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Left behind by banks, poor Americans pay more to borrow

January 6, 2016 at 6:25 PM EST
It’s expensive to be poor. Unable to maintain a minimum balance or provide the necessary ID to open a bank account, many low-income Americans rely on fringe financial services like check cashing stores and payday lenders, which charge interest rates that can reach the triple digits. Hari Sreenivasan learns more from Mehrsa Baradaran, author of "How the Other Half Banks."
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Chasing the Dream CtD-Logo21Chasing the Dream: Poverty and Opportunity in America is a multi-platform public media initiative that provides a deeper understanding of the impact of poverty on American society. Major funding for this initiative is provided by The JPB Foundation. Additional funding is provided by Ford Foundation.

GWEN IFILL: Now Hari Sreenivasan takes a broader look at the problems lower-income Americans face when it comes to getting the money they need.

HARI SREENIVASAN: South Dakota isn’t the only place where payday loans are such a big problem.

While a few states have banned or imposed strict regulations on these fringe lenders, they’re ubiquitous in most of the country. In fact, there are more payday lending storefronts than there are Starbucks and McDonald’s combined.

In her book “How the Other Half Banks,” Mehrsa Baradaran explores the booming industry providing financial services to the poor at exorbitant costs and offers some more equitable solutions.

Thanks for joining us.

So, why — where is this gap created? And why isn’t there an incentive for all banks to reach out to all people with money?

MEHRSA BARADARAN, Author, “How the Other Half Banks”: The gap is fairly new.

So, starting in the 1980s, a lot of community banks started shutting down branches in lower-income areas, inner-city neighborhoods, areas where their profit margins were lower than in other areas. And so part of it is, it’s higher cost to lend to someone or to take a small deposit than it is to get a big deposit. Right? Your overhead is the same whether you’re, you know, taking in $100,000 vs. taking in $500, but your revenue off of that $100,000 is much higher than it is off of that small deposit.

And so these banks started leaving these areas. And part of it is that the government deregulatory forces allowed them to merge and form these huge conglomerates such as Bank of America. So, as these banks leave, they leave this void for banking service. And this is a void that quickly is filled by these fringe lenders, so payday loans, check cashing.

HARI SREENIVASAN: Now, when you go through certain cities, just like there are food deserts where you don’t have a grocery store, it seems like there are almost bank deserts, where it’s populated primarily with these lenders that you’re talking about.

How much money is there to be made?

MEHRSA BARADARAN: It’s an $89 billion industry yearly. And it doesn’t seem that way.

So, when you go into these neighborhoods, these check cashers or payday lenders, they seem like neighborhood joints. But they’re really sort of multinational corporations. They’re large, very profitable organizations.

And they have this, what I call a facade of informality, right? So it seems as though, look, they speak your language. They’re in your neighborhood, but, really, behind them, there is a lot of bank financing. These are very sort of corporate, big, big firms.

HARI SREENIVASAN: These companies are going to say, look, I’m taking a greater risk. This is a person that is not as creditworthy as someone who maybe walks into a Bank of America with a much larger amount of assets, right, so shouldn’t I be able to charge a higher interest rate to get them this money fast?

MEHRSA BARADARAN: It is certainly a higher risk to lend to someone who’s low-income.

However, there’s a lot of studies to show that the price that they’re actually charging isn’t the cost of the loan. It’s also fairly misleading when you compare it to the credit markets that the middle class and higher income have access to.

And one of the big points of the book is, even assuming that this is a market price that they’re charging and it is the cost of credit because of the risks and the defaults, et cetera, the rest of us don’t pay market prices for credit.

The credit markets, whether it’s for our mortgages, our student loans, any sort of bank credit you get is heavily subsidized by the federal government.

HARI SREENIVASAN: The book is called “How the Other Half Banks.”

Mehrsa Baradaran, thanks so much for joining us.

MEHRSA BARADARAN: Thank you.

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