Concentration of payday lending associated with neighborhood crime rates study finds

Recommends Congress Cap Payday Lender Interest Rates at 36 Percent

As Congress debates financial regulatory reform and the Obama Administration advocates for greater consumer financial protection, a new study finds a need for Congressional action on fringe banking practices used heavily by financially vulnerable families. The study released today details the toll on communities with a high concentration of payday lending business and finds a clear association between the presence of payday lenders and neighborhood crime rates. The study recommends that Congress take action to cap payday lender interest rates at 36 percent, enacting for the entire country protections Congress put in place for U.S. military families. The new study, entitled “Does Fringe Banking Exacerbate Neighborhood Crime Rates? Social Disorganization and the Ecology of Payday Lending,” was conducted by The George Washington University professors Charis E. Kubrin and Gregory D. Squires, along with Dr. Steven M. Graves of California State University, Northridge.

“As a criminologist, I can attest to the fact that there is woefully limited research on the impact of the behavior of financial institutions on neighborhood crime. As our research demonstrates, these connections can no longer be ignored by criminologists and law enforcement officials across the country,” said Charis Kubrin.

The study examined payday lending, a practice that has become part of the growing web of fringe banking largely concentrated in low-income and disproportionately minority communities. It allows lenders to provide cash advances on post-dated checks and has increasingly become a way for financially-strapped families and individuals to obtain money in the short-run. Nearly all of these loans come with exorbitantly high interest rates and fees, and these monetary costs to families who become trapped by them has been well documented. However, this study finds there are broader community costs that all residents incur in those neighborhoods where payday lenders are concentrated. These broader community costs include higher rates of violent crime. The study found that the association between payday lending and violent crime remains statistically significant even after a range of factors traditionally associated with crime are controlled for statistically.

“This study shows that not only do individuals suffer from predatory lending practices, but entire communities can pay a price for a high concentration of payday lenders. Congress took an important step by limiting payday loan interest rates in military base communities but it shouldn’t stop there. Congress should do for all communities what it did for military families,” said Gregory Squires.

The researchers provided several policy recommendations to reign in predatory practices and provide incentives for banks and other financial institutions to provide alternatives that would preserve access to small consumer loans. An immediate step Congress could take is to cap interest rates at 36 percent. Currently, several states provide this protection to consumers, and Congress enacted this protection for loans to members of the military and their families.

“These findings will surprise very few who both understand how this industry operates, and have witnessed its explosive growth in the very neighborhoods that have struggled to reduce crime,” said Graves.

The working paper can be read here: http://www.gwu.edu/~newsctr/09/pdfs/Payday_Lending_and_Crime_Working_Paper.pdf

Source: George Washington University