What the Dis­trict Could Do About the High Cost of Be­ing Poor

The Washington Post Sunday - - Close To Home -

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.

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