Study: Payday lending debt trap strips annually $247 million from California’s African-Americans, Latinos


Center for Responsible Lending
March 26, 2009

Payday stores concentrate in African-American, Latino neighborhoods

Race, ethnicity leading factor in determining payday lender location, but not banks'

Payday lenders are nearly eight times more concentrated in California's African-American and Latino neighborhoods as compared to white neighborhoods, draining these communities of $247 million in payday loan fees according to new research from the Center for Responsible Lending (CRL). A disparity remains even after accounting for factors like income, poverty rates and education.

Federal legislation could address problems with predatory payday loans, which trap borrowers in long-term debt at 400 percent annual interest rates. CRL favors a 36 percent cap on interest rates, the only measure that has effectively stopped abusive payday lending in fifteen states and the District of Columbia. Such a cap has been introduced in the U.S. Senate (S500) and House (H.R. 1608), and would not prohibit California or other states from instituting their own caps.

"Payday lenders contend that they provide access to credit for underserved communities," said Leslie Parrish, senior researcher at CRL. "What they are really providing is access to long-term debt traps which too often lead to extra overdraft fees, credit card delinquency, trouble paying bills including medical expenses, even bankruptcy." 

Predatory Profiling: The Role of Race and Ethnicity in the Location of Payday Lenders in California, is the first quantitative study of the factors that influence both payday lender and bank branch location. Even after controlling for a number of factors beyond race and ethnicity, including income, educational attainment, homeownership rates and others, CRL analysis found that payday lenders were still more than twice as concentrated in neighborhoods with large numbers of African Americans and Latinos.

"Predatory Profiling confirms with solid analysis what we have always known intuitively," said José Cisneros, treasurer of the City and County of San Francisco.  "Take a walk through San Francisco's Mission District, and you'll see too.  Working-class families of all races and ethnicities deserve policies that keep more of their hard-earned dollars in their pockets—not policies that trap them in cycles of debt."

Among the report's other key findings:

  • On average, controlling for a variety of factors, the nearest payday lender is almost twice as close to the center of an African-American or Latino neighborhood as a largely white neighborhood.
  • Race and ethnicity play a far less prominent role in the location of other financial institutions, such as banks.  These factors account for over half of the variation in payday lender location explained by neighborhood factors, but only one percent of the variation in bank branches.

"Payday loans are a debt trap—and in California, that trap ensnares more African Americans and Latinos by a staggering margin," said Ginna Green, spokeswoman for CRL's California office.  "The only solution that springs the trap is a comprehensive, small-loan rate cap that covers all small-dollar loans. California's payday lenders don't deserve to be above the laws that regulate their competition."  

Visit the Predatory Profiling page on the CRL web site and take an interactive payday store tour of one of four California cities, view the PowerPoint presentation, read the executive summary or download the full report.

For more information: Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.

###

About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.