Twelve million American households rely on `fringe lending,' Fannie Mae reports

WASHINGTON – More and more households are turning to check cashing stores, payday lenders and pawnshops to meet their financial needs in part because the `fringe lending’ industry is quickly becoming an outlet for one-stop shopping. This according to a recently released report by the Fannie Mae Foundation titled “Financial Services in Distressed Communities: Framing the Issue, Finding Solutions,” that found as many as 12 million American households do not have accounts at credit unions, banks or savings institutions. The numbers continue to swell, according to Fannie Mae for three reasons: such households lack physical proximity to mainstream financial institutions; their lack of understanding of or trust in such institutions and a lack of basic consumer finance education including not being familiar with how a checking or savings account works. “While there are many reasons why lower-income, largely minority households don’t do business with mainstream financial institutions, it’s clear that these households’ reliance on alternative services leaves them seriously disadvantaged,” said Stacey Davis, president and CEO of the Fannie Mae Foundation. Fannie Mae acknowledged that fringe lending has filled an important gap in the financial services needs of lower-income households but the cost of doing business for those households can be detrimental in the long run. Because pawnshops, payday lenders, and similar establishments typically do not offer savings products or services, households that rely exclusively on such establishments to meet their financial services needs have neither the incentive nor the opportunity to save, the report showed. “Lack of savings seriously disadvantages low-income and minority households and communities by frustrating people’s efforts to become homeowners and by limiting market-driven community investment activity,” said James Carr, Fannie Mae Foundation senior vice president and principal author of the report. Many fringe lenders engage in subprime lending, a controversial form of credit extension that has come under fire by regulators and consumer groups for charging excessive fees and requiring expensive and often unnecessary insurance. “The recent explosive growth of subprime lending raises questions about the extent to which households may be targeted for high-cost mortgages as a result of their race or ethnicity, rather than their creditworthiness,” the report read. Subprime loans are three times more prevalent in lower-income neighborhoods than in high-income areas, and five times more likely in Black communities than in White neighborhoods, according to Fannie Mae. Twenty-nine percent of the 12 million households that rely on fringe lending are Hispanic and one-third are African American. The numbers certainly show the so-called “un-banked” are rapidly becoming forces to be reckoned with – they generate $78 billion in gross revenue and $5.5 billion in fees each year. Check cashers, payday lender, pawnshops, rent-to-own stores and related institutions now engage annually in at least 280 million transactions. Fannie Mae has proposed a number of solutions for fringe lenders that include a single national reporting requirement that would enhance regulators’ ability to examine industry practices. So far, fringe-lending outlets are regulated at the state level with wide degrees of regulatory oversight. A national requirement would closely examine fee schedules, collateral requirements, number of customers served, and revenue and earnings statements. For subprime loans, more complete information on these items would allow regulators and policy makers to note the potential vast differences in credit terms extended to borrowers on the basis of race, ethnicity, age, gender, or other personal attributes unrelated to creditworthiness, Fannie Mae said. Technology efforts between fringe lenders and mainstream financial institutions could connect households receiving government benefits to low-cost access through electronic transfer accounts. Products could also be developed between the two that would meet the unique needs of lower-income families. The Foundation’s findings underscore the need for more consumer education programs which have and will continue to be a key focus for the National Federation of Community Development Credit Unions, said Cliff Rosenthal, executive director. NFCDCU will launch a capitalization project that will bear some of the risk of community development credit unions expanding their lending to victims of predatory lending. A program called PRIDE or Predatory Relief and Intervention Deposits is expected to launch by the end of the year. “The findings underline the need for more education and we’re glad the Foundation pointed out the efforts of CDCUs,” Rosenthal said. – [email protected]