Predatory lending. High-cost lending. Fringe finance. Regardless of how we classify high-cost lending and financial transaction – they are a massive problem in our community.
Picture a bucket filled with financial resources in low- and moderate-income communities. There are slow leaks in the bucket, so some dollars are escaping. Aging housing stock, underemployment, stagnant wages, and macro-economic challenges are the cause of these holes. Philanthropy, nonprofits, municipalities, and corporations work to address these issues. But here is the kicker. Payday loans, money orders, check cashing, auto-title loans, paid tax preparation – these poke giant holes in the bucket. Already strapped families with leaking holes in their buckets, soon experience massive holes that are not easily repairable.
What’s more, predatory lending undermines other community investments. Take a job training program that elevates a worker from an $8 an hour job to a $15 an hour job with some benefits. They become “bankable” and are working toward saving and spending more effectively. But, their landlord only takes money orders, so this worker pays $10 each month for a money order from their bank. To get to their job, they have a car (after all, Ohio invests some of the lowest levels of dollar in public transportation), which needs repairs. So the worker, now with a checking account and a paycheck, takes out a 2-week balloon payment payday loan to pay for the repairs. Two-weeks later, the payday lender cashes the check and now the worker is short on dollars for the other bills and is faced with the lose-lose proposition: borrow again or fall behind on other bills.
The most recent CFED Assets and Opportunities Scorecard recognizes this for Ohio and the country. Ohio receives low-grades for our ineffective rules around payday and auto-title lending, high underbanked rates (20% in Ohio), and low homeownership rates (2x worse for minority communities).
WHAT CAN WE DO?
* Enact paid tax preparer regulation. Believe it or not, your hair stylist – regulated/licensed by Ohio. Your paid tax preparer – not. Cities, Ohio, and federal government can all do so much better here. Ohio could also do what municipalities in Ohio does and fund free tax preparation.
* Housing policy…lacking. What does Ohio do to promote and incentivize low- and moderate-income homeownership? Not nearly enough. How about a statewide down payment assistance program?
* Refundable EITC. The Earned Income Tax Credit (EITC) is the nation’s largest work support and poverty relief program. Ohio, very wisely, enacted a state credit to piggyback the federal credit. But unlike the majority of other states, Ohio’s credit is nonrefundable – meaning it does far less to get dollars back into the community.
* Support the CFPB as they move to better regulate payday lending – moving to a system without a balloon payment and with better underwriting.
* See a host of policy proposals that we should consider and tell us what YOU think.