Predatory Inclusion in Consumer Credit: Explaining Black and White Disparities in Payday Loan Use

Payday loans are a high-cost form of credit, yet they remain a popular financial tool used by a significant proportion of Americans. Use of these loans varies significantly across social groups. Black households in particular are more than twice as likely to use payday lending as white households. Explanations for households’ decision to use payday loans remain disputed. Some scholars argue that poor financial literacy is a major driver of payday borrowing. Others propose instead that payday loans are a form of credit of last resort used after depleting higher quality sources of credit. In this article, I argue these explanations are incomplete and miss the racialized nature of payday lending. Payday lending is a form of predatory inclusion: it provides households experiencing exclusion from consumer credit markets with a needed source of credit but under conditions that jeopardize long-term benefits of access. Given historical and contemporary patterns of financial exclusion, this process entails disproportionate reliance on payday lending by black households. Models using data from the Survey of Consumer Finances provide support for both the predatory inclusion and the credit exhaustion explanations. Predatory inclusion, however, explains the largest portion of racial disparities in payday loan use.     

In Defense of the Community Reinvestment Act

In the wake of the 2008 global financial crisis, the Community Reinvestment Act (CRA) of 1977 has probably received more media attention in the past 2 years than it garnered cumulatively over the previous 30 years. Numerous conservative pundits and commentators have blamed the CRA for the subprime crisis and the subsequent worldwide financial meltdown. Most social workers are probably unaware that the CRA is probably responsible for more investment, loans, and wealth creation in low and moderate income neighborhoods than any other single piece of federal legislation over the past 40 years. This article highlights the following features about the CRA that social workers need to know: The CRA was created and passed only because of grassroots community organizing; the CRA has been directly or indirectly related to 8 trillion dollars of investments, mortgage, and small business loans in low income neighborhoods since 1977; community organizing has always been the primary enforcement mechanism of the CRA; contrary to widespread right-wing media accounts, the CRA was not responsible for the housing bubble and worldwide financial crisis in 2008. In this article, we articulate the veridical factors contributing to the financial collapse. Presently, Congress is debating reforms for the financial sector, and the way banking functions will be transacted in the future remains unclear. Regardless of the eventual restructuring of finance, moving forward, social workers should continue to advocate for legislation that will ensure housing for low and moderate income people.     

Which Elderly Home Owners Are Interested in Accessory Apartment Conversion and Home-Sharing

Previous researchers have found high levels of demand for, and utilziation of housing programs by the better off elderly. This pattern of self-selectivity is not shown in the present article which examines the determinants of interest in accessory apartment conversion and homesharing among a sample of elderly homeowners in the Baltimore metropolitan area. Respondents who were under financial stress, as indicated by large uninsured medical expenses, and who were in poor health, were especially interested in these programs. The results indicate the importance of implementing accessory apartment conversion and homesharing in conjunction with counseling, low interest housing rehabilitation loans and other ancillary services.     

ON INTERGENERATIONAL IMMOBILITY: EVIDENCE THAT ADULT CREDIT HEALTH REFLECTS THE CHILDHOOD ENVIRONMENT

We examine the persistence of inequality through credit health, linking administrative records from several sources. We document that childhood circumstances are strongly predictive of financial fragility in adulthood, with credit scores among those from disadvantaged backgrounds nearly 100 points lower and 20 percentage points more likely to qualify as subprime. We find evidence this relationship reflects differences in human capital and debt management; still, neither appears to fully explain the relationship. Our results reveal another dimension along which childhood circumstances persist into adulthood and could mean the many settings that evaluate individuals based on their credit health help reinforce inequities.(JEL D12, E24, I32)     

Does Investment Risk Affect the Housing Decisions of Families?

Households assume substantial house-price risk when purchasing a home. This article investigates the effect of such risk on families' housing decisions. Using a repeat cross-section of household data from the American Housing Survey spanning a 10-year period and measures of expected return and time-varying risk, I find that families are less likely to own and housing demand is reduced during episodes of relatively high, anticipated house-price volatility. The impact is greater on low- and moderate-income families and first-time homeowners than other groups. The results hold implications for policies designed to assist homeowners in lessening the risk they bear. (JEL R21 , D12 , D84 )     

Parental transfer of financial knowledge and later credit outcomes among low- and moderate-income homeowners

It is well established that acquiring financial skills during childhood is linked with better savings in adulthood. Little is known, however, about the relationship between parental teaching of money management early in life and children's financial outcomes in adulthood. This is particularly true for low- and moderate-income (LMI) households. Using data from Community Advantage Program survey data for 2,389 LMI homeowners, we find that adults who report receiving high levels of money-management teaching in childhood from their parents are associated with higher credit scores and lower credit card debt in adulthood. We also find that the level of parental financial teaching influences the relationship between children's later educational attainment and credit scores. These findings suggest implications for initiatives promoting financial capability for parents and children.     

Examining evidence of financial and credit exclusion in Canada from 1999 to 2005

Changes are occurring in the provision of consumer credit, including the expansion of subprime and some fringe financial services (e.g., payday lending). We link two existing literatures on credit constraint and financial exclusion to assess the impact of these developments on the financial circumstances of low and modest-income consumers. We develop a model that identifies observable measures of credit constraint and financial exclusion and relate them to consumer characteristics and life cycle behaviour. We estimate this model using the two latest Surveys of Financial Security for 1999 and 2005, which provide consistent evidence of credit constraint and financial exclusion through time. We find modest overlap among our measures of financial exclusion, which include a zero balance/no account, credit card refusal, and using a pawnshop. Probit regression is used to investigate the factors influencing the incidence of financial exclusion. The results are similar for 1999 and 2005 and indicate rising incidence of financial exclusion as income and wealth fall, although the relationship is nonlinear such that incidence rises much faster at very low levels of income and wealth. Our analysis also suggests potentially important links between financial literacy, formal education, asset building, and financial exclusion and credit constraint. When we combine the samples, we find statistically significant evidence of growth in the incidence of each indicator of financial exclusion when other factors are held constant. Policy implications may include the strengthening of banking regulations that affect low-income Canadians and the promotion of universal financial literacy.     

Strengthening senior tax credit programs in Massachusetts

In the last decade, property taxes have increased, creating a financial burden on senior homeowners. In Massachusetts, senior property tax credit programs have arisen to address this problem, as well as to provide cost-effective volunteer assistance for municipal departments, offer seniors meaningful work that otherwise would not have been attempted, and foster involvement in municipal government among seniors. The success of the programs in retaining senior homeowners in the community remains to be evaluated. Program specifics are detailed, policy options are considered, and recommendations are made to strengthen existing programs and assist replication.     

Boom and bust: housing equity withdrawal and consumption decisions and their impacts on household wealth

The authors examine whether the surge in housing refinance and equity withdrawal generated by the housing boom disproportionately affected older households in terms of decisions on whether to refinance, whether to withdraw equity, and how much to withdraw, and how in turn these decisions affected their household wealth. Using the Federal Reserve's Survey of Consumer Finances, the authors found the highest rates of refinancing and cashing out equity among older (although not necessarily the oldest) households. The authors also found that appreciation in house value, being a baby boomer, and having higher household income were the factors that most increased the probability of refinancing and withdrawing equity. Amounts cashed out were higher among older than among younger households. Ordinary least squares (OLS) estimates showed that amounts withdrawn were increased by price appreciation, financial assets, and income, along with being a "pre-boomer" or "early boomer." Older cohorts displayed larger wealth effects than younger ones, but their withdrawn equity was a smaller percentage of total net worth. A relatively small percentage of respondents' dollars was used for consumption, and most dollars were used for home improvement, other investment, or debt repayment. However, massive equity withdrawal and the subsequent collapse of housing prices have caused housing leverage to soar, putting some homeowners "underwater" and jeopardizing others' retirement preparedness. The ensuing housing finance crisis raises numerous policy issues, from reform of mortgage underwriting, securitization, servicing, and foreclosure procedures, to potential limitations on borrowing against unrealized housing equity gains, to enhanced government transfers for distressed older homeowners, to local and state revenue policy changes.     

Loans for energy conservation in sweden and connecticut: some comparisons

In field studies conducted in Sweden and Connecticut data were collected to evaluate the effects of home loan programs on residential energy conservation. While many households take the loans, it is not clear whether the availability of a loan is critical for, or merely incidental to, a decision to take a conservation action.Representative samples of residents in owner-occupied, single-family dwellings were interviewed by telephone. Samples of loan users also were contacted to collect equivalent data on energy conservation behavior. Results show a greater utilization of this type of energy incentive among Swedish homeowners, while Connecticut homeowners, both loan users and the random sample, reported higher levels of energy conservation activity. Loan users in both countries live in slightly older buildings, but differences in housing quality may be a factor influencing the level of conservation activity. The paper examines variations by household income, knowledge about the loan program, sources of information as factors that may be affecting differences between countries and program status.The paper concludes with a discussion of these findings and their implications for the implementation of energy conservation policy.     

Strengthening Senior Tax Credit Programs in Massachusetts

Summary

In the last decade, property taxes have increased, creating a financial burden on senior homeowners. In Massachusetts, senior property tax credit programs have arisen to address this problem, as well as to provide cost-effective volunteer assistance for municipal departments, offer seniors meaningful work that otherwise would not have been attempted, and foster involvement in municipal government among seniors. The success of the programs in retaining senior homeowners in the community remains to be evaluated. Program specifics are detailed, policy options are considered, and recommendations are made to strengthen existing programs and assist replication.     

STUDYING THE EFFECTS OF HOUSEHOLD AND FIRM CREDIT ON THE TRADE BALANCE: THE COMPOSITION OF FUNDS MATTERS

In this article, we focus on distinguishing between household and corporate sector credit and investigate the effects these two types of credit have on the trade balance. A higher level of private credit indicates better developed financial markets and easier credit access for businesses and households. Yet, both types of borrowers vary in terms of the use of credit. Our model and empirical analysis suggest that the composition of credit does matter for the trade balance: lending to consumers has a negative effect on net exports, while firm loans contribute to a rise in net exports . ( JEL F32, F41, G21)     

Exiting or retaining owner-occupied housing in the United States 1999–2009: How do social programs matter?

This research examines exits from homeownership in the United States between 1999 and 2009 using data from the Panel Study of Income Dynamics. We first document the extent to which homeowners exited owned housing (to a rental unit or a rent-free unit) during that time period. Second, we examine how socio-demographic characteristics, housing characteristics, debt levels, and receipt of public and private transfers are associated with exiting (or retaining) homeownership, with a particular focus on whether transfers counteract earnings decreases and/or housing cost increases to assist homeowners in retaining their homes. We also investigate whether these associations differ for several subgroups of homeowners defined by their location in the income distribution and race. Findings from regression models that include individual, year, and state fixed effects highlight the role of both labor markets and housing markets in influencing exits from homeownership. More generous and universal public transfers (such as OASDI) appear to help owners retain homes, whereas less generous and means-tested transfers do not. At the same time, the influences of universal transfers on retaining a home are small in magnitude compared to those of decreases in earnings and home values as well as increases in payment-to-income and consumer debt-to-income ratios.     

The evolution of housing finance in Indonesia: Innovative responses to opportunities

Indonesia has been a late starter in the development of a modern housing-finance system. Its growth has been constrained, among other things, by a housing-delivery system that encourages informal housing that cannot be formally financed, by the repressive effect of a small volume of heavily subsidised loans, and by a financial system which has few sources of long-term finance. Nevertheless, an environment of financial deregulation has recently generated some innovative responses from the country's bankers and policy makers, including development of a secondary mortgage facility, and the marketing of short-term, small, non-mortgage construction loans. This paper describes recent changes in housing finance in Indonesia in their political and economic context, and conjectures that conditions are now sufficiently stable for the market to continue to mature.     

Financing low-income housing in South Africa: Borrower experiences and perceptions of banks

South Africa is facing a low-income housing crisis, with the current backlog estimated at over three million units. An obstacle in the provision of low-income housing is the difficulty encountered by commercial banks to extend loans in this market despite supporting initiatives by Government. A lack of knowledge on the borrowing behaviour, preferences and experiences of low-income households in accessing housing finance from the commercial banking sector in South Africa hampers an understanding of the reasons for these problems. This paper's contribution is to provide information on the experiences and perceptions of low-income borrowers in the housing market of South Africa, specifically in their dealings with commercial banks. Results from a survey of 653 households across five provinces of the country are provided. In the survey, a structured questionnaire was used to obtain information on the experiences and perceptions of low-income households about their access to credit and housing finance, their experience of banks, the successes in credit approval, their judgements on the suitability of banks’ home-loan products, as well as preferences with regard to prices and interest rates.     

Education loans and wealth building among young adults

With the use of education loans growing rapidly as a way to finance college education, it is important to examine how such loans impact the future financial well-being. This study examines the association between education loans and postcollege wealth accumulation among young adults, the group with the greatest share of outstanding education loans. Data come from 15 rounds of data of the 1997 National Longitudinal Survey of Youth, and the analyses control for a number of student characteristics, college experiences, and parental income. Results from a treatment-effects model indicate that having education loans upon leaving college is negatively related to postcollege net worth, financial assets, nonfinancial assets, and value of primary housing. Furthermore, having education loans also has an additional negative link to the value of net worth among Black young adults. The relationship between the amount of education loans and wealth accumulation is not statistically significant among those with outstanding loans. The study findings indicate the importance of developing alternative approaches, instead of additional loans and other credits, to meet the financial needs of college students.     

The Effects of Homeownership on Civic Participation among Immigrant Farmworkers in Washington State

Homeownership is generally considered to have positive benefits for families and communities. However, the collapse of the housing market in 2009 led to questions about this assumption, especially for low‐skilled workers whose employment is volatile. This question is particularly relevant to the farmworker population in rural communities for whom homeownership might function as the first step in the path toward social integration. In this study I ask whether homeownership impacts immigrant adaptation among farmworkers in Washington State. To answer this question researchers analyzed 2,845 responses from the Washington State Farm Worker Survey. I divided the sample into renters and homeowners and evaluated behaviors and attitudes along three dimensions: perceptions of community efficacy, civic engagement, and motivations for civic engagement. I found that when compared with those who rent, farmworkers who are homeowners tend to have a greater sense of community efficacy, are more engaged in their communities, and are more motivated to get involved in local affairs. These findings suggest that homeownership can function as a vehicle for immigrant adaptation among Washington State farmworkers. This bodes well for the future of the state's rural areas, where Latinos are increasingly becoming the majority in many agricultural communities.     

A Cautionary Tale: Discriminatory Lending against Hispanic Farmers and Ranchers in Southern Colorado

Despite legal and civil emancipation, minorities in the United States continue to face extremely unequal opportunity structures in the financial realm. Evidence of this is found in the fact that segregation between Anglos and minorities has changed little since the civil rights era. This is particularly true for Hispanics, who have actually witnessed an increase in segregation in recent years. Although many factors have contributed to this outcome, unequal access to financial credit has played a particularly important role in maintaining the status quo between Hispanics and Anglos. In this article, I analyze the lasting impact of discriminatory lending within Hispanic communities in southern Colorado. I examine how unfavorable access to credit has contributed to wealth disparities in this region. My results demonstrate that lenders systematically denied Hispanic farmers and ranchers access to subsidized loans throughout the twentieth century. The lack of access to formal banking, the underappreciation of homes and land, and the deliberate isolation of Hispanics from formal institutions forced many Hispanic families to leave the area altogether. Ultimately, unequal access to credit has fostered deep inequalities between Anglos and Hispanics in the region, which, in turn, has reinforced ethnic tension between these two groups.     

Beyond "banking for the poor": credit mechanisms and women's empowerment

This article describes some strengths and limitations of credit programs for women in developing countries. It is urged that development planners recognize the importance of the selection of the type of credit mechanism in the long term. Ethical issues should be decided upon before the credit mechanism is operable. Organizations should make clear what level of commitment there is to empower borrowers. Most organizations give loans to women and assume empowerment will take place without devising strategies to ensure empowerment. Credit mechanisms include credit for the poor and credit by the poor. A sound financial portfolio and 100% repayment are not the appropriate criteria for securing the empowerment of women. Empowerment of women is related to "building the capacity of borrowers to manage and control decision making." UNICEF's framework of gender equality and women's empowerment identifies levels of empowerment as "welfare, access, conscientisation, participation, and control." Development planners should be aware that provision of credit also has the potential to increase a poor family's debt. Delinquency may be hidden by overlapping loans that trap borrowers. Fewer installment payments increase the chances of a debt trap. Reducing the number of installments may reduce administrative costs and conform to production processes, but may also lead to a debt trap. There is now considerable emphasis on investing in low-income women entrepreneurs as a highly efficient means of achieving social and economic objectives. Credit programs aim to support the growth of small, self-sustaining businesses, to improve women's opportunities, and to provide alternatives to exploitation by local money-lenders. This article describes the following credit mechanisms: bank guarantee systems, government credit schemes, intermediary projects, direct lending projects, banks for the poor, credit unions, and village-based banks.     

Financial policy innovation for social change: a case study of China's green credit policy

Financial policy impacts on a range of social issues such as poverty alleviation, education, pollution control, etc. Making good use of financial policy and applying innovation to existing financial systems can generate positive outcomes for society. This article is to discuss the case of green credit policy in China. This policy was jointly announced in 2007 by financial and environmental regulators. According to this policy, banks were encouraged to give more loans to environmental friendly companies than to others. Such policy has made great progress, and it became a more formal document entitled ‘Green Credit Guideline’ in 2012. This guideline included a comprehensive definition on green credit and specified several requirements at practical levels. Despite the great success, challenges of implementing such policy still remain. First, information about corporate environmental performance is insufficient; second, market incentives for green credit policy are not high enough; third, most banking staff lack knowledge and capacity to handle environmental affairs. Nevertheless, this case still sheds light on how financial policy innovation drives social changes. The key is to identify the connection between social issues and financial issues, and then to make a business case that creates pressures or incentives for financial institutions. This requires a market where social and environmental cost is appropriately priced and internalized to those who generate it. Ideally, financial policies should help shape such a market so that society can share values created by financial institutions.