SAN FRANCISCO (CBS SF) – California’s payday lenders are mostly located in poor neighborhoods with more black and Latin American populations and single mothers.
California has nearly 2,000 payday loan transactions, and new research confirms the majority are concentrated in low-income neighborhoods, with larger populations of single mothers and larger blacks and Latinos than the statewide ratio.
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It may seem obvious to many people that if you live in a poorer area, you’re more likely to be living next to a payday lending business, but this study was released this month by the California Department of Business Oversight, the government agency that oversees payday lending businesses and other financial services providers in California now confirms the obvious.
To confirm this, California researchers examined the US Census Bureau’s 2014 data regarding the locations of shop windows for payday loans. From there, they were able to provide a much more complete picture of the neighborhoods where payday lenders set up their businesses.
They found that in most neighborhoods with payday lenders, the family poverty rate was higher than the national rate and that a greater percentage of poor families were led by single mothers.
The DBO’s research found that neighborhoods with a high concentration of payday lending businesses had larger populations of Latinos and blacks compared to the national ratio.
“For whites, the opposite was true,” the DBO research reads, meaning that Caucasians were less likely to be near many payday lending businesses.
However, it remains unclear whether the payday lending businesses contributed to poverty in these neighborhoods, or whether the businesses in these neighborhoods opened up due to their impoverishment, or whether it was a mix of both.
Payday loans have long been criticized for charging high interest rates and fees on short-term loans – in 2015, the average annual interest rate on payday loans in California was 366 percent – and because most borrowers instead convert the loan to a new one when they pay it off , it becomes less likely that they will get out of debt.
But the Community Financial Services Association of America, a trade group for payday lenders, states on its website, “Just like Home Depot and Costco, payday advance shops are located in metropolitan areas that are convenient for customers to live, work and shop. ”
The trade group says payday lenders meet a financial need from communities that are not served by banks and credit unions.
A 2013 study by the Milken Institute came to similar conclusions as the DBO, noting that “payday lenders serve a specific group of customers – those with less formal education, those with lower incomes, and those with minority backgrounds”.
The Milken Institute study also found that counties with higher proportions of blacks and Latinos are more likely to have payday loan transactions than counties with higher proportions of whites. The study found that “there is a significantly negative correlation between the number of payday loan transactions per capita and per capita income”.
Research into the relative financial vulnerability of populations living near payday lending is ongoing as both the state and federal government develop new regulations for payday lending.
DBO Commissioner Jan Lynn Owen said the department was considering regulations “that would address the problem of consumers taking out multiple payday loans at the same time and create a common database to allow real-time transaction tracking”.
Federal policy makers have proposed a national policy for payday loansbut some critics – including an analyst.
Nick Bourke at Pew Charitable Trusts – says the proposed Consumer Financial Protection Bureau regulations would leave consumers vulnerable and not go far enough to protect them.
“Giving consumers more time to pay is a positive move, but dangerous loans with APR of 400 percent and more will likely be the order of the day with this proposal,” wrote Bourke in an analysis of the draft rule.
The proposed federal rule was also criticized by eighteen Republican attorneys general, who wrote an open letter to the director of the Consumer Financial Protection Bureau stating that the proposed payday loan rule went too far and would seize state authority. They argue that “States have put in place and enforced workable regulatory systems to protect consumers in this area”.
While about 15 states – mostly in the Northeast – prohibit payday lenders from operating under their state laws, California still allows payday lending and California remains big business, with payday lenders collecting at least $ 84 million in fees in 2015.
More than $ 53 million of this came from customers who took out seven or more payday loans in 2015, suggesting that a significant number of people are paying fees for being unable to repay their payday loans.
From Hannah Albarazi – Follow her on Twitter: @hannahalbarazi