Asset building 101: Develop a banking relationship, and steer clear of financial predators!

One of the first things often mentioned in a discussion of asset building is the issue of the unbanked.  That is, individuals who do not benefit from traditional financial services such as checking or savings accounts and access to credit. 

According to the National Disability Institute, approximately 30% of people with disabilities have a checking account, while only 12% possess a savings account.  This phenomenon is not limited to people with disabilities.  In fact, in California, the nation’s richest state, nearly half the population does not have a savings account and 25% of African Americans and Latinos do not have a checking account at all.  California is not alone with such numbers.  According to a National Survey of Latinos conducted by the Pew Hispanic Center-Kaiser Family Foundation, 35% of all Latinos and 53% of Mexican immigrants in the United States are unbanked.

Recently, I was discussing this issue with a colleague in the disability community.  Frankly, she didn’t believe it was that big of a problem and she didn’t believe it was a concern with people she knew.  Similar skepticism and accompanying rationalizations are often voiced in various parts of the community. That got me thinking…is it really that bad out there?  The truth of the matter is….yes!  Mortgage foreclosures, the contracting economy, and inflation worries aside, there are a few simple financial rules of survival that many people are choosing to ignore.  That, of course, is their choice, but the consequences are long-term, significant, and profound. 

Without access to basic financial services, many people turn to check cashers, payday lenders, and pawn shops for their financial services needs.  This is an expensive proposition that virtually traps people in a revolving nightmare of poverty and debt.  According to the Wall Street Journal, non-banked full-time workers pay an average of $40 to cash each pay check; an amount that adds up to over $40,000 over the worker’s lifetime.  That is not a typo!  Forty thousand dollars in fees to convert one’s earning to cash over a lifetime.  That is just the simple mathematical consequence of not having a checking or savings account. 

According to the Brookings Institute, were those fees to be invested in the stock market, an individual would accumulate over $360,000 (three hundred and sixty thousand dollars) for retirement.  The decision is clear: $40,000 in fees or $360,000 in accumulated wealth.  It starts with the choice of how too cash that next check, the choice to direct that next $40.

Despite the overwhelming numbers, many Americans still choose to patronize check cashers and payday lenders.  More than twenty million Americans still cash more than sixty billion dollars in checks each year at such institutions, while the payday lenders sell an additional $40 billion in expensive small-dollar loans each year that carry fees thirty times the average credit card rate, according to the Wall Street Journal.

Again, 30 times more interest than a credit card is not a typo!

The trap is usually triggered by an unforeseen expense—the van needs repairs so one can get to work, or perhaps an unforeseen medical bill sends one seeking emergency cash. 

Here’s how it works: These lenders often charge as much as $17.50 per $100 dollars borrowed.  If the consumer wants to borrow $500.00 dollars, that means a fee of $87.50 for the 14 day advance. 

The structure of the next step can vary, but often works like this: The consumer will not receive $500.00 but that amount less the $87.50, or $412.50.  When the consumer receives her next pay check, her first stop is back at the payday lenders.  Remember, she owes $500.00 even though she only received the $412.00.

Usually, she cannot afford the outstanding balance, or $500.00.  In fact, her paycheck or benefits check or both is already spoken for with food, rent, gas, etc.  As a result, the payday lender will happily roll that $500.00 loan into a new loan of $587.50 (500.00 times 17.50 per 100 borrowed).  This loan, to pay off the first loan, will also be due in 14 days, and the lending trap is complete.  Within one month, the consumer has received cash of $412.00 and already accumulated interest of $175.00.

Research shows that the payday lending business model is designed to keep borrowers in debt, not to provide one-time assistance during a time of financial need. According to research done by the Center for Responsible Lending (CRL), borrowers who receive five or more loans a year account for 90 percent of the lenders’ business.

The lending business all adds up to an eight billion dollar industry with twice as many store fronts as McDonald’s restaurants in the United States. Behind the scenes, industry lobbyists from state to state assist in the growth of this lending business by pushing for illusory reforms that seem progressive. In reality, these reforms fail to reduce the rates at which payday lenders flip borrowers into new transactions that collect more interest with no reduction in principal.

Advocates across the nation and state representatives have been making great strides in reforming the payday predatory lending industry:

• Bringing an end to the practice of trapping borrowers in 400 percent payday loans, the governor of Ohio, for example, has promised to sign a 28% interest rate cap that was finalized by the Ohio House on May 20, 2008, a reform that passed the State Senate a week prior.  The measure received strong bipartisan support, including sponsorship and support by Republican leadership. A fierce coalition of consumer, religious, and business groups kept the fire burning in the media and the pressure on lawmakers to do the right thing throughout the hard-fought battle.

• It is estimated that Ohio's citizens will save $210 million per year in abusive fees, adding the state with the fourth largest number of payday loan stores to a growing list of jurisdictions that have had enough of triple-digit interest rates. Industry-provided researchers testified that the average Ohio borrower had eleven to twelve transactions per year, so borrowers end up routinely paying back more in interest than they borrowed.

• In addition, New Hampshire, Oregon, and the District of Columbia have passed two-digit caps on sky-high lending rates. In Arkansas, the attorney general recently chased out payday lenders who were not in compliance with the 17% cap outlined in its constitution.  This brings the total to 15 states plus D.C. that have freed themselves from outstanding predatory payday lending rates.

• Similar efforts have been made on the municipal level of government as well:  Boston, Los Angeles, Miami, New York, Providence, San Francisco, Savannah, and Seattle, each have begun efforts to reach out and educate the populations of unbanked residents, while also attempting to limit growth of the payday lending industry.

Many go to payday lenders for a short-term advance of up to $800 on their paycheck, but the terms of the loan make it difficult to pay off and walk away the first time. They find themselves trapped in a loan they can't afford to pay off for months on end.  Employers, banks, credit unions and community based organizations all need to come together to help address this issue. 

Many non-banked consumers including people with disabilities, however, are either leery of banks, have concerns regarding banking privacy, or believe the products and services are too expensive or are not necessary.  It is crucial to recognize that the cost of being unbanked far outweighs any costs associated with a checking or savings account.  That said, consumers need to be smart shoppers when it comes to opening an account.  Many banks and credit unions offer free accounts with direct deposit of a pay check or monthly benefit check.  Often these accounts come with free bill pay by internet or by phone and offer access to affordable loan products for lower income individuals.  Many of these institutions also provide financial education training to assist the consumer in improving their financial situation.  They can help establish and repair credit, open a savings account, and provide many other services specifically tailored to the needs of the customer.  These credit unions and community development financial institutions want your business and are organized around the concept of customer service.  For more information, check out the National Federation of Community Development Credit Unions at www.natfed.org or find a credit union or community bank in your neighborhood.

Choose to open an account, join the mainstream and improve your financial future.