Wall Street Mega-Banks Employ 'Undercover Brothers' to Rip Off Minorities with Payday Loan Scams
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All in all, big banks provided more than $1.5 billion in capital to publicly traded payday loan companies, and an estimated $2.5 to $3 billion in total.
American banks have a long and checkered racial history. Government intervention was required to stop "redlining," the practice of denying financial services (or charging more for them) to minority neighborhoods. The biggest banks play a major role in backing auto loans, which studies have also shown to charge higher interest rates to African Americans than Caucasians. HSBC settled a lawsuit accusing it of c harging minority borrowers more. Do payday lenders really target minorities? As this study shows, these fringe bankers have disproportionately set up shop in minority neighborhoods. The study, "Race Matters," was conducted in North Carolina, where African-American communities had three times as many payday lenders per capita as white communities, even when adjusted for other factors.
Remember, this is in the same state where taxpayer-assisted banks helped bankroll Advance America. These banks are profiting handsomely from the exploitation of minority communities, behavior they disguise by using payday lenders as their "undercover brothers."
Won't it hurt minorities if payday lenders are shut down?
In a word: No. While this has been a common argument, we now have experience and data on the subject. North Carolina's anti-usury law (the one Advance America violated) has been in place since the law effectively ended payday lending in 2006. A survey was conducted to determine the impact of the law. One key finding: More than twice as many former payday borrowers reported that the absence of these lenders has had a positive effect on their households, rather than a negative one.
No credible defense
There have been attempts to defend these institutions on the grounds that they provide a service to lower-income communities, but these arguments don't hold water. Jim Hawkins at the University of Houston Law Center made a thought-provoking and intellectually honest attempt, but Nathalie Martin's critique of Hawkins is right on target: In the real world, that's not how these loans play out. Economist Gregory Elliehausen mounted another defense, but it seems clear to me that the three studies I cited here undermine his argument and render his assumptions invalid. (I'd be happy to have more eyes looking at these studies and critiquing both sides of the debate.)
Defenders who suggest that payday loans are designed to help people with one-time cash flow problems should read a study from the University of North Carolina entitled " Payday Lending: A Business Model That Encourages Chronic Borrowing." These lenders know exactly what they're doing when they trap people into a long-term debt cycle at 450% interest. It's a common practice to offer cheap loans to first-time borrowers, for example, to begin the entrapment process. ("50% Off For New Customers! Only $9.31 per $100! ")
The "No, you're the racist!" argument
Oh, some defenders will say, so you would leave these poor and minority people without any access to short-term loans? You bleeding hearts don't really care about them! And you call us racist! (For the record, I don't think these lenders or their big bank funders are racist - they're just profiting from a racially inequitable system.) These payday defenders sometimes even argue that those who would reform the system are the " real racists," because they're implying minorities can't make informed financial decisions for themselves.
First, the North Carolina survey indicates that low-income communities (and even payday loan customers themselves) feel their lives are improved when payday lenders are shut down. That doesn't suggest that a ban on usurious lending would harm them. And the absence of a fair lending system is no defense for an unfair and exploitative one.