Does fringe banking exacerbate neighborhood crime rates? Investigating the social ecology of payday lending

Research Summary Payday lenders have become the banker of choice for many residents of poor and working-class neighborhoods in recent years, often trapping the most vulnerable residents in a cycle of debt. The substantial costs that customers of these fringe bankers incur have long been documented and have been the subject of much policy debate as part of the controversy over financial services generally in recent years. Yet there is reason to believe there are broader community costs that all residents pay in those neighborhoods where payday lenders are concentrated, costs which have not yet been recognized or taken into consideration in policy debates. One such cost may be an increase in crime. Social disorganization theory provides reason to expect that where payday lending proliferates, neighborhood crime rates increase. In a study of Seattle, Washington, a city that has seen a typical increase in the number of payday lenders, we find that a concentration of payday lending leads to higher violent and property crime rates, controlling on a range of factors traditionally associated with neighborhood crime. The findings suggest important policy recommendations that could ameliorate these costs. Policy Implications Several steps could be taken by state and federal financial regulatory officials (including legislators and regulators), private industry and nonprofit financial service providers, and law enforcement agencies to help eliminate the predatory practices ofpayday lenders, along with the subsequent community costs, and to provide access to small consumer loans on an equitable basis. Among the steps that could be initiated immediately are the following: 1. Congress could cap the interest rate thatpayday lenders are allowed to charge at 36% as several states have done and Congress did for loans to members of the military and their families; 2. Credit unions could, profitably, offer small loan programs that enable their members to access credit on reasonable terms and to save and accumulate wealth as some community development credit unions are currently doing; 3. Federal banking officials could provide Community Reinvestment Act credit to depository agencies that provide small consumer loans on equitable terms in order to encourage larger lenders to offer such services; 4. Stateandlocalgovernmentscouldenactzoninglawslimitingthenumberanddensity ofpayday lenders as several have already done. 5. Financial service regulators could establish suitability standards requiring lenders to offer only those loans that are in the financial interests of the borrowers and 6. Law enforcement officials could provide additional service in neighborhoods where payday lending outlets are concentrated. There may well be additional community costs that have not been recognized To further understand the range of costs associated with payday lending, we propose the following research agenda. 1. Property values may be adversely affected as crime rates increase and those costs should be estimated; 2. Owners ofpayday lending outlets often reside outside of the neighborhoods in which the businesses are located, resulting in a drain of capital from those areas that should be quantified; 3. The costs in other communities beyond Seattle should be determined; 4. To complement this snapshot of Seattle, longitudinal research should be conducted Access to a wide range of financial services on an equitable basis has become the subject of much policy debate and social science research in recent years. Payday lenders constitute part of a network of fringe bankers that have been concentrated in low-income, minority communities but have begun to spread throughout metropolitan areas. Costs to borrowers have been documented with some precision. But broader community costs have not been subject to scrutiny. That payday lending is associated with crime should, in fact, come as no surprise. How we choose to respond to that connection remains to be determined.