Study: California's Poor Attract Payday Lenders
SAN FRANCISCO (CBS SF) -- California's payday lenders are largely located in poor areas with greater black and Latino populations and single mothers.
California has almost 2,000 payday lending storefronts and new research confirms that the majority are concentrated in low-income neighborhoods with larger populations of single mothers as well as larger black and Latino populations than the statewide ratio.
It may seem obvious to many people that if you live in a poorer neighborhood, you're more likely to live next to a payday lending business, but research released this month by the California Department of Business Oversight, the government agency that oversees payday lending businesses and other financial service providers in California, now confirms the obvious.
To confirm this, California researchers looked at 2014 U.S. Census Bureau data in relation to the locations of payday lending storefronts. From there, they were able to provide a much fuller picture of the neighborhoods where payday lenders set up shop.
They found that in the majority of neighborhoods that had payday lenders, family poverty rates were higher than the statewide rate, and had a larger percentage of poor families headed by single mothers.
The DBO's research found that neighborhoods with a high concentration of payday lending storefronts had a larger Latino and black population in comparison to the statewide ratio.
"The reverse was true for whites," the DBO research states, meaning that Caucasians were less likely to live near high concentrations of payday lending storefronts.
But it remains unclear whether the payday lending businesses contributed to the poverty in those neighborhoods or whether the businesses opened up in those neighborhoods because they were impoverished, or whether it was a mixture of the two.
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Payday lending has long been criticized for charging high interest rates and fees on short-term loans -- in 2015 the annual percentage rate on payday loans in California was, on average, 366 percent -- and since most borrowers roll the loan into a new one instead of paying it off, they become less likely to emerge from the debt.
But the Community Financial Services Association of America, a trade group for payday lenders, states on their website that "Just like Home Depot and Costco, payday advance stores are located in population centers that are convenient for where customers live, work, and shop."
The trade group says payday lenders fill a financial need of communities not being served by banks and credit unions.
A 2013 study by the Milken Institute reached similar conclusions as the DBO, finding that "payday lenders cater to a specific set of customers -- those with less formal education, those with lower incomes, and those belonging to minority groups."
The Milken Institute study also found that in counties with higher percentages of black and Latino people, payday lending stores were more prevalent than in those counties with higher percentages of white people. The study found there to be "a significantly negative correlation between the number of payday lender stores per capita and income per capita."
The research into the relative financial vulnerability of populations living near payday lenders comes as both the state and the federal government are crafting new regulations surrounding pay day lending.
DBO Commissioner Jan Lynn Owen said the department is considering regulations "that would address the problem of consumers taking out multiple payday loans at the same time and establish a common database to allow real-time tracking of transactions."
Federal policy makers have proposed a national payday lending policy, but some critics -- including analyst.
Nick Bourke at the Pew Charitable Trusts -- says the Consumer Financial Protection Bureau's proposed regulations would leave consumers vulnerable and doesn't go far enough to protect them.
"Giving consumers more time to repay in installments is a positive step, but dangerous loans with APRs of 400 percent and higher are likely to be commonplace under this proposal," Bourke wrote in an analysis of the draft rule.
The proposed federal rule also received criticism from eighteen Republican Attorney Generals, who wrote an open letter to the director of the Consumer Financial Protection Bureau stating that the proposed rule concerning payday loans goes to far and would commandeer the state's authority. They argue that "States have created and enforced workable regulatory regimes to protect consumers in this area."
While roughly 15 U.S. states -- largely in the northeast -- prohibit payday lenders to operate under their state laws, California still allows payday lending and it remains a big business in California, with payday lenders collecting at least $84 million in fees in 2015.
More than $53 million of that amount came from customers who took out seven or more payday loans during the year 2015, which suggests that there are a significant amount of people paying fees because they are unable to pay back their payday loans.
By Hannah Albarazi - Follow her on Twitter: @hannahalbarazi
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