'Unbanked' but No Longer Ignored
Tuesday, October 13, 2009
For years, the country's makeshift network of payday lenders and check cashers has operated with little competition or federal regulation.
But as the financial crisis sparks a new wave of consumer protections, lawmakers and the private sector alike are training their sights on an industry that caters to the most vulnerable of populations: the estimated 40 million households on the margins of the nation's financial system, with limited, if any, access to banks or credit.
Congress is debating the creation of a Consumer Financial Protection Agency that would provide federal oversight of the industry for the first time. In addition, several bills have been introduced to cap the often-triple-digit interest rates on payday loans, long considered by many one of the industry's most abusive practices.
Meanwhile, big companies are muscling into a sector that has been dominated by independent operators, lured by the promise of a largely untapped $13 billion market. Wal-Mart, the world's largest retailer, stepped up the competition earlier this year by slashing prices on its most popular financial services, such as check cashing. Start-ups have emerged to offer lending to niche groups, such as Hispanic immigrants, at dramatically lower rates.
"People are always damaged by these products. . . . This can be the thing that pushes them over the brink," said Rachel Schneider, innovation director of the nonprofit Center for Financial Services Innovation. "In a recessionary environment, the consequences of using predatory products are more apparent."
In the financial world, those without access to traditional financial services have been dubbed the "unbanked." With spotty bank records and thin or nonexistent credit reports -- documents often required to rent an apartment, buy a cellphone or even get a job -- they rely on storefront businesses that may charge a 4 percent fee to cash a check or a 995 percent annual interest rate for a short-term loan.
Though the number of unbanked is difficult to track, Schneider said anecdotal evidence suggests that their ranks increased as the recession deepened. The center estimates that median household income for the unbanked is $26,390 -- about half of the national median -- and many have little to no savings.
Anthony Jeffers lives in North Carolina, where the unemployment rate is 10.7 percent, and he travels to Washington every other month to hunt for construction work. The costs are high -- he pays for an apartment in both places.
The expenses overwhelmed him last year, so Jeffers turned to a payday lender to get $800 for his rent. When he repaid the loan two weeks later, he owed about $1,100, meaning he paid more than 30 percent interest, or 975 percent on an annualized basis.
"All you're thinking of is getting your money to take care of your situation," said Jeffers, who was standing outside a check casher in the District on a recent afternoon after buying a money order to pay his rent back home. "It just seems like a lot of interest to pay back."
The proposed federal agency -- one of the White House's signature pieces of legislation -- would have broad authority to set new national standards for the non-bank industry and investigate complaints, marking the first time the industry would fall under the eye of a federal agency. Until now, it has been overseen largely by the states. Congress is still hashing out details of the legislation, and a vote is expected this fall.
"We want a watchdog on the financial industry, both the currently regulated and the unregulated market," said Steve Adamske, spokesman for the House Financial Services Committee. "Hopefully, this agency will level the playing field."