Do Black-Owned Banks Substitute for Payday Lenders? An Exploratory Study

The annualized interest rate charged on payday loans can reach 1,950 percent, whereas similar rates charged by banks are typically less than 25 percent. Also, persons borrowing from payday lenders and paying the higher interest rates are disproportionately lower-income Blacks. This provides an incentive for Blacks seeking loans to turn to banks rather than payday lenders. This may be more likely to happen when there are Black-owned banks in communities with greater percentages of Blacks. Indeed, offices of such banks may substitute for payday loan stores, providing a greater opportunity for Blacks to avoid the higher interest rates associated with payday lenders. We hypothesize that to the extent Black-owned banks substitute for payday there is a greater opportunity for lower-income Blacks to substitute/switch firms and thereby seek lower-cost loans. We do find that there are significantly fewer payday loan stores in counties where there are more Black bank offices.

Regulation and Recent Trends in High-Interest Credit Markets

In this article we review the contested effects of traditional payday loans on borrowers and describe recent regulatory changes to the product. We then provide detail on the institutional features and regulation—to the extent that there is any—of new products emerging to fill demand that remains when payday loans are more strictly regulated. Little is known about the effects of these new loan products on borrowers. What is certain is that state restrictions have led lenders to modify their loans to narrowly evade restrictions on interest rates, loan lengths, loan sizes, and repayment procedures like allowing loans to roll over. We focus on the starkest changes to small-dollar credit regulation that have occurred recently, including the development of high-interest installment loans, so-called flex loans offered by payday lenders, and the fintech creation of earned wage advance products.

Online Payday Lenders: Trusted Friends or Debt Traps?

The recent Senate inquiry into credit and hardship underscored the prevalence of predatory conduct in the payday lending industry. The rise of digitalisation has increased consumer access to high-cost payday loans and the ensuing risk of debt spirals. The article examines the marketing strategies of online payday lenders, revealing that the effect of mandatory warnings on the risk of harm are often diminished through website layouts. At the same time, lenders commonly offer fast, convenient cash in tandem with blogs that provide advice on managing finances and living well on a budget, obfuscating the distinction between advertising and altruistism. The findings highlight the need for regulatory enforcement of laws aimed at safeguarding vulnerable financial consumers. Emerging challenges from the increasing digitalisation of payday lending and social media marketing raise the need for reforms to address gaps in the regulatory framework.

The Last Big Fights

At the start of the Trump administration, the Consumer Financial Protection Bureau had three unfinished projects that represented years of work to protect consumers. First, the bureau had adopted a rule protecting consumers who increasingly use prepaid cards as a substitute for traditional bank accounts. Second, the bureau was finalizing a rule preventing financial companies from using arbitration clauses to strip consumers of their right to band together to sue a company in court. Third, the bureau was straining to finish its work on a rule reining in predatory payday loans that trap consumers in a ruinous and repeating cycle of high-cost borrowing. This chapter describes the urgent need for these rules and the fierce political battle that followed the bureau’s completion of each rule, with industry sometimes winning and sometimes losing its push to undo the rules.

Consumers and Predators

Consumers rely on credit every day, using credit cards, student loans, mortgages, and the like to seek the American dream. But as the risks and complexities of credit grew and deceptive practices by predatory lenders spread, it became all too easy for responsible people to end up in bad situations. When consumers raise issues with financial companies, they are often stymied—ignored or dismissed—and few have the resources or expertise to fight back on their own. Lack of financial literacy increases the risks for many people. Using stories of problems that people face with credit cards, student loans, auto loans, payday loans, debt collectors, and credit reporting companies, this chapter sets the stage for why consumers need government—the Consumer Financial Protection Bureau—to stand with them and provide balance to the financial marketplace.