Structured Finance: A Tool to Address Inequality

In this report we discuss two ways wealth inequality can be addressed.  First, expanding the use of alternative data to compute consumer credit scores. This step alone would provide the opportunity for millions of people to access credit, which is considered by many to be the first step to wealth building. Additionally, since credit scores are one important way to allow the borrower’s risk of default to be quantified, which is key to responsible investing, this step opens up the channel for investors to support lending efforts. In the second part of this report, we explore how structured finance and the securitization of loans can support the mission of community financial development institutions (CDFIs) by channeling private capital to underserved, minority, and historically disadvantaged communities.

This report also provides as background information an overview of the literature on growing income and wealth inequality over the past 40 years in the US. It spotlights a key reason why lower income people cannot start to build wealth; upwards of 45 million people lack access to basic financial services, including bank accounts, mortgages, and small business loans.