What the District Could Do About the High Cost of Being Poor
I t goes without saying that it’s hard to be poor — hard to find affordable housing, hard to pay for health care, hard to make ends meet. But it can be expensive to be poor, too.
In the District, the high cost of being poor is most evident in financial services. While moderate- to upper-income people commonly use credit cards if they are short of cash, many poor people turn to deferred-deposit check-cashing services for short-term loans.
These check-cashers charge an extra fee for agreeing to postpone depositing a customer’s check. Customers often pay these fees again and again over many months to keep deferring the deposit. The fees for these “payday loans” are subject to a legal cap, but charging the maximum allowable fees enables a check-casher to earn the equivalent of 336 percent annual interest, 14 times the Dis- trict’s usury law ceiling of 24 percent. Many states, including Maryland, do not allow payday lending that exceeds usury limits.
In addition, poor people without checking accounts are likely to use check-cashing services whose fees, on average, skim about 2.5 cents per dollar off a payroll or government benefit check.
Furthermore, in the District, low-income households are more than twice as likely as others to use refund-anticipation loans offered by tax preparers. Customers take out a loan to cover the costs of their tax preparation services until their tax refund comes through, usually a matter of only a few weeks. The interest rates on these loans commonly exceed 70 percent, nearly triple the usury threshold. For example, if a tax preparer, in anticipation of a customer receiving a $2,400 tax refund, lends the customer $2,400 for one month at 70 percent interest, the customer pays $140 in interest.
Besides paying too much for credit, poor people pay too much for credit substitutes, such as rent-to-own furniture and appliances. Rent-to-own dealers commonly charge usurious interest rates folded into customers’ monthly payments. As is also the case with some more affluent credit-card users, rent-toown customers typically focus on whether the monthly payments are affordable rather than on whether the total cost is reasonable. For instance, in a typical rent-to-own transaction, a customer would pay about $746 for a television that he or she could buy outright for about $218.
Taken together, payday loans, check-cashing fees, refund-anticipation loans and rentto-own arrangements ravage poor people’s limited incomes. Unfortunately, many poor people don’t know how to avoid these costs.
Better consumer education is part — but only part — of the solution. Government also must help protect consumers by ensuring that merchants clearly and prominently disclose the effective rate of interest. Legislation is needed to establish interest rate ceilings that will protect consumers from unconscionable fees in situations where the usury law does not apply. One such bill pending before the D.C. Council is the Payday Loan Consumer Protection Act of 2007, which would close the loophole that, since 1998, has allowed usurious fees to be charged for deferred-deposit check-cashing in the District. And we need to aggressively enforce existing laws to rein in deceptive and abusive practices.
Beyond that, a sure-fire solution is to encourage mainstream banks, credit card com- panies and retailers to market their creditrelated products in poor neighborhoods. In this region, alternative check-cashers and payday lenders disproportionately serve the poor. The number of such outfits, per capita, is more than three times greater in lowincome neighborhoods than in middleincome neighborhoods, and more than 30 times greater than in upper-income neighborhoods. Providing poor people with easy access to reasonably priced credit is the most effective way to dry up demand for pricey alternatives.
It’s hard enough to be poor without the extra burden of high-cost financial services.
Washington The writer is the attorney general for the District of Columbia.