Left behind by banks, poor Americans pay more to borrow

Now Hari Sreenivasan takes a broader look
at the problems lower-income Americans face when it comes to getting the money they need. HARI SREENIVASAN: South Dakota isn’t the only
place where payday loans are such a big problem. While a few states have banned or imposed
strict regulations on these fringe lenders, they’re ubiquitous in most of the country.
In fact, there are more payday lending storefronts than there are Starbucks and McDonald’s combined. In her book “How the Other Half Banks,” Mehrsa
Baradaran explores the booming industry providing financial services to the poor at exorbitant
costs and offers some more equitable solutions. Thanks for joining us. So, why — where is this gap created? And
why isn’t there an incentive for all banks to reach out to all people with money? MEHRSA BARADARAN, Author, “How the Other Half
Banks”: The gap is fairly new. So, starting in the 1980s, a lot of community
banks started shutting down branches in lower-income areas, inner-city neighborhoods, areas where
their profit margins were lower than in other areas. And so part of it is, it’s higher cost
to lend to someone or to take a small deposit than it is to get a big deposit. Right? Your
overhead is the same whether you’re, you know, taking in $100,000 vs. taking in $500, but
your revenue off of that $100,000 is much higher than it is off of that small deposit. And so these banks started leaving these areas.
And part of it is that the government deregulatory forces allowed them to merge and form these
huge conglomerates such as Bank of America. So, as these banks leave, they leave this
void for banking service. And this is a void that quickly is filled by these fringe lenders,
so payday loans, check cashing. HARI SREENIVASAN: Now, when you go through
certain cities, just like there are food deserts where you don’t have a grocery store, it seems
like there are almost bank deserts, where it’s populated primarily with these lenders
that you’re talking about. How much money is there to be made? MEHRSA BARADARAN: It’s an $89 billion industry
yearly. And it doesn’t seem that way. So, when you go into these neighborhoods,
these check cashers or payday lenders, they seem like neighborhood joints. But they’re
really sort of multinational corporations. They’re large, very profitable organizations. And they have this, what I call a facade of
informality, right? So it seems as though, look, they speak your language. They’re in
your neighborhood, but, really, behind them, there is a lot of bank financing. These are
very sort of corporate, big, big firms. HARI SREENIVASAN: These companies are going
to say, look, I’m taking a greater risk. This is a person that is not as creditworthy as
someone who maybe walks into a Bank of America with a much larger amount of assets, right,
so shouldn’t I be able to charge a higher interest rate to get them this money fast? MEHRSA BARADARAN: It is certainly a higher
risk to lend to someone who’s low-income. However, there’s a lot of studies to show
that the price that they’re actually charging isn’t the cost of the loan. It’s also fairly
misleading when you compare it to the credit markets that the middle class and higher income
have access to. And one of the big points of the book is,
even assuming that this is a market price that they’re charging and it is the cost of
credit because of the risks and the defaults, et cetera, the rest of us don’t pay market
prices for credit. The credit markets, whether it’s for our mortgages,
our student loans, any sort of bank credit you get is heavily subsidized by the federal
government. HARI SREENIVASAN: The book is called “How
the Other Half Banks.” Mehrsa Baradaran, thanks so much for joining
us. MEHRSA BARADARAN: Thank you.

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