As Congress debates financial regulatory reform and the Obama Administration advocates for greater consumer financial protection, a new study by researchers at Cal State Northridge and The George Washington University finds a need for Congressional action on fringe banking practices used heavily by financially vulnerable families.
The study released today details the toll on communities with a high concentration of payday lending businesses and finds a clear association between the presence of payday lenders and neighborhood crime rates. The study recommends that Congress take action to cap payday-lender interest rates at 36 percent, enacting for the entire country protections Congress put in place for U.S. military families.
The new study, “Does Fringe Banking Exacerbate Neighborhood Crime Rates? Social Disorganization and the Ecology of Payday Lending,” was conducted by Cal State Northridge professor Steven M. Graves and The George Washington University professors Charis E. Kubrin and Gregory D. Squires.
“These findings will surprise very few who both understand how this industry operates, and have witnessed its explosive growth in the very neighborhoods that have struggled to reduce crime,” Graves said.
Squires said the study “shows that not only do individuals suffer from predatory lending practices, but entire communities can pay a price for a high concentration of payday lenders. Congress took an important step by limiting payday loan interest rates in military base communities, but it shouldn’t stop there. Congress should do for all communities what it did for military families.”
Kubrin said that as a criminologist, she can “attest to the fact that there is woefully limited research on the impact of the behavior of financial institutions on neighborhood crime. As our research demonstrates, these connections can no longer be ignored by criminologists and law enforcement officials across the country.”
The study examined payday lending, a practice that has become part of the growing web of fringe banking largely concentrated in low-income and disproportionately minority communities. It allows lenders to provide cash advances on post-dated checks and has increasingly become a way for financially strapped families and individuals to obtain money in the short run. Nearly all of these loans come with exorbitantly high interest rates and fees, and the monetary costs to families, who become trapped by them, have been well documented.
The study found that there are broader community costs that all residents incur in those neighborhoods where payday lenders are concentrated, given the socioeconomic status of the lenders’ customer base and the location of their services. These broader community costs include higher rates of violent crime. The study found that the association between payday lending and violent crime remains statistically significant, even after taking into account a range of factors traditionally associated with crime.
The researchers offered several policy recommendations to reign in predatory practices and provide incentives for banks and other financial institutions to provide alternatives that would preserve access to small consumer loans. As an immediate step, they recommend that Congress cap interest rates at 36 percent. Several states currently provide this project to consumers, and Congress enacted this protection for loans to members of the military and their families.
A draft of the study can be found at http://www.gwu.edu/~newsctr/09/pdfs/Payday_Lending_and_Crime_Working_Paper.pdf.
Steven M. Graves, an associate professor of geography at Cal State Northridge, has been researching the patterns and effects of differential access to credit for more than a decade, publishing several articles on the spatial behavior of payday lenders. His co-authored article exposing the extraordinary concentration of payday lenders near military bases, published in the Ohio State Law Review, was named the Cal State Northridge Pre-eminent Scholarly Publication in 2008. He received his Ph.D. in geography from the University of Illinois in 1999.
Charis E. Kubrin is an associate professor of sociology at The George Washington University. She is currently working on a variety of projects that reflect her larger research agenda on neighborhoods, race and violence as central to social disorganization theory. In 2005, Kubrin received the Ruth Shonle Cavan Young Scholar Award from the American Society of Criminology and the Morris Rosenberg Award for Recent Achievement from the District of Columbia Sociological Society. In 2007, she was a visiting fellow at the Centre for Criminology at Oxford University. Kubrin served as president of the District of Columbia Sociological Society in 2007-2008. She currently is heading up the Dean’s Scholars in Globalization Program at The George Washington University. She received her Ph.D. in sociology from the University of Washington in 2000.
Gregory D. Squires is a professor of sociology and public policy and public administration at The George Washington University. He also is a member of the board of directors of the Woodstock Institute, the advisory board of the John Marshall Law School Fair Housing Legal Support Center in Chicago and the social science advisory board of the Poverty & Race Research Action Council in Washington D.C. He has served as a consultant and expert witness for fair housing groups and civil rights organizations around the country, including the U.S. Department of Housing and Urban Development, the National Fair Housing Alliance, the National Community Reinvestment Coalition and others. He also served a three-year term as a member of the Consumer Advocacy Council of the Federal Reserve Board. He has written for several academic journals and general interest publications, including Social Problems, Social Science Quarterly, Urban Affairs Review, The Nation, The American Prospect, The New York Times and the Washington Post. Prior to joining the faculty at The George Washington University, Squires taught at the University of Wisconsin-Milwaukee and served as a research analyst for the U.S. Commission on Civil Rights.