Wealth Stripping--Why It Costs So Much to Be Poor__Democracy-A Journal of Ideas

7/30/2019 Wealth Stripping--Why It Costs So Much to Be Poor__Democracy-A Journal of Ideas

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the objective o the assets feld over its frst 20 years. Without more capital,

amily balance sheets will be unbalanced, and too many aspiring amilies will

never realize the American Dream. The asset-building feld, somewhat cozy

and boutique thus ar, is now ready or prime timeand the nation, ollowing

a massive decline in household wealth and retooling or a new economy, needs

to know what it has learned. d

wealth tripping:

why t Costs o Much to Be oor

James H. Carr

Within the public policy arena, the contemporary use o the term wealthstripping has generally reerred to fnancial products and services like

payday lenders, rent-to-own stores, and the like that exploit the lack

o fnancial sophistication among economically disadvantaged populations.

Awareness o the problem among policy-makers and advocates arguably origi-

nated with Michael Sherradens 1991 book, Assets and the Poor. Sherradens

landmark work spawned a virtual avalanche o research, proposals, and innova-

tive initiatives on asset building. Out o that body o research grew signifcant

attention toward wealth stripping. John Caskeys seminal 1996 book, Fringe

Banking:Check-Cashing Outlets, Pawnshops, and the Poor, was the subjectsoundational text, highlighting how the high cost o alternative or ringe lend-

ers strips away the fnancial resources o the poor. Many other scholars have

since ollowed with dierent perspectives on both saving opportunities and

the wealth-stripping challenges conronting the poor.

Even today, writings on the subject o wealth stripping tend to ocus principally

on the high cost o alternative fnancial services. But the Great Recessiondriven

by the oreclosures that hit minority communities especially harddemands a

broader examination o the issue to include ways in which the ailure to impose

or enorce consumer protection and anti-discrimination laws can lead to evengreater harms. This broader perspective is essential i we are to understand and

james h. carris a Closing the Racial Wealth Gap Fellow with the Insight

Center or Community Economic Development and a ormer executive

committee member o Americans or Financial Reorm. He has also served as

chie business ofcer with the National Community Reinvestment Coalition

and has published and lectured extensively on access to fnancial services or

underserved communities.


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address the unique hurdles aced by low- and moderate-income households and

people o color, who are disproportionately aected by these problems.

Wealth stripping has only increased during the economic crisis. Since the

onset o the Great Recession, Americans have lost $7 trillion in equity in their

homes. The Federal Reserve estimates the median American amily has lost

nearly two decades o wealth, or almost 40 percent o their assets. In a separate

report, the Pew Research Center estimates that Latinos, Asians, and Arican

Americans have experienced wealth losses o 66 percent, 54 percent, and 53

percent respectively, compared to 13 percent or whites. These losses are largely

due to home oreclosures and lost equity.

In the wake o the crisis, it is imperative that we understand wealth strip-

ping to include both predatory fnancial services and the huge loss in wealth

that resulted rom oreclosures that stemmed rom subprime lending. Millionso households that neither accessed a predatory loan product nor were ore-

closed upon have nevertheless experienced exceptional wealth loss due to the

concentration o oreclosures in their neighborhoods. Millions o borrowers

also now hold mortgages that are valued at more than the price o their homes.

While the recently established Consumer Financial Protection Bureau (CFPB)

should help in eradicating much o the predatory lending that occurred prior

to the Great Recession, the CFPB is not empowered to address the allout rom

the fnancial crisis. Dealing with that atermath is essential to avoid urther

substantial wealth stripping as we climb out o the recessions rubble.

According to the Federal Deposit Insurance Corporation, roughly nine

million households are unbanked. Adults in these homes do not have a

savings or checking account rom a mainstream bank or credit union. An

additional 21 million households are underbanked, meaning they have a checking

or savings account but rely instead on alternative fnancial services provided by

check cashers, payday lenders, pawn shops, and automobile-title lenders. This

translates into 60 million adults who operate outside o the fnancial-services

mainstream. More than hal o Arican Americans and nearly 45 percent oLatinos and American Indian/Alaskans all into this category.

The alternative fnancial-services industry is big business, with an estimated

340 million transactions each year costing customers $13 billion annually. Jan-

neke Ratclie, executive director o the Center or Community Capital, points

out that check-cashing and payday-lending storeronts outnumber all McDon-

alds, Burger King, Target, Sears, J.C. Penney and Wal-Mart stores and branches

combined (33,000 versus 29,000 respectively). The ees these alternative (also

known as ringe) lenders charge are steep. Nonbank check-cashing costs on


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average $40 per payroll check. Although expensive, relatively speaking, thats

a bargain compared, say, to rent-to-own stores, where a computer that retails

or $851 can end up costing $4,459 ($49 per week or 21 months or 91 payments).

Ratclie urther fnds that a subprime credit card with a $300 limit can come

with ees totaling $250.

Initial high-cost ees are not the only or even greatest fnancial harm that

can result rom using an alternative fnancial-services provider. Relying on an

auto-title lender, or example, can result in the loss o ones automobile since

the borrowers car title is pledged as collateral or the loan. The typical auto-

title loan is generally only 30 to 50 percent o the value o the vehicle used as

collateral, but i the borrower ails to make the ull repayment on time, he or she

stands to lose the entire value o car, not just the outstanding loan amount. (And

i that car is needed or work, then theloss o it can mean the loss o a job.)

Payday loans are widely known or

being fnancially ruinous to their cus-

tomers. Such loans are generally 14-day

cash advances that cost between $15

and $30 per $100 borrowed, and range

in size rom $100 to $1,000 with the

median loan size about $350. In addi-

tion to interest rates that typically exceed 400 percent annually, payday loanscan trap consumers into rolling over the same debt multiple times, incurring

excessive expenses on relatively small initial loan amounts. The Center or

Responsible Lending estimates that more than 75 percent o all payday loans

are the rollovers o previous unaordable debt.

In their deense, these lenders claim they serve communities that banks

do not. To some extent, they have a point. There are ar ewer banks in minor-

ity neighborhoods than in white ones. But physical proximity is not the only

barrier to greater bank usage cited by lower-income and minority consumers.

Many alternative fnancial-services customers do not trust banks, do not eelwelcome at them, do not understand the products they oer, and cannot aord

the steep ees they charge. For debit cards, the typical overdrat ee o $34 is

triggered by transactions that average just $17. And bank ees have been rising

since the onset o the current economic crisis. According to a report by the Pew

Charitable Trust, the median extended overdrat penalty ee at the nations 12

largest banks has increased 32 percent since 2010.

Disappointingly, there are substantial and growing connections between

mainstream banks and alternative lenders. One study ound that more than 40

5-line pullquotes are best.

4-line pullquotes are also

good and 6-line pullquotes are

acceptable but not ell liked

dummy dummy copy dummy.


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percent o the payday-loan industry is fnanced by the nations largest banks.

Moreover, some recent bank products mirror those o the most predatory alter-

native storeront lenders. Many traditional banks have entered the payday-loan

arena, or example, with a product called a checking account advance loan.

Those loans typically are or a 10-day period and carry an annualized interest

rate o 365 percent. Its worth noting that the nations largest banks are able

to borrow at a practically 0 percent interest rate due to the Federal Reserves

monetary policy.

O course, the most damaging and predatory loan product o all was the

subprime mortgage that triggered the ongoing oreclosure crisis. The loss

o wealth rom oreclosures has been unnecessarily compounded by our

inability to respond adequately to the crisis and the continued ailures o theederal oreclosure-prevention programs.

The higher numbers o oreclosures among minority households related to

predatory loan products has been extensively documented. Prince Georges

County in Maryland is the highest-income majority Arican-American county

in the nation and, ironically, also the oreclosure capital o that state. In a recent

study on oreclosures in that community, high-income borrowers in Arican-

American neighborhoods were 42 percent more likely to go into oreclosure

than typical borrowers in white neighborhoods. High-income borrowers in

Latino communities ared worse: They were about 160 percent more likely toexperience a oreclosure.

The reasons or the dierences in oreclosure rates between residents in

minority and nonminority communities are not known; they are not explained

by dierences in basic money management or loan or product type, since these

variables are controlled or. Some possible causes could be a ailure to apply or

or receive similar treatment with respect to loan modifcations, ewer savings

to cushion fnancial shocks, higher levels o unemployment or underemploy-

ment, and higher levels o negative equity or minority households; gaining a

ull understanding o these causes is critical.In addition to this direct loss o wealth, neighboring residents in the com-

munities in which oreclosures have been concentrated have also suered.

Distressed home sales drag down adjacent home prices, and improperly main-

tained vacant and abandoned properties can cause home prices in a community

to collapse. (Not all neighborhoods are treated the same by the mortgage ser-

vicers who are responsible or the maintenance o their oreclosed properties: A

recent investigation by the National Fair Housing Alliance ound that oreclosed

properties in communities o color were more than 80 percent more likely than


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those in white areas to have broken or boarded-up windows and other visible

maintenance defciencies.) Failing to prevent oreclosures and maintain vacant

and abandoned properties has contributed to wealth stripping, particularly in

minority communities. Research by the Woodstock Institute ound that Arican-

American and Latino communities in the Chicago area are likely to experience

twice the amount o negative home equity (the amount by which the value o

a mortgage exceeds the value o a home) as non-Hispanic white communities.

Foreclosures have other harmul impacts on community. One consequence is

a decrease in property tax revenue as a result o alling property values, which

can harm local schools and other essential social services. Large numbers o

oreclosures can also cause a loss in community cohesion and stability as ami-

lies that have lost their homes relocate out o the neighborhood. And large

numbers o oreclosures can lead to increasing crime that accompanies vacantand abandoned properties.

Going orward, there are some changes that must at a minimum be made.

First, people should be able to access bankruptcy protection in order to

maintain their homes. Right now, the amily home is the only asset that

cannot be restructured in bankruptcy proceedingsthough the outstanding

debt on a luxury yacht, vacation home, or investment property can be modifed.

This serves no legitimate public purpose and disproportionately harms those

amilies and communities most aected by the current oreclosure crisis. It hasbeen estimated that bankruptcy protection could have prevented thousands o

oreclosures, and at no cost to the American taxpayer.

Second, credit reports should distinguish whether poor credit repayment

behavior is the result o a mainstream or predatory fnancial product. Such a dis-

tinction would permit many subprime mortgage borrowerswhose deault was

due to deceptive loan products, not their unwillingness to payto obtain credit

cards or other consumer credit, as well as secure employment opportunities.

Third, policy-makers and regulators should remain aware that access to a ull

continuum o aordable and reliable fnancial products and services is essential,and that vulnerable consumers need to be protected. They need to exercise their

authority with both urgency and careurgency in purging the excessive and

exploitative costs o ringe fnancial products and services, care in maintain-

ing the customer-riendly marketing and operations that alternative-lending

customers value. This includes aordable homeownership fnancial products

that will be essential to jump-start the housing market and begin the process o

rebuilding the enormous wealth loss resulting rom the pre-crisis prolieration

o reckless and unsustainable subprime mortgages.


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The recently established CFPB goes a long way toward addressing the con-

cerns Ive laid out here. The agency has broad authority over predatory lending

in the mortgage markets as well as retail consumer fnancial services. The worst

o the subprime lending practices that were virulent prior to 2008 have already

been eliminated and the CFPB has the authority to ensure they do not return.

And, or the frst time, the ederal government, through the CFPB, has direct

authority over the fnancial-services practices o alternative or ringe lenders.

But the CFPB is not a panacea. For example, it is not authorized to address the

challenges presented by vacant and abandoned properties resulting rom ore-

closures. Nor does the agency have the ability to dictate more eective loan-

modifcation practices to help consumers avoid urther oreclosures.

While much progress has been made, a great deal o work still needs to be

done. The ailure o private institutions to serve all amilies and communitiesequally has been an important impediment to disadvantaged amilies. Getting

our leaders to begin caring about such amilies is essential to creating greater

economic equality and a fnancially stronger America. d

Manufactured ousing:

he omeoners o ne hinks f

Paul Bradley & George McCarthy

The weather in Unadilla, New York, a small town about 40 miles east o

Binghamton, was pretty typical one aternoon in August 2010: sunny skies

and temperatures in the low 80s. But as one o the residents o Unadillas

Meadow Valley Manuactured Home Park looked out her window, she didnt

like what she saw. She was chagrined by the alarming deterioration o the vacant

home next door and, even more, by the decline in the lot around it. Weeds crept

up to the windows, over stairs and railings, and the situation threatened her

home with deer ticks and fres. One day, a rat the size o a small dog had emerged

rom beneath the home to greet her.

paul bradley is the ounding president o ROC USA, a social venture that

combines expert technical assistance and fnancing to help homeowner

cooperatives purchase their mobile home parks.george mccarthy directs

the Ford Foundations Metropolitan Opportunity program, which ocuses on

providing low-income people in the United States better access to jobs and

other opportunities by supporting regional planning eorts, transportation

investments, and housing development policies.

Documents

Wealth Stripping--Why It Costs So Much to Be Poor__Democracy-A Journal of Ideas