Banking and the poor

The Underrated Role of Financial Services in Reducing Poverty

Ethan Geiling and Genevieve Melford, Corporation for Enterprise Development - Posted July 11, 2011

Something as simple as a checking account can be the first step in saving, planning for the future, building credit, and climbing the economic ladder. Unfortunately, basic financial services like checking accounts are out of reach for many low-income American families.

If we’re going to help connect these people to genuine opportunity, now is the time to take some simple but important steps to provide better financial products for low-income Americans.

According to the Federal Deposit Insurance Corporation (FDIC), approximately 8 percent of all American households are unbanked, with neither a checking nor a savings account. Another 18 percent are underbanked, meaning they may have an account but they also rely on non-bank financial services like check cashing and high-interest payday loans.

This financially underserved population of over 30 million households is disproportionally low-income and minority. Forty-three percent of households with a yearly income below $30,000 are either unbanked or underbanked. Nationally, 54 percent of black households and 43 percent of Hispanic households are unbanked or underbanked, compared to only 18 percent of white households.

These households spend an enormous amount of money on financial services for which most Americans pay little to nothing. The average full-time worker without a bank account spends $40,000 over the course of his or her lifetime to turn income into cash.

To read this entire, very challenging report click here.

Ethan Geiling is a policy and research associate at the Corporation for Enterprise Development. Genevieve Melford is director of research at the Corporation for Enterprise Development.

Payday loans. . .local action now!

Even though the state battle to provide more robust regulation of the payday lending industry is about over, a very important local effort is still very much in play.  Read what follows and then take personal action to help in our efforts to protect our low-income neighbors.

STOP PREDATORY LENDING IN DALLAS

Predatory lending is a big problem across Dallas. In recent years, the number of auto title and payday lending locations has exploded and now over 200 storefronts exist within the city.

Payday and auto title lenders have found a loophole to escape state licensing and are “legally” able to charge outrageous rates, trapping many people in cycles of debt while draining community resources. The Texas Legislature must ultimately act to regulate these lenders so that their practices are fair and reasonable; however, since there is a heavy concentration of these locations in Dallas neighborhoods – particularly in areas already struggling economically -- the Anti-Poverty Coalition of Greater Dallas is calling on the City of Dallas to take action and reduce the negative impact of these lenders through a strong zoning ordinance.

These loans create a treadmill of debt. Few borrowers can repay the loan in full, plus interest, and pay for other monthly expenses. Thus, borrowers must to re-borrow, or “rollover”, the loan in order to fill the gap in their budget created by their loan. None of the rollover payments apply towards the loan principal, so the cost to borrow the money frequently exceeds the original loan principal. Over half of payday borrowers rollover at least once before they pay the loan off – and nearly one in four borrowers rollover loans multiple times.

The average payday borrower pays $840 for a $300 loan. 

Because payday loans are secured by a borrower’s post dated check, payday lenders can hold borrowers’ bank accounts hostage.

If the borrower cannot pay in full or the exorbitant fee to rollover the loan, they will face heavy charges from both the payday lender and from their bank in overdraft charges.

Fees for a one-month $4,000 auto title loan exceed $1,000. This $1,000 fee must be paid every month until the loan is paid in full, or a missed payment can result in repossession of the car.

Last year, nearly 200,000 vehicle liens were filed in Texas by unlicensed auto title lenders.

TAKE ACTION

Contact your State Senator and Representative to tell them that you support Texas regulating payday and auto title lenders.

Sign the petition asking the City of Dallas to enact an ordinance to lessen the concentration of payday and auto title stores and reduce their harmful impact on our neighborhoods.

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THE ANTI-POVERTY COALITION OF GREATER DALLAS

The Anti-Poverty Coalition of Greater Dallas is a new coalition that seeks to move 250,000 people out of poverty permanently by 2020 by coordinating efforts to keep people from falling into poverty and increasing pathways out of poverty. We are a broad-based coalition that unites the business community, faith-based organizations, social service agencies, and foundations. Join our fight today!