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Forum spotlights high cost of low income Click here to access audio links.
5:02 p.m., March 21, 2006--Whether it involves buying basic necessities or obtaining financial services, residents of low-income communities often pay markedly more than residents of middle- and upper-income communities. These high costs usually are associated with the use of alternative lending operations such as pawnshops and payday-loan and check-cashing businesses that have proliferated in low-income neighborhoods in the last 15 years. Helping to identify why many individuals in low-income areas use these alternative financial services and what concerned individuals and policymakers are doing to address the situation were among the topics discussed during the Louis L. Redding Public Policy Forum, "The High Cost of a Low Income: Financial Services in Underserved Markets," held March 17, in Clayton Hall on the University of Delaware's Newark campus. The event was sponsored by the Institute for Public Administration in the College of Human Services, Education and Public Policy and the Brown v. Board of Education 50th Anniversary Consortium, Wilmington Trust Co. and Discover Bank. Cosponsors included UD's Center for Community Research and Service, the Metropolitan Wilmington Urban League and the Delaware State Bar Association. During his introductory remarks to participants at the daylong event, Leland Ware, Louis L. Redding Professor for the Study of Law and Public Policy at UD, said that while middle- and upper-income customers are served by mainstream financial institutions, a significant percentage of minorities and members of low-income communities use check-cashing outlets, pawnshops and payday lenders. “The fees that these operations charge are high and their business practices are different from the asset-building and wealth-creation services provided by mainstream financial institutions,” Ware said. “The proliferation of these operations in lower-income and minority communities seriously undermines the asset-building potential of households in these communities.” About one-in-five African-American and Hispanic households do not have bank accounts, and among low-income minorities the figure is 38 percent, Ware said. Ware said some of the reasons that researchers have identified for the use of alternative financial services are bank fees and minimum balance requirements that are considered too high by members of low-income communities. Other research notes the need of members of low-income communities for privacy in financial matters and the fact that they are just not comfortable dealing with banks. In lieu of traditional financial services, Ware said, members of low-income communities often turn to alternative establishments such as check-cashing outlets that offer a variety of financial services. Besides cashing paychecks, these establishments sell low-cost money orders with stamped envelopes for mailing payments and often serve as agents for utility payments and electronic transfer services, such as Western Union, Ware said.
Beset by problems in their credit histories, members of low-income communities often turn to high-cost lenders for short-term loans to meet emergencies. Payday lenders provide short-term loans of up to $500 that can be obtained at check-cashing outlets, pawnshops or independent storefront operations, where the customer writes a check to the lender, Ware said. “The amount on the check equals the amount borrowed, plus a fee that is either a percentage of the full amount of the check or a flat dollar amount,” Ware said. “Interest rates for payday loans are high, ranging from a 30 percent to 910 percent annual percentage rate.” Matt Fellowes, a senior research assistant at the Brookings Institution in Washington, D.C., said that the number of payday lenders has skyrocketed from about 300 establishments nationwide in the early 1990s to 25,000 in 2006. Fellowes said that his research group is in the middle of a multi-year study to evaluate how prices for basic goods and services vary by income, and how low-wage families pay higher prices than higher-income households for nearly every basic necessity. “Across the 12 metropolitan areas in our sample, there are approximately 5,243 alternative providers of check-cashing and short-term loan services that collectively earn about $3.2 billion in annual revenue,” Fellowes said. “The highest per-capita number of alternative check-cashing and short-term loan providers tend to be located in the lowest-income neighborhoods of metropolitan areas.” The social and economic factors involved in the growth of this burgeoning alternative financial services sector include welfare reform, recent high levels of immigration and wages that have not kept pace with inflation through much of this period, particularly among low-income workers, Fellowes said. The proliferation of alternative check-cashing and short-term loan establishments also has caught the eye of state policymakers mainstream providers of financial services, Fellowes said. “Credit unions are entering the payday loan market, and banks are exploring new, competitively priced short-term loan products and are increasing by competing for checking account customers, Fellowes said. “Municipalities have gotten into the business of regulating check-cashing establishments, and there will be a flurry of state activity as policymakers will not ignore the high cost of short-term loans.” The conference also included presentations and speeches by U.S. Sen. Thomas Carper; U.S. Rep. Michael Castle; James H. Carr of Fannie Mae Foundation; Delaware Insurance Commissioner Matt Denn; Patrice Alexander Ficklin, associate general counsel at Fannie Mae; Delaware Bank Commissioner Robert A. Glen; Saundra Johnson, director of the Delaware State Housing Authority; Patricia Kelleher of the Wilmington YMCA; Delaware State Treasurer Jack Markell; James O'Neill, UD professor of economics; John Relman, an expert on fair housing and fair lending law from Washington, D.C.; and Josh Silver, vice president of research and policy at the National Community Reinvestment Council in Washington, D.C. Article by Jerry Rhodes |
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