Tuesday, March 15, 2011

Preyday Lenders

Payday lenders – or “deferred presentment service providers,” as they call themselves – are painfully pervasive in the city.  While 15 states have banned payday lending, Michigan embraced the payday lending industry with the passage of PA 244 in 2005.  Lenders are allowed to charge some of the highest rates in the country with little risk of enforcement or real penalties. Due to this relative freedom, payday lending has proliferated.  Detroit is especially inundated with these predatory businesses.  With 44 payday lenders, Detroit has nearly five times more lenders per square mile than Oakland County, and more than three times more Macomb County.  There are more payday lenders than bakeries, and more than two payday lenders for each produce market.

Nationally, payday-lending customers often get caught in a predatory cycle in which they use subsequent payday loans to pay existing ones.  In almost no cases do people get just one payday loan.  This trend isn’t surprising, given Michigan’s maximum allowable rate for payday lenders: 391.1% APR / 3685.7% EAR.


In addition to this exorbitant interest rate, lenders operate in a market with minimal enforcement.  Today, 12% of Detroit’s 44 payday lenders with ads in the local Yellow Pages are unlicensed according to State of Michigan data.  Besides being unlicensed, there are other infractions, too. According to google streetview and the companies’ own websites, some of the lenders falsely advertise affiliation with the FDIC and charge fees beyond those allowed by state law.  Together, all of this suggests a troubling level of law enforcement. 


This lack of proper enforcement is especially troubling because payday lenders inherently deal with the city’s most vulnerable residents – those that can least afford to fall victim to these kinds of oversights.  As this map suggests, payday lenders prevalent in areas with low education attainment rates.


Payday lenders are also concentrated in areas dominated by African American residents.  As this map illustrates, only four of the city’s 44 payday lenders are in the 20% of block groups with considerable white, Asian, Arabic, or Hispanic populations. 




Most troubling, perhaps, is that in the rare instance that payday lenders face enforcement action, the penalties seem inconsequential.  In the only instance of state officials shuttering an unlicensed payday lender listed on Lexis Nexis, the owner was fined $5,000.  By contrast, failing to check ID while selling beer carries a prison term of more than 90 days.  Clearly, the current penalties aren't a deterrence.     


Given the Detroit City Council's willingness to standup to other harmful businesses, it's time to increase enforcement, if not regulation, of these lenders at the local level.  As it stands, the residents who can least afford these punishing rates are the ones facing the consequences.  


Special thanks to my colleague, Nick Kahn, for suggesting this topic.

21 comments:

  1. Great post highlighting some depressing realities that are easy to ignore. In terms of action, is it up to the city to set and enforce fines and the State that controls the enabling legislation, then?

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  2. Can you post some more details about the high school education correlation? From the map you posted, it looks like a fair number of the loan providers are located in the relatively more-educated northwest side of Detroit, with around 16 of them bordering on at least one area that is in the most-educated range.

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  3. Robbie, I believe you can do a regression in Arcgis that would help flesh this out. I have never done it before but the argis reader had a good article in it a couple of months ago about how to perform it.

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  4. @ Ben- Thank you so much for your kind words!

    @ Matt- Oh no! Thank you for pointing that out. The map that is supposed to be there is one showing 8th grade attainment. I'll have to make the switch once I get back to the lab. Thank you for pointing that out!

    @ Anon- Yes! I'm actually starting to learn how to do multivariate regressions in Arcgis, but I don't feel confident enough to go public with regression maps. Stay tuned for some of those, and thank you for the great comment!

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