Memphis, according to the 2020 census, is home to approximately 633,000 people, of which 64.5% are African American. As a new report from the Memphis Black Clergy Collaborative (BCCM) and Political Institute of Hope—the political arm of Hope Credit Union, a Delta-based Community Development Financial Institution (CDFI), demonstrates Memphis is also home to an astounding 114 storefronts of predatory lenders. That’s more than one showcase for 6,000 people.
Those 114 storefronts, the report’s authors point out, represent “more than double the number of Starbucks and McDonalds combined” in the entire city (2). This is just one of the conclusions of the two organisations’ new report, entitled High-Cost Debt Traps Widen Racial Wealth Gap in Memphis, which examines at the micro level how the daily extraction of wealth from black Americans occurs in the city of Memphis, Tennessee.
Memphis, as census data also shows, is tied for being the second poorest major city in the nation (500,000 or more), with a 2020 poverty rate 24.6%. By depriving working-class and especially black neighborhoods of assets, predatory interest rates reinforce this poverty. In Memphis, 45% of black households and more than 50% of Latinx households are unbanked or underbanked, compared to 15% of white households (6). People without full banking services are of course most likely to turn to other sources of finance, including predatory lenders.
Memphis in Context: The National Reach of Predatory Lending
To NPQ we have written regularly about the racial wealth gap. Often the focus is on how to build BIPOC wealth. But no one should lose sight of the fact that BIPOC’s wealth is being stripped from communities every day. As Jeremie Greer of Liberation in a Generation wrote in Refuge Strength earlier this year: “The racial wealth gap is a systemic problem, not a product of the personal choices of black people. And no matter how many wealth-creating opportunities we create for black people and other people of color, those efforts will never be effective if we leave the processes of wealth stripping intact.
One of the processes described by Greer is predatory lending – loans with three-digit interest rates. According to a article published by the Federal Reserve Bank of St. Louis, the “payday loan” represents a market of 9 billion dollars. As an economist Jeanette Bennett writes, on average “the typical $375 loan will incur $520 in fees due to repeated borrowing”. If check cashers and related businesses are added, the size of the predatory lending industry is even greater. An estimate puts the number at $19.1 billion. Black and Latino families are disproportionately affected. And as a recent study by Jim Hawkinsprofessor of law at the University of Houston, and Tiffany Pennerrecently graduated from law school, published in the Emory Law Review documents, marketing is biased to attract borrowers of color.
In their paper, Hawkins and Penner found that in Houston, “while African Americans make up only 15.6% of auto title lender customers and 23% of payday lender customers, 34.8% of photographs on the websites of these lenders represent African Americans”. They add that 77.3% of ads in physical locations they surveyed targeted borrowers of color.
How predatory lending extracts wealth from communities
Predatory lenders go by many names, with payday loans, car title loans, and flex loans being the most common. Whatever their name, they have in common three-digit interest rates and coercive repayment mechanisms. In their report, Hope Policy Institute and BCCM describe how these lending mechanisms work:
Payday Loans: In Memphis, under Tennessee state law, a borrower can charge an annual percentage rate (APR) of 460% on a two-week loan. Some states allow even higher interest rates; Texas has the highest in the country, with a 664 percent APR.
What does 460% translate to bi-weekly? In fact, this equates to a fee of just over $17.50 per $100 borrowed. As the report’s authors explain, “Payday lenders gain access to a borrower’s bank account by requiring a post-dated paper check or electronic banking authorization (ACH) as part of the loan transaction. This means that the day a borrower receives their income – whether it is their paycheck, stimulus check, or Social Security check – the payday lender is first in line for repayment” ( 8). These loans can – and of course are regularly – rolled over for a certain price; more than 75% of payday lenders’ fees are generated by people who borrow for 10 consecutive periods of two weeks or more.
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Car title loans: These are not guaranteed by a paycheck, but by a vehicle. According to the report’s authors, a typical loan of $300 will incur fees of $66 for 30 days, an effective APR of 267%. Like payday loans, these loans are typically rolled over, according to national data, an average of eight times. In Tennessee, in 2019, the most recent year for which data is available, 45% of car title loans issued that year defaulted and more than 11,000 cars were repossessed (9). Notably, 2019 was, relatively speaking, a good year for car title borrowers in Tennessee. In the six-year period from 2014 to 2019, title lending companies repossessed more than 101,000 cars statewide, an average of nearly 17,000 repossessions per year.
Flexible loans: These were created in Tennessee in 2014 and act like an open-ended line of credit that can be secured by a paycheck or a car. While payday loans are capped at $500, flexible loans allow you to borrow up to $4,000. ￼￼ Tennessee state law sets the interest rate for flexible loans at 24%; however, borrowers must also pay daily port charges, or “usual charges,” of up to 255%, resulting in an effective combined annual rate of 279% (9).
The geography of lending
As noted above, the marketing efforts of predatory lenders are aimed at attracting borrowers of color. What’s more, when you look at a map of Memphis’ 114 predatory lending storefronts, it’s clear that the location of these storefronts is anything but random, almost all located in neighborhoods heavily populated by people of color.
In addition to tracing the geography of storefront physical location, the report’s authors also trace the geography of storefront ownership. As the report details, 74 of the 114 storefronts are owned by companies headquartered outside of Tennessee, 52 of which are owned by just two companies: Ace Cash Express (Populus Finance Group) of Texas and Title Max (TMX). Financing) of Georgia. This means that more than half of the profits generated by payday lenders, title companies and flex lenders are extracted entirely from the Memphis community and instead end up in the hands of out-of-state investors and managers.
There are many complex issues regarding economic policy. However, the end of three-digit interest rates is not one of them. As BCCM President Reverend J. Lawrence Turner puts it in the report, which he co-authored, the impact of charging interest of up to 460% on loans serves to “effectively entrap workers poor in webs of long-term debt” (7).
It should be noted that today’s predatory lending is a relatively recent development. Like Pew Charitable Trusts has documentedalthough he may appear payday lenders have always been with us, this is not the case. Beginning in 1916, and for many decades, states limited monthly interest rates to 3.5%; annual APR ratings ranged from state to state from 18 to 42 percent. This changed with consumer protection deregulation in the 1970s and 1980s. As Pew puts it, “As this deregulation continued, some state legislatures sought to act in kind for lenders based in the state by allowing deferred presentment transactions (loans made against a post-dated check) and three-digit APRs. These developments set the stage for state-licensed payday loan shops to flourish.
Even today, only 18 states and the District of Columbia cap loans at annual rates of 36% or less. They include many Northeastern states (Vermont, New Hampshire, Massachusetts, Connecticut, New York, New Jersey, Pennsylvania, and Maryland). But many others have also taken action. For example, in the South, Arkansas, West Virginia, North Carolina and Georgia have passed similar laws. In the West and Midwest, similar laws exist in Illinois, Montana, South Dakota, Nebraska, Colorado, and Arizona. A recent American banker The article adds that similar legislation is currently being debated in four other states: Michigan, Minnesota, New Mexico and Rhode Island. There is also pending federal legislation introduced by Sen. Sherrod Brown (D-OH) that would create a maximum rate of 36% nationwide.
The report’s authors add that even if the Senate blocks legislative action, the federal Consumer Financial Protection Bureau could use its regulatory authority to act. “The CFPB,” the authors insist, “has the ability to enact new rules that ensure high-cost lenders, like those in Memphis, don’t endlessly trap people in cycles of unaffordable debt like they currently doing” (7).