This article appears in the June 2023 issue of The American Prospect magazine. Subscribe here.
As a Black woman in America who was barely making ends meet, Ms. Lillie, who asked that we withhold her last name, was a target for high-cost lending. So much so that, one day, an offer showed up in her mailbox. A local lender in Greenville, South Carolina, where she lived, was offering her a loan.
In a just country, Lillie would not have needed the financial help. She had a stable job as a hospital staffer and a decent credit score. But her paycheck still left her short for her basic needs, and she was unable to make rent. Credit cards were an option, but as Lillie told the Prospect, a clerical miscommunication put her behind on her payments with her bank, Wells Fargo. By the time it was corrected, she could no longer afford the payments. She could not drive—she used the bus to get around Greenville—and she was not good with using the internet to research her options. “I’m a baby boomer,” she said. “When I was growing up, we didn’t have computers, or laptops.”
One day, Lillie got on the bus and stopped at the lender who had sent the mailing, and took the $700 offered. It was not her first line of credit, but, as she told the Prospect, it was the first that sent her into a cycle of debt. And so it ensued: She’d take out new loans to pay off recurring expenses, including previous loans, and then take out more. Lillie began to feel overly burdened and depressed. “It made me feel like the world was on my shoulders,” she said.
A decade later, with more than $15,000 in debt, Lillie filed for bankruptcy at the age of 70. When asked if, knowing what she knows now, she would do it again, Lillie answered quickly: yes. And who really could be justified in blaming her? It was as simple as getting on the bus.
MANY POOR AND WORKING-CLASS PEOPLE have been involved with a predatory lender, or know someone who was. Often, these are people of color who—like Ms. Lillie—work, and still just cannot make ends meet.
Predatory loans rely on an information advantage. Lenders know how to manipulate the terms of the loan to keep the customer borrowing more and more. They can bury the most important provisions in financial jargon, leaving the borrower unaware of what they are getting into. Often, people are desperate, seemingly out of options, and willing to accept pretty much anything. That enables the remarkably high interest rates, hidden fees, and constant rollovers into new loans accruing more interest that can trap people in a web of financial stress.
Subprime mortgage lending in the 2008 financial crisis crashed the economy, which is why Congress finally decided to do something about it with the 2010 Dodd-Frank Act. The law established specific provisions relating to minimizing predatory lending practices, and created the Consumer Financial Protection Bureau (CFPB), both to consolidate consumer protection into a single agency and to give a federal entity the power to regulate nondepository financial institutions such as payday lenders. “It meant that the entire industry had to move to a safer product, or bear increased financial risks to their own balance sheets,” said Mitria Spotser of the Center for Responsible Lending (CRL).
Bank deserts are often located in low-income areas and populated by people of color.
The CFPB is generally regarded as an “unmitigated success” in protecting consumers, which is why the GOP and industry lobbyists want to see it dismantled, or at least made severely inefficient. The legislative and legal battle for the CFPB is critical; without the consumer agency, poor people would be left without the tools and information to adequately defend themselves against predatory lenders, and without an advocate to turn to if they find themselves caught in the trap.
However, even with the CFPB, predatory lending remains pervasive, particularly for people of color. The key components of the industry, from geography to marketing, take aim at Black and Latino borrowers in need. Low wages, generational poverty, and a lack of traditional financial services funnel people to predatory lenders. Only better jobs, reputable loan alternatives, or tangible aid can give poor people the options they need to walk away from the cycle of debt.
MS. LILLIE SHOULD NEVER HAVE BEEN subject to a predatory loan. She worked at a hospital for 14 years, retiring at 65. Her pay was “reasonable.” For the most part, she was supporting herself. Still, she would find herself needing a boost for necessities, like rent or other bills. And one bad loan set her down a path.
That path was one of few offered to Lillie, and the least distressing one that she would consider. This is by design—not a blind spot of the system, but an essential facet. Predatory lenders and other alternative financial service providers (AFSPs) occupy a space left by traditional banking. As commerce and financial services have moved online, brick-and-mortar bank branches across the U.S. have fallen from 36 per 1,000 adults to 30. From 2017 to 2021, 9 percent of bank branches closed. Of those, a third were in majority-minority communities, per the National Community Reinvestment Coalition.
Bank deserts, as they are called, are often located in low-income areas and populated by people of color. And in the typical majority-Black or -Latino community, there are fewer options for financial services, usually translating into higher interest rates and lower savings rates.
Current FDIC statistics show that nearly six million households have no bank account, while another 18.7 million are “underbanked,” meaning that they have used at least one AFSP in the past year. Black and Latino households were much more likely to be unbanked or underbanked, according to the 2021 data.
“The irony is that people who have lower financial means are individuals who are less likely to use online financial services, so they’re looking for storefronts,” Spotser said. And the storefronts they find, Spotser said, are often high-cost lenders: pawn shops, payday lenders, and check cashers.
A Pew Research study from 2012 found that, when adjusted for other factors, Black people had a 105 percent greater chance of receiving a loan compared to other races. Additionally, Pew found that payday loan usage is concentrated in the South and Midwest. A Morning Consult report from 2020 found that Black people were almost twice as likely to live near a small-dollar lender, such as a payday lender.
JESSIE BONNER/AP PHOTO
Black people are almost twice as likely to live near a small-dollar lender, according to a 2020 study.
A 2018 Center for Responsible Lending study in Michigan found that “while statewide there are 5.6 payday stores per 100,000 people in Michigan … census tracts that are over 25% and 50% African-American and Latino are 7.6 and 6.6 payday stores per 100,000 people, respectively.” In 2018 testimony delivered to the Rhode Island legislature, CRL noted that, when comparing areas within a similar income bracket, areas with a “significant population” of Black and Latino people have a 70 percent higher concentration of payday lenders in the state.
Even the marketing for payday loans features Black and Latino faces more prominently. “Payday lenders engage in a type of reverse redlining, locating primarily in communities that have been historically and systematically deprived of mainstream financial services in order to extract fees on the false promise of access to credit,” Diane Standaert told the Rhode Island legislature for CRL.
South Carolina, where Lillie lives, is rife with high-cost lending. Eighteen states and the District of Columbia have instituted interest rate caps for payday loans no higher than 36 percent, but South Carolina has yet to do so. That’s not without consequence: The average payday loan interest rate in the state in 2021 was almost 400 percent. As The Greenville News reported, “of 1.2 million short-term loans made in South Carolina in 2021, 46 percent were ‘flipped’ or ‘renewed.’” In other words, about half of these borrowers were unable to pay off the loan within the term, and they took out a new one, creating that cycle of debt. CFPB research has put that number even higher: Four out of every five loans are reborrowed.
THE CFPB HAS ATTEMPTED TO REGULATE the subprime and predatory lending industries, but it’s only as good as its personnel. President Trump may have stopped short of attempting to eliminate the CFPB entirely, but he did not have to, as the institution was wildly ineffective for most of his administration. Under Trump, the CFPB recovered $783 million from companies that violated consumer protections in its most active year. Compare this with the nearly $6 billion recaptured under Obama in 2015, as the Los Angeles Times reported. In fiscal year 2020, ten separate CFPB fines collected just one dollar each.
When the Dodd-Frank Act was negotiated, the CFPB’s structure was written so that the director of the agency could not be fired at will, but instead only for cause. This was meant to keep the agency’s priorities from changing with administrations. Despite ample precedent for this at other agencies, in Seila Law LLC v. CFPB (2020), the Supreme Court ruled that this violated the separation of powers clause of the Constitution.
Ironically, this example of Republicans and the courts chipping away at the CFPB made it more effective under Biden. If the old rule were in place, Trump’s CFPB director Kathy Kraninger would have been able to serve out her five-year term until December of 2023. Instead, Kraninger resigned before being fired on Biden’s Inauguration Day, and now progressive Rohit Chopra serves as the director.
But opponents of the CFPB haven’t stopped. Another way Congress attempted to insulate the agency’s operations is through the so-called “self-funding” mechanism. CFPB gets its budget from the Federal Reserve instead of Congress. This mechanism became the next target.
A rate cap for consumer loans would not fully address the predatory lending.
In 2016, the CFPB issued a regulation known as the “payday lending rule” (officially, the Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule), which severely restricted how payday and other high-cost lenders could grant loans. The rule introduced underwriting provisions that would force lenders to determine a borrower’s ability to repay the loan, as well as other payment protections. This is similar to the ability-to-repay rule CFPB established for higher-risk mortgages.
Since multiple flipped or renewed loans power the profit margins in payday lending, the rule was likely to “severely” impact the industry and potentially slash the number of loans granted, per The New York Times’ reporting.
Initially, the rule would have also introduced a rate cap of 36 percent, but payday lending lobbyists successfully demanded its elimination. Kraninger then rescinded the underwriting provisions, leaving only the payment protections for borrowers, making the rule a shell of its former self.
But that was not enough for the lending industry. In 2018, CFPB was sued again, this time in CFPB v. Community Financial Services Association of America (CFSA). In this case, CFSA, the payday lending industry’s leading trade association, sought to completely eliminate the rule, because of both the for-cause firing provision (which hadn’t yet been decided) and the self-funding scheme, which CFSA argued violated the Constitution’s appropriations clause. When the for-cause provision was struck down, CFSA amended its complaint to focus on the latter.
Last October, the U.S. Court of Appeals for the Fifth Circuit, one of the most conservative in the country, concurred with CFSA’s argument, rendering the consumer agency’s funding unconstitutional. CFPB has appealed to the Supreme Court, and the case is set to be heard in its next session.
This court uncertainty makes the potentially harmful consequences of dismantling the CFPB not a hypothetical. New rulemaking has slowed down as the court case looms. And the payday lending rule, which is at the heart of the case, hasn’t been touched by the new regime, even though advocates would like to see the ability-to-repay standard restored. That places an undue financial burden on the people and communities that the CFPB has been unable to cast a wide enough net to protect.
IN MARCH OF THIS YEAR, the South Carolina legislature was debating whether an interest rate cap for consumer loans would be right for the state. Lenders argued that such a regulation would put them out of business, leaving a wide swath of people unable to access credit lines.
An opinion piece for South Carolina’s Post and Courier sums up the argument well: “By imposing a rate cap, policymakers would hinder access to crucial credit products, drive out ethical lending companies and perhaps most significantly, harm borrowers with less-than-perfect credit who will lose what may be the only form of credit for which they qualify,” wrote Dan Walters, CEO of Credit Central, an online installment lender.
While ultimately this argument is just the industry trying to stop regulation, this perspective does get one thing right: High-cost lending is servicing people who have been otherwise shut out of traditional financial markets, through years of systemic discrimination. Previous generations got to benefit from racially exclusive loans, building wealth for their communities. Payday and other high-cost lenders targeted people of color and low-income individuals by walking through an open door.
A rate cap for consumer loans would not fully address the predatory lending that happens in other lending sectors, like auto title lending, student lending, and—even after Dodd-Frank—mortgage lending. “In every market, almost every single study of discrimination has found that discrimination still exists,” Kathleen Engel, professor at Suffolk University in Boston, told the Prospect. “It may be less pronounced. It may be less extreme. But it’s still out there.”
SUSAN MONTOYA BRYAN/AP PHOTO
The marketing for payday loans features Black and Latino faces more prominently.
Engel notes the deceptive practices used in auto title lending: added warranties that hike up the cost, misrepresent the product, and create a false sense of urgency. These practices are the hallmark of predatory lenders. And while Dodd-Frank pushed discriminatory mortgage lending to the shadows and made it hard to study, there is evidence that it is still happening, as well. One way it can be revealed is through experiments that test whether white people can get better deals on loans than Black people with the same financial credentials.
A New York Times article from 2022 on racism in home appraisals notes exactly this. After Nathan Connolly and Shani Mott had their home in the Baltimore area appraised at $472,000, they removed all photos and identifying information from the home and had a white friend meet a second appraiser at the door. That appraiser estimated the home value at $750,000. Often, it’s not about how much money a person has, but simply whether or not they are Black.
This is not always due to outright racism from individuals. It is just as likely to be systemic forces that have historically placed Black people in proximity to financial destitution, and in need of a quick loan.
Industry arguments do not adequately account for the massive amount of predatory lending that is costing the country, and the victims, dearly.
IF ANYTHING, MS. LILLIE WAS ONE of the luckier ones. Her credit score was pretty good, and the nominal interest rate for her loans wasn’t that high. But the continual reborrowing got her in over her head. “My life was in shambles,” she told the Prospect over Zoom. “I was trying to pick up the pieces.”
But Lillie was not necessarily looking for help when she met Jenny Weidenbenner. They met at a casual event through mutual acquaintances, and got to talking about finances. Through that discussion, it came out that Lillie was drowning in debt. Weidenbenner, a staffer at Homes of Hope, a local nonprofit, immediately offered her assistance—and empathy. Lillie had to accept that she needed help, and Weidenbenner made that possible. Their rapport is clear even over Zoom—“Jenny really is my guardian angel,” Lillie said.
Weidenbenner told the Prospect that she did her best not to push Lillie into anything, but eventually, Lillie began to see how filing for bankruptcy could help her. Lillie attended the necessary counseling sessions and hearings, and successfully got out from under the loans that plagued her.
That was two years ago, and Lillie, now 72, feels a lot better now. “I can sleep at night, I can eat,” she said. She’s also getting her GED.
Lillie’s story represents how, through nonprofit organizations, communities are getting second chances at accessing less risky credit. Community development financial institutions, which are partially funded through the U.S. Treasury, partner with community organizations to provide alternatives to high-cost loans.
One of these organizations is the Self-Help Credit Union, which aims to “help our members avoid high-cost lenders and check cashers that too often prey on working people.” Kerri Smith, South Carolina president of Self-Help, told the Prospect that they also partner with local churches to identify community members who may need a loan, either to avoid high-cost lenders, or to get out of bad loans.
Self-Help loans usually carry about 4 percent interest, are due over a longer period of time, and can be granted for a larger amount. “We’ve seen folks that have come in through this program, and are now looking towards homeownership. They’re taking advantage of checking accounts, credit cards, and things like that,” Smith said. “A lot of them have just been pushed out of traditional financial services and now, they’re able to access credit in a way that they haven’t been able to before.”
Community aid is a particularly salient and effective way of combating the prevalence of predatory lending, precisely because it addresses the systemic issues that have made the industry so rampant. Meanwhile, Lillie thinks there should be more regulations, because she knows there are more people out there who may need help, like she did.
“Sometimes, people my age don’t know what to do to help the situation,” she said.
