OPINION: Congress has the power to ‘fix’ the lack of access to loan options, but their decision could leave Blacks permanently in the poor house
Why the 2019 Protecting Consumers from Debt Traps and Unreasonable Rates Act is not the answer to Black people's financial dilemmas.
I remember when I was in college in the late 1980s going into the early 1990s, my mom and brother would sometimes just have $25.00 a week to live on. My mom had a stable, good job working as a Registered Nurse, but as a single mother who found herself newly divorced with one kid in college and the other about to enter high school, she had to count her pennies.
Like many Black families, we had few options. There were no payday lenders or short-term loans back then. You could take a cash advance on your credit card, but that was not a great option. Typically, most people just borrowed money from family and friends or just simply found a way to get through until that next paycheck. Fast forward to 2019.
Black female heads of households, like the one I grew up in, now account for over 68 percent of Black households as opposed to 37 percent for white, non-Hispanic single female heads of household, according to the Center for American Progress. And that is where this discussion should begin, because like most things in America, race and gender play a huge role in who gets access to capital, to loans, to financing, credit cards and the like.
Just like with my own family, bills could easily get behind if a tire had to be replaced, if there was a medical emergency, or even if the car broke down. This is not uncommon for many Americans. For example, according to the Federal Reserve, 46 percent of Americans do not have enough money to cover an emergency expense of just $400.
As we head into the 2020 Election Cycle, candidates running for President on both sides are rightly focused on healthcare, the economy, jobs, and student loans. However, one key issue that is simply being ignored is one that impacts tens of millions of Americans daily—a solution for a short-term money infusion in the case of a medical emergency, a sick parent, shoes for my kids, or simply putting food on the table when funds are low.
The short answer is that there are currently many popular loan products where African Americans, Hispanics, and Native Americans are typically the customer base as they are more than twice as likely than white customers to use these products. Unfortunately, many of these loans carry APRs greater than 36 percent, which can be devastatingly difficult to pay back.
I know that there are some strong arguments being put forth about the cost of these products, and many of these criticisms are warranted. The types of credit people of color have access to are usually more expensive and less competitive, because it’s tougher for folks like us to get credit from a traditional bank. Yet, the challenge is where do women and people of color in the working class and working poor go for credit or cash when there is no “savings” to tap into and the banks have already said “no?”
Right now, the U.S. House of Representatives Financial Services Committee is debating the Protecting Consumers from Unreasonable Credit Rates Act of 2019, legislation that would eliminate the excessive rates and steep fees charged to consumers for payday loans but then impose an interest rate on all consumer loans at an Annual Percentage Rate (APR) of 36 percent.
This cap will have potentially negative repercussions on the Black community and especially on Black women and entrepreneurs. Here are some facts we should consider as the arguments being put forth by Rep. Maxine Waters, Senator Bernie Sanders, Rep. Alexandria Ocasio-Cortez and others take shape:
Over sixteen percent of African Americans do not have a bank account and therefore often rely on alternative forms of credit.
- African Americans need more credit to take advantage of economic opportunities, but they can’t get credit without being credit-worthy.
- Women are more likely than men to be “underbanked” and therefore to rely on consumer loan products that carry higher interest rates.
- African-Americans are twice as likely as other borrowers to use payday loans.
- In recent years, banks have closed branches, and the closures have taken place disproportionately in African American communities.
- While the average African American wealth level is $5,446, the average White American wealth is 11 to 16 times higher.
- Sixty-nine percent of Americans have almost no savings, and it is well documented that the average African American’s personal wealth is lower than that of the average White American. Without the availability of nontraditional options, people who are desperate to pay their bills and make ends meet are more likely to end up bouncing a check, bankruptcy, piling up debt on a credit card and paying only the monthly minimum.
- African American entrepreneurs are more likely than White entrepreneurs to rely on personal credit, rather than business credit, to raise the capital to launch their businesses.
- Once established, businesses often rely on infusions of credit to weather downturns and to cover unexpected expenses, and African American business owners—especially Black women who are business owners—are more likely to rely on personal credit, rather than business credit, to keep their operations afloat.
- Regrettably, African American business owners are two to three times more likely as business owners as a whole to report “lack of access to business loans/credit” or “lack of access to personal loans/credit” as a reason for their businesses’ closures.
People who are desperate to pay their bills and make ends meet are always going to gravitate toward less desirable options. There’s no reason this should continue to be the only options for people of color, and women who are single heads of households, sometimes working more than one job to make ends meet.
Yes, high interest rates on payday loans or credit cards are not an ideal solution, however we can’t take those tools away and replace them with nothing. A national rate cap on consumer loans would shock the marketplace and devastate people of color and minority business owners. This is why we need traditional options of savings accounts, liquidating investments and 401Ks available in a way that encourages economic parity and allows disenfranchised communities to make better, smarter choices for their present and futures.
Sophia A. Nelson is an award-winning journalist and author of the award winning book, “Black Woman Redefined: Dispelling Myths and Discovering Fulfillment in the Age of Michelle Obama.”
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