Payday lenders have long been recognized as fringe bankers that charge excessive fees to their customers while making exorbitant profits. But it is not just payday lenders' customers who are paying heavy costs. The concentration of payday lenders fosters higher levels of violent crime in those neighborhoods. Consequently, virtually all people who live, work and play in those communities are paying a price.
We recently examined the location of all payday lenders in Seattle and found that as the number of such businesses increases, so does the incidence of violent crime. The association between payday lending and violent crime persisted even after accounting for those factors that criminologist have long found to be associated with crime, including the unemployment rate, income, occupation, education level, the number of young males, and population turnover.
The fact that payday lending and violent crime are related is clear. We suspect that the availability of relatively large amounts of cash in distressed neighborhoods at readily identifiable locations during evening and weekend hours accounts for this connection. Payday lending may lubricate the cash-only drug trade. Job loss and other factors may drive some desperate people to seek out unsuspecting victims, particularly late at night. The concentration of payday lenders in a community may constitute an unwitting advertisement that there is easy money to be "made" in such communities, and not just by the proprietors.
Payday lending has become big business in recent years, growing from virtually no such outlets in 1990 to more than 22,000 in 2008 doing $17 billion in loan volume annually nationwide, according to the Center for Responsible Lending. In Seattle the number has grown from none just a few years ago to 44 by 2005. For the state of Washington there are now 729 stores, with each doing almost $1.5 million in loan volume each year. Today there are more payday lenders than McDonald's restaurants.
Contrary to industry claims, most customers are not occasional users meeting an unusual emergency. The CRL reported that only 2% of all payday loans went to borrowers who took out just one loan. Over 60% of the loans went to borrowers who took out 12 or more per year. Ironically, more than 75% of the fees paid by borrowers went to covering the costs of loans taken out to repay previous payday loans.
With annual percentage rates of interest on these loans ranging from approximately 390% to 520% nationwide (and about the same in Washington), the CRL estimated that payday lenders have cost borrowers $4.2 billion each year in excessive fees — those exceeding the risk posed by borrowers and which they would have paid for similar services at conventional banks. These services are concentrated in low-income, minority communities though they are beginning to spread to working-class and middle-class neighborhoods, exploiting those who can least afford it.
But it is not just the customers who pay. Local residents, businesses, their customers, nonprofit organizations, their clients and all who live and work in neighborhoods where these stores are located pay. They pay by having to negotiate more dangerous streets. Property values go down, undercutting the equity local homeowners can accumulate. The cost of doing business goes up, discouraging new businesses from moving in and increasing the prices that existing businesses charge. Local governments, in this case the city of Seattle and King County, lose needed revenue resulting in higher taxes, reduced public services, or both.
Many cities and states have begun to respond. At least 15 states and Washington, D.C., have limited interest rates at what has been for generations a traditional usury cap in the U.S. of 36%, so that triple-digit interest rates are a thing of the past in those areas. At least 81 cities, five counties and 19 states have enacted zoning laws limiting the location and density of alternative financial institutions like payday lenders, check cashers and pawnshops. Congress capped the interest rates creditors could charge members of the military and their families at 36%.
Seattle, King County and the state of Washington could take similar action. No doubt this is not just a Seattle phenomenon. State and local officials around the country could respond accordingly.
In the meantime, law enforcement agencies might enhance their services to neighborhoods where these fringe bankers operate. Payday lenders do not simply take advantage of their customers. They create costs that entire communities are paying.