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Memphis hosts approximately, according to the 2020 census 633,000 people, 64.5 percent of whom are African American. Like a new report from the Black Clergy Collaborative of Memphis (BCCM) and Institute for the Politics of Hope– the political arm of credit union hope, a Delta-based Community Development Financial Institution (CDFI) — reveals that Memphis is also home to a staggering 114 predatory lender store fronts. That’s more than one shop for every 6,000 inhabitants.

Those 114 storefronts, the report’s authors point out, are “more than double the number of Starbucks and McDonalds combined” citywide (2). This is just one finding in the new report by the two organizations, titled High-priced debt traps widen the racial wealth gap in Memphis, which examines at the micro level how wealth is being drained from black Americans on a daily basis in the city of Memphis, Tennessee.

Memphis is the second poorest city in the country (population 500,000 or more) with a 2020 poverty rate, as shown by census data. 24.6 percent. By draining assets from low-income, and especially black, neighborhoods, predatory interest rates reinforce this poverty. In Memphis, 45 percent of black households and over 50 percent of Hispanic households are unbanked or unbanked, compared to 15 percent of white households (6). Naturally, people who lack comprehensive banking services are most likely to turn to alternative sources of finance, including predatory lenders.

Memphis in Context: The National Reach of Predatory Lending

At the NPQ We have written regularly about the racial wealth gap. Often the focus is on how to build BIPOC wealth. But no one should lose sight of the fact that BIPOC assets are being siphoned from communities every day. As Jeremie Greer of Liberation in a Generation wrote shelter force Earlier this year: “The racial wealth gap is a systemic problem, not a product of black people’s personal choices. And no matter how many wealth-building opportunities we create for Black people and other people of color, those efforts will never succeed if we leave the wealth-building processes intact.”

One of the processes Greer describes is lending — borrowing at triple-digit interest rates. According to article Payday Lending, published by the Federal Reserve Bank of St. Louis, is a $9 billion market. As an economist Jeanette Bennett writes that “a typical $375 loan incurs an average of $520 in re-borrowing fees.” When you add check handlers and related businesses, the size of the pirated credit industry is even larger. An estimate puts the number on $19.1 billion. Black and Hispanic families are disproportionately affected. And like a recent study by Jim HawkinsLaw Professor at the University of Houston, and Tiffany buma recent law school graduate, published in the Emory Law Journal Documents, marketing is crooked to attract borrowers of color.

In their article, Hawkins and Penner noted that in Houston, “While African Americans make up only 15.6 percent of auto title customers and 23 percent of payday loan customers, 34.8 percent of the photos on these lenders’ websites depict African Americans.” They add that 77.3 percent of the physical location ads they surveyed targeted color rental companies.

How predatory lending extracts wealth from communities

Predatory lenders go by many names: payday loans, auto title loans, and flex loans are the most common. Regardless of the name, they share three-digit interest rates and mandatory repayment mechanisms. In their report, the Hope Policy Institute and BCCM outline how these lending mechanisms work:

payday loan: In Memphis, Tennessee law allows a borrower to charge an annual percentage rate (APR) of 460 percent on a two-week loan. Some states allow even higher interest rates; Texas has the highest in the country, with a 664 percent APR.

What does 460 percent mean every two weeks? This effectively results in a fee of just over $17.50 per $100 borrowed. As the report’s authors explain, “Payday lenders gain access to a borrower’s bank account by requiring either a postdated paper check or an electronic bank authorization (ACH) as part of the lending transaction. This means that the day a borrower receives their income—be it their paycheck, stimulus check, or Social Security check—the payday lender is first in line for repayment” (8). These loans can – and of course are regularly – extended for a fee; Over 75 percent of lender fees are generated by people who borrow for 10 consecutive two-week periods or longer.

Auto Letter Loan: These are not backed by a paycheck but by a vehicle. According to the report’s authors, a typical $300 loan incurs $66 in fees for 30 days, which translates to an APR of 267 percent. Like payday loans, these loans are typically rolled over — an average of eight times, according to national data. In Tennessee, in 2019, the latest year for which data is available, 45 percent of auto loans granted that year defaulted and over 11,000 cars were repossessed (9). Notably, 2019 was a relatively good year for auto title borrowers in Tennessee. In the six years from 2014 to 2019, title loan companies seized over 101,000 cars nationwide — an average of nearly 17,000 seizures a year.

Flex loan: Created in Tennessee in 2014, these act as a perpetual line of credit that can be backed by either a paycheck or a car. While payday loan borrowing is capped at $500, flex loans allow you to borrow money up to $4,000.  Tennessee state law sets the interest rate on flex loans at 24 percent; However, borrowers must also pay a daily processing fee, or “usual fee,” of up to 255 percent, resulting in an effective combined annual rate of 279 percent (9).

The geography of credit

As mentioned above, predatory lenders’ marketing efforts focus on attracting borrowers of color. Additionally, if you look at a map of the 114 predatory loan stores in Memphis, it becomes clear that the location of these stores is far from random, as almost all are in neighborhoods heavily populated by people of color.

The report’s authors track not only the geography of the physical location of the storefronts, but also the geography of the storefronts’ ownership. As the report details, 74 of the 114 storefronts are owned by companies headquartered outside of Tennessee, with 52 of those owned by just two companies — Texas-based Ace Cash Express (Populus Finance Group) and Georgia-based Title Max (TMX Financing). This means more than half of the profits generated by payday lenders, title companies, and flex lenders are drawn entirely from the Memphis community and end up in the hands of foreign investors and managers instead.

political solutions

There are many complicated issues related to economic policy. However, the end of triple-digit interest rates is not one of them. As BCCM President Reverend J. Lawrence Turner says in the report he co-authored, the impact of charging up to 460 percent interest on loans serves to “effectively entangle the working poor in webs of long-term debt” (7).

It’s worth noting that today’s predatory lending is a relatively recent development. As Pew Charitable Trusts has documentedwhile it can appear That payday lenders have always been with us is not the case. From 1916 and for many decades capped monthly interest rates at 3.5 percent; Annual APR ratings varied between 18 and 42 percent across states. This changed with the deregulation of consumer protection in the 1970s and 1980s. As Pew puts it, “As this deregulation progressed, some state legislatures sought to act in kind for state lenders by approving deferred presentation transactions (loans made against a postdated check) and triple-digit APRs. These developments are setting the stage for federally licensed payday lending businesses to thrive.”

Even today, only 18 states and the District of Columbia limit borrowing to annual interest rates of 36 percent or less. This includes many states in the Northeast (Vermont, New Hampshire, Massachusetts, Connecticut, New York, New Jersey, Pennsylvania and Maryland). But many others have also acted. In the South, Arkansas, West Virginia, North Carolina, and Georgia, for example, have similar laws. In the West and Midwest, similar laws exist in Illinois, Montana, South Dakota, Nebraska, Colorado and Arizona. A recently American banker The article adds that similar legislation is currently under discussion in four other states – Michigan, Minnesota, New Mexico and Rhode Island. There are also pending federal laws introduced by Sen. Sherrod Brown (D-OH) that would create a national ceiling of 36 percent.

The report’s authors add that the Federal Office for Consumer Financial Protection could use its regulator to act even if the Senate blocks legislative action. “The CFPB,” the authors point out, “has the ability to enact new rules that ensure expensive lenders like those in Memphis don’t endlessly keep people stuck in prohibitive debt cycles like they are doing now” (7).