How High-Cost Loans Are Affecting Black and Latino Communities in Memphis
A new report links the impact of high-cost loan storefronts mostly concentrated in minority communities in Memphis to the city’s widening racial wealth gap.
A report by Political Institute of Hope and Memphis Black Clergy Collaborative published on Wednesday said that while these loans (which include payday loans) are marketed as a “quick financial fix”, they are often designed as “debt traps”. This is attributed to the triple digit interest rates on the loans and the repayment mechanisms which can leave those more in debt before taking out the loan.
“The more things change, the more they stay the same,” said Reverend Darell Harrington, economic empowerment chair of the Black Clergy Collaborative and senior pastor of New Sardis Baptist Church. “It’s basically economic slavery. Every time an individual borrows a small amount, $400 or $500, and over time they get locked into a situation where they pay back thousands and thousands dollars, it’s a real trap.
According to the report, there are 114 high-cost loan stores in Memphis, with the majority concentrated in the densely populated black and Latino neighborhoods of North and South Memphis.
Here are three takeaways from Hope and Black Clergy Collaborative’s report on high-cost loans and their impact on minority communities in Memphis.
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Where are the high cost loan storefronts in Memphis?
Of the 114 high-cost loan storefronts in Memphis, 71 are concentrated in six Memphis ZIP codes, all in heavily populated minority areas.
Postcode 38116, primarily Whitehaven, has the most storefronts with 15, according to the report. Postcode 38115, Hickory Hill, is second on the list with 12.
Four ZIP codes have 11 Memphis high-cost loan storefronts (38111, 38122, 38128, and 38118), located in Orange Mound, Jackson/Berclair, Egypt/Raleigh, and Oakhaven, respectively.
“These patterns are enabled by and reinforce long-standing residential racial segregation and exclusionary lending practices, such as redlining, predatory mortgages and covenants,” the report states.
The 114 high-cost loan storefronts are more than double the number of McDonald’s and Starbucks locations combined in Memphis.
Seventy-four of the 114 storefronts are owned by non-state lenders, of which 52 (45%) are owned by two companies. Texas-based Populus Financial Group, Inc./Ace Cash Express has 29 storefronts and Georgia-based TitleMax/TMX Financing has 23.
Diane Standaert is senior vice president of policy and advocacy for Hope Enterprise Corporation and Hope Credit Union. In his role, Standaert directs the Hope Policy Institute.
She said reporting and visualizing the number of storefronts headed out of state further shows the inequities caused by their presence.
“They’re basically siphoning people’s money and hard-earned paychecks out of people’s pockets and into the pockets of these big out-of-state companies,” Standaert said. “It’s not just storefronts there to provide people with help when needed. They are storefronts for essentially sucking up resources and sending them elsewhere.
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Impact of High-Cost Loans on Memphis’ Racial Wealth Gap
In Memphis, 60% of Latino households and 50% of black households are liquid asset poor, compared to 20% of white households, according to the report. Liquid asset poverty measures whether a person has a sufficient financial cushion for basic needs for at least three months after an unexpected loss of income.
The report states that “high-cost loans, through their cost extraction and economic consequences,” perpetuate this wealth gap.
About 15% of white households in Memphis are considered unbanked or underbanked, meaning someone may have a bank account but use other financial services such as payday loans or money orders. That’s compared to 45% of black households in Memphis and more than 50% of Latino households classified as unbanked or underbanked.
High-cost loans can lead to an increased likelihood of overdraft fees, failure to pay other bills, involuntary bank account closures, and bankruptcy. For example, payday loans can incur up to 460% APR on a loan due in full in 14 days, as permitted by state law.
This could lead the borrower into a loan cycle if the loan is not repaid on time. The typical borrower is usually in 10 payday loans per year. More than 75% of all payday loan fees are generated by borrowers with 10 or more payday loans per year, according to data from the Consumer Financial Protection Bureau cited in the report.
Solutions for Dealing with High Cost Loans in Memphis
Last fall, the Black Clergy Collaborative launched an initiative with Hope Credit Union connecting people to financial products to help borrowers save and potentially avoid falling into a cycle of debt.
Once nominated by Hope from a participating church, a person can receive a small loan of up to $1,000. The person has access to half of the loan immediately, while the other half goes into a savings account to collect the interest.
Once the borrower has repaid half of the loan at a rate between 6 and 18 percent, the amount that was in savings becomes available, plus accrued interest, according to a September editorial on the trade call explaining the program.
Harrington said he has worked with about 30 families since the program began.
“We want individuals to understand that there is hope, that there is a better way to manage and maintain good financial condition even when they are going through tough times,” he said.
Locally, in 2009, Memphis and Shelby County passed a joint ordinance prohibiting the construction of new high-cost loan storefronts within 1,000 feet of people’s homes. In 2020, the Memphis City Council passed a resolution asking the Tennessee General Assembly to eliminate payday loan operations. The city does not have the authority to enact this change at the local level.
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This resolution passed after The Commercial Appeal report in February 2020 showed that Memphis, Light, Gas & Water collected $22 million from more than 133,000 payments made at 30 ACE Cash Express stores in Shelby County.
The Black Clergy Collaborative and the Hope Policy Institute are calling on the state legislature and federal lawmakers to reduce some aspects of high-cost lending. One suggestion is to cap interest rates at 36% or less, a protection in place at the federal level for active duty military and 18 states plus Washington, D.C. Arkansas is one of 18 states that caps rates at 17%, according to the report.
Omer Yusuf covers the Ford Project in Haywood County, residential real estate, tourism and banking for The Commercial Appeal. He can be contacted by email. [email protected] or follow on Twitter @OmerAYusuf.