before moving toward public banking as a mitigating response. One way of understanding Chicago residents’ experiences is through their complaints made to the Consumer Financial Protection Bureau (CFPB). These complaints can illustrate how private banks and lenders harm Chicago residents and even thwart the city’s efforts to support residents in paying bills and buying a home.
This report analyzes Chicago residents’ complaints about financial products and services to the CFPB between 2011 and 2022. The findings provide understandings about how Chicago residents use private banks’ and lenders’ financial products and services, the extent to which residents experience harms and problems, and the potential for a public bank to intervene. Additional, community-specific information is available upon request, and supplemental materials including select community profiles and appendices are available here.