Payday Lending Regulation Can Help Narrow the Wealth Gap

The recent 50th anniversaries of the March on Washington and the launch of the War on Poverty offer a chance to reflect not only on the progress we۪ve made as a society, but also on the work we have ahead of us. And unquestionably, much of that work needs to focus on closing the racial income gap and the still-expanding wealth gap between whites and minority communitiesa modern day civil rights crisis.

According to a study by the Urban Institute, non-Hispanic white families as of 2010 earned about $2 for every $1 that black and Hispanic families earned, and that hasn۪t budged much over the last 30 years. The median income of black families in 2011 was $40,495, just 58 percent of the median income of white families ($69,829). The figure was similar for Hispanic families, whose median income was $40,061.

But while the racial income gap has remained stagnant, the wealth gap has exploded. Families in the top quintile of the wealth distribution as measured by total assets like cash savings, retirement accounts, and homes (minus debts) saw their net wealth increase by close to 120 percent between 1983 and 2010. Families in the middle quintile, however, saw gains of only 13 percent.

These figures are especially troubling considering the racial disparities that underlie them. Non-Hispanic white families before the Great Recession had about four times the wealth as non-white families, a figure that jumped to six times by 2010. The recession saw Hispanic families lose 44 percent of their wealth and black families lose 31 percent of theirs between 2007 and 2010. By contrast, white families lost just 11 percent of their wealth over the same period.

This broadening wealth gap can be attributed in no small part to predatory payday lending activity that disproportionately and aggressively targets minority communities. Payday loans alluringly, and often deceptively, provide a quick route to credit for consumers who might not qualify otherwise. However, they must be fully repaid in a very short period of timeoften on the borrower۪s next payday. This repayment structure and the lack of underwriting for affordability for the loan contributes to a hopeless cycle of indebtedness, causing borrowers to pay more in fees alone than the amount they borrowed and forcing them into even more dire financial situations. In turn, many payday loan borrowers struggle to afford necessities like food, healthcare, and educationleaving them at risk of bankruptcy and deeper levels of poverty.

According to the Center for Responsible Lending, payday loan borrowers are disproportionately African American and Latino. For example, a 2009 study found that California “payday lenders are nearly eight times as concentrated in neighborhoods with the largest shares of African Americans and Latinos as compared to white neighborhoods, draining nearly $247 million in fees per year from these communities.” Crucially, the resulting wealth gap preserves inequality for future generations, with powerful implications for economic security and mobility among people of color.

This can۪t go on any longer.

At our annual meeting in December 2013, The Leadership Conference and its member organizations unanimously approved a resolution urging states and Congress to implement sensible regulation of payday loans, and pressuring federal agencies including the Department of Justice, the Federal Reserve, the Consumer Financial Protection Bureau (CFPB), and the Federal Trade Commission to increase regulatory oversight and enforcement of lenders. As the resolution states, “regulations in 16 states including the District of Columbia and some Native nations that impose a two-digit interest rate cap on payday loans are already saving borrowers $1.8 billion annually in predatory payday fees, and a 2007 federal law imposing a 36 percent interest rate cap on loans to military personnel and their families has stopped the worst payday lender abuses of those serving our country.”

In other words, progress is possible.

We are calling on the CFPB, which started accepting payday loan complaints in November 2013, to issue regulations that take into account a borrower۪s ability to repay the loan, limit the amount of time that lenders can keep borrowers in debt, and restrict lenders from requiring a post-dated check or electronic access to a borrower۪s checking account as a condition of extending credit. The CFPB must also continue to collect and make public its data on payday loan use, and urge those states that are not currently collecting data to do so. These measures will go a long way toward combatting predatory activity and reducing the borrowers۪ risk of slipping into poverty.

As the Rev. Dr. Martin Luther King Jr. said in March 1968, just five days before he was assassinated, “There is nothing new about poverty. What is new is that we now have the techniques and the resources to get rid of poverty. The real question is whether we have the will.” Dr. King spoke of America۪s opportunity to “help bridge the gulf between the haves and have-nots.” This year, when Dr. King۪s legacy is especially in the foreground, we must recommit ourselves to helping America۪s most vulnerable communities and confronting the racial wealth gap. Addressing usurious payday loans is an important part of this effort.

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Wade Henderson is the president and CEO of The Leadership Conference on Civil and Human Rights, a coalition of more than 200 national civil and human rights organizations working to build an America as good as its ideals.

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