This number stops millions of homeowners from accessing the home financing market. This number is the minimum FICO score for many lending institutions to consider providing a loan. This number may be safe for financiers, but it is unfair to homeowners. It lumps in low-risk households who make payments on time but have low credit scores with the high-risk households that lenders don't want to touch. The consequence? About 6.3 million American homes excluded from the market*. These households are victims of yet another assumption that could be dispelled with a conversation.
In spring of 2019, a large financial corporation tasked a group of design thinking graduate students at Johns Hopkins and MICA with a challenge to better serve their users. Over fourteen weeks, we maintained a line of communication with our client, updating them on our findings and including them in the ideation process. We confronted biases and assumptions and crafted human-centered solutions our client could easily act upon. Our low- and moderate-income users are more capable than people gave them credit for, and we learned where and when our client can reach them with new product offerings.
Our client is required by the Community Reinvestment Act (CRA) to ensure equitable servicing of Low- and Moderate-Income (LMI) households. They tasked our team with figuring out how their company can meet its CRA obligations in a better way while reducing home ownership expenses for LMI households. Our client currently meets its CRA obligations primarily by purchasing mortgages serviced by local banks. This arrangement works because the company does not have many regional branches, but it makes the company dependent on local banks and doesn’t actually connect them with LMI customers. My team had to learn the goals and pain points of the LMI population to learn what steps our client could take. Along the way, we had to check a lot of biases and assumptions.
1. Neighbors assumed LMI households couldn't afford to own homes
They were wrong! We recruited interviews from Facebook groups for Baltimore neighborhoods. When we posted our request for homeowners making $28-46k/yr with FICO scores under 680, neighbors commented saying people making that little money couldn't possibly own homes. Their comments were immediately rebutted by other neighbors saying no, in fact, they fit that exact description.
2. Financiers assumed LMI households were too risky to lend to
The financial industry is all about risk, and our team along with our client assumed that LMI households lack financial literacy and struggle to pay bills. While LMI households may suffer financial stress and vulnerability, the people we interviewed dispelled the assumption that they were disorganized or late with payments. Every person we interviewed had their own system for juggling bills and paychecks in order to pay bills on time. Every person triaged their bills, prioritizing mortgage payments and insurance first. Our users all gained financial literacy through personal experiences- successes and failures- and mentorship from financially savvy family members and friends. For some it was a roommate in college, for others their parents or a spouse. In short, we discovered that the LMI population is a wrongfully underserved market for financiers.
Cutoffs on FICO scores and income make crude lending criteria. Low-risk customers are being lumped in with the high-risk! Every stakeholder in the market suffers as a result. Financiers obviously lose out on low-risk customers, while customers are denied loans for home improvements that could save them money and raise their property values. Solar installers and other contractors for home modifications lose out on a lot of business, too; since they finance through third parties, installers’ customer bases are determined by lending criteria rather than customer demand. More intelligent lending criteria would unlock a whole new segment of the market. Some companies in fintech and insurtech are starting to look at signs of regular payments like Netflix and Spotify subscriptions that aren’t factored into FICO scores. My team emphasized that financial companiashould reexamine how risk is calculated if it wants to adapt and innovate.
3. My team underestimated the resourcefulness of LMI households
We learned from our interviews with stakeholders assisting and selling to our users that LMI households do not always take advantage of programs available to help them. Perception is reality, and for-profit lenders actively selling loans are a lot more visible than underfunded government programs and nonprofits. Loans just seem easier to obtain than grants. Many LMI homeowners end up saddled with debt putting their homes on the line when they could have qualified for grants. We knew LMI households weren’t taking full advantage of local nonprofits and public assistance. What surprised my team was learning just how resourceful LMI homeowners are within their communities.
We learned earlier that LMI households are organized with their finances and had systems in place to pay bills on time. They also work really hard to avoid incurring expenses in the first place. LMI households are intimately embedded in their neighborhoods and can easily connect with affordable contractors and sources of second-hand materials for home improvements. One homeowner, Jen, remodeled her kitchen for a few hundred bucks with secondhand countertops and cabinets from her local church, which was undergoing renovation. They band together as a community to fill gaps in government or landlord services. Another homeowner, Noel, would get five or six people together to clean up the streets and weed whack vacant lots in her neighborhood.
Our client didn't want us to come up with a new financial instrument; they had plenty of employees quite capable of doing that. What they didn't have were people on the ground learning how and when to offer products and services to the LMI population in their region. To guide our client's internal resources, my team decided to make "design pathways" for them to explore. Combining the 48 insights we extrapolated from our data, we came up with three design pathways:
1. Act Locally
LMI households operate hyperlocally. They have good reason to distrust corporate outsiders, being historically taken advantage of by predatory lenders. They are also highly motivated to support local businesses and share resources with their neighbors. If our client wants to make headway with the LMI population, they need to create hyperlocal presence with advocates from the neighborhoods they want to serve. Trust has to be earned.
2. Intervene Strategically
The best time for our client to offer a home improvement loan is during the home acquisition process. When people are setting up a $100,000 mortgage, taking out a $5,000 loan for a home improvement that will save them money in the long run is an easy decision. They're already making a major financial decision and thinking about their long-term finances; it just turns from a $100,000 loan into a $105,000 loan. But selling that $5,000 loan after the dust has cleared? No, thank you. That's upsetting the delicate financial balance of a household and asking to go from $0 to $5,000 in additional debt. Whatever combination of public assistance and private lending our client wants to offer, they should bundle it during the home acquisition process to simplify choices and enable proactivity.
3. Visualize Effectively
When our client presents information on financing options during the home acquisition process, that information must be concise and clearly show present and future value to the homeowner. LMI households plan for the future and make highly intentional decisions about their finances, in part because unforeseen expenses can be so disruptive. Taking out an additional loan with public assistance for an energy-efficient home improvement may or may not be a net positive financial decision in the long run. If it is, it needs to have clearly evident short- and long-term benefits. Without immediate benefit, a good long-term decision may be unpalatably difficult to make today. Collateralizing future savings is one way to provide home improvement loans to households with few existing assets, but it is not a simple concept. If a home improvement will raise property value today and realize net savings over ten or twenty years, that information needs to be plainly visible at the time of decision-making.
This project was intellectually and emotionally challenging. Engaging as a team with seemingly intractable challenges felt like what Brené Brown might call a street fight. Reaching our users, immersing ourselves in their world, and synthesizing all our data was hard. In the end, we felt wholly confident with the handoff presentation we delivered to our client in New York City. We had done the quality primary and secondary research necessary to carry out human-centered design. We left our egos at the door and created something authentic. A few months after our project handoff, we learned that our client had validated our findings. Our research was carried out in Baltimore, where we were based. Our client's continued exploration into LMI households in the metropolitan area they service "echoed the insights [we] developed".
*The addressable US market includes nearly 16 million homes, and 40% of these homes are precluded from access to the market by financing criteria such as minimum FICO scores of 680-700. Our client wanted to include this underserved population in the financing market. Our client's focus was on increasing LMI access to financing energy-efficient home improvements, especially big-ticket items like solar panel installations. They wanted to blend HUD Title I home improvement loans with private loans and public assistance to bring LMI households into the market. LMI households make 80% or less of the area median annual income for the communities they live in. Across the US, this population includes households with annual incomes between $28k and $46k (2017 data). These households are comprised of teachers, servers, mailpersons, farmers, and other occupations critical for society.
My team wanted to maintain a line of communication with our client so that we could stay on track with their evolving needs. We set up weekly check-in meetings where we shared what we had learned and asked industry-specific questions our client was familiar with, ensuring we directed our efforts where the client most wanted help. We ran through the entire design thinking process in fourteen weeks in parallel with several other projects; our time commitment was about 10hrs per week. As we typically see with design thinking projects, the work was heavily frontloaded. Ethnography and synthesis took the bulk of our time. We interviewed a range of stakeholders including LMI households, financial institutions, energy and public policy experts, solar panel installers, and nonprofits providing financial and home improvement services to LMI households. Our interviews ran about an hour each, and we preferred conducting them in-person in comfortable environments for our interviewees. Many of our interviews with LMI homeowners were conducted in their homes. To contextualize our primary research, we broke up our secondary research by topic and briefed each other internally with summary documents and infographics. When we reached the ideation and prototyping stage of our process, we had already finished the heavy lifting. When you listen to people, they'll usually tell you what they want. Our team quickly converged on solutions drawn from our data, and the three prototypes we tested were all validated with user feedback. We planned our handoff presentation with input from our client to make sure we delivered our findings and solutions in a helpful, actionable manner. After our presentation, we held a co-ideation session with our client, brainstorming ways they could implement our proposed solutions. This creative collaboration left our client with actionable steps and proved critical in getting their buy-in and understanding.