SALINA, Kan. - As Congress debates financial regulatory reform and the Obama Administration advocates for greater consumer financial protection, a new study finds a need for Congressional action on fringe banking practices used heavily by financially vulnerable families.
About 60 million Americans live without a bank account and resort to using pawn shops, payday loan storefronts and other non-bank operations to handle their finances, according to a report issued a few days ago by the Federal Deposit Insurance Corporation (FDIC).
Payday lending is a practice that has become part of the growing web of fringe banking largely concentrated in low-income and disproportionately minority communities. It allows lenders to provide cash advances on post-dated checks and has increasingly become a way for financially-strapped families and individuals to obtain money in the short-run.
Nearly all of these loans come with exorbitantly high interest rates and fees, and these monetary costs to families who become trapped by them has been well documented.
Aren't these non-banking systems providing a valuable service to Kansans? Who pays the most - and who profits the most - in Kansas? Why should we care?
The FDIC survey revealed vast racial disparities in access to financial services. In our state, the difference is stark: in Kansas, 38.4% of Black, 28.3% of Hispanic and 28.4% of other minority households are underbanked and another 27.9% of Hispanic, 13.6% of Black and 14.6% of other minority households are completely unbanked.
The study, the first of its kind, lifts the lid on the vast banking underclass in our nation, raising questions about the fairness of our banking services.
The FDIC found that some 17 million adults in the U.S. are living in households where no member of the household has any bank account whatsoever. Another 43 million Americans had accounts but were "underbanked", meaning that they are relying on high-interest and high-fee non-bank services such as pay-day lenders and pawn shops.
These days, being poor in Kansas is like standing on quick sand. Money is hard to come by and more expensive to acquire, the poorer you are. The poor pay higher interest rates for credit. Those that can't get mainstream accounts pay even more. Cashing pay checks is more expensive.
In Kansas, 26.5% of all of our state's residents are either unbanked or underbanked, an estimated 304,000 Kansas households.
Clearly the poor pay more and, also not surprising, the payday lenders profit.
As one example, the payday lending company QC Holdings Inc. (QCCO), based in Overland Park, operates more than 558 branch locations across the country, offering a variety of financial services that include payday loans, check cashing, money orders and Western Union money transfers. It's services would be categorized as unbanked or underbanked, characteristic of the type used by the Kansas households described above. Last quarter, QC Holdings reported a nearly 69 percent increase in third-quarter earnings. For the quarter, it posted revenues of $56.8 million.
A new study details the toll on communities with a high concentration of payday lending business and finds a clear association between the presence of payday lenders and neighborhood crime rates. The study recommends that Congress take action to cap payday lender interest rates at 36 percent, enacting for the entire country protections Congress put in place for U.S. military families. The study, entitled Does Fringe Banking Exacerbate Neighborhood Crime Rates? Social Disorganization and the Ecology of Payday Lending, was conducted by The George Washington University professors Charis E. Kubrin and Gregory D. Squires, along with Dr. Steven M. Graves of California State University, Northridge.
This study finds there are broader community costs that all residents incur in those neighborhoods where payday lenders are concentrated. These broader community costs include higher rates of violent crime.
"This study shows that not only do individuals suffer from predatory lending practices, but entire communities can pay a price for a high concentration of payday lenders. Congress took an important step by limiting payday loan interest rates in military base communities but it shouldn't stop there. Congress should do for all communities what it did for military families," said Gregory Squires.
FDIC Vice Chairman Martin Gruenberg said, "there's a substantial segment of American households whose financial services needs aren't being adequately met."
To help reach the unbanked and underbanked, steering them away from payday storefronts, the FDIC said it would promote "starter accounts," which have no minimum balance requirements and do not include automatic overdraft fees.
As policy experts in Topeka and Washington consider these inequities, perhaps some may pose these questions, "As a people and a society, are we content with this sort of regressive profiteering? If the rich just get steadily richer and the poor get increasingly poorer, where will our country and economy end up? Do we believe it's ethically or morally right to establish systems that encourage corporations to increase their profits by charging the poorest more?"
Beyond profits, "there has to be a greater responsibility for the community in which banks are located," said Valarie Wilson of the National Urban League Policy Institute.
Post your own comment here