Regulators are going to bump up against a real Catch-22 -- when you rein banking practices, some groups get cut off from credit.
This week's credit check: People of color are more likely to pay credit card interest rates of 20%. Women make up two-thirds of those seeking help for their debt loads.
The ability to stay away from credit cards is a privilege, as is being offered banking products, including checking accounts. Indeed, minorities and women have historically been shut out of the products others take for granted. And this problem was one of the excuses used by the industry to deregulate and "democratize" credit. But as access to credit and banking expanded, so did predatory practices. As the CFPB tries to rein them in, it risks shutting people out all over again.
As "Up to Our Eyeballs" recalls, before deregulation women, African Americans, and Latinos were all but excluded from credit by the good old boys at the helm of the country's financial institutions. Women were given credit only with their husband's signature and in his name, no matter what their own personal finances were. Divorced and single women were often unable to buy a house or a car, let alone open up a credit card account. Barbara Parramore recounted for me her own experience attempting to get a credit card in 1973: "I filled out all the papers, and then the man said, 'Well if you have your husband come down here and sign this form with you we'll isuse you the credit card.' I rose up in my seat and I said, 'Well no, I will not have my husband come down here, if my name is not good enough I will not have a card with you.'" She promptly left -- but such practices were the norm of the time. Meanwhile, African American communities were simply shunned by banks and shut out of lending altogether. "Entire neighborhoods were redlined -- that is, declared off limits," the book notes.
So deregulation was promoted as a way to bring access to credit for everyone, and it met with some success. Minority homeownership and access to credit cards has increased, and women are now able to open cards in their own names without a husband's involvement. But the story for minorities has been very mixed: "As low-income Americans and people of color have gained the ability to borrow," the book points out, "many have been channeled into a world of manipulative practices and fringe players." Gary Rivlin recounts in "Broke USA" that when nonbank lenders started to realize there were profits to be made in low-income neighborhoods in the early 1990s, they preyed upon the poor, who had never been lent to before. "[T]he typical customer...didn't feel ripped off paying interest rates of 20% or more but instead felt grateful that finally, someone was saying yes," he notes. And in fact they are still more likely to be paying interest rates on credit cards of 20% or more, says "Up to Our Eyeballs".
Women haven't been targeted by predatory practices in nearly the same way, but they are often seduced into retail credit cards that come with whopping APRs. These are the cards that cashiers offer you as you check out at the Gap or Macy's, with little time to check the fine print on any agreements. CreditCards.com found that 19 such cards had APRs of 23 percent or higher, up from only 11 in 2009, and those rates are rising. Meanwhile, women are carrying more debt now than two years ago and make up two-thirds of those looking for help for it, including a significant increase in divorced or single women seeking debt relief.
But as regulations are put back in place, most notably the CARD Act, these groups may end up with a mixed bag again. Some women especially may find themselves back to square one. One of the Act's provisions is a requirement that card issuers verify an individual's income before allowing him or her to open a new account, and if that can't be verified, a co-signer is required -- a provision meant to stop the practice of giving credit cards to students under 21. But it may also mean that stay at home moms are unable to open accounts in their names all over again, since household income isn't taken into account. (This will also affect stay at home dads, of course.)
Meanwhile, banks are continuing to shut down branches in low-income areas even as they open some in wealthy ones. While the NYTimes notes that 2010 was the first time in 15 years that more bank branches closed than opened, the closings were not equal:
In low-income areas, where the median household income was below $25,000, and in moderate-income areas, where the medium household income was between $25,000 and $50,000, the number of branches declined by 396 between 2008 and 2010. In neighborhoods where household income was above $100,000, by contrast, 82 branches were added during the same period.
While some of the closings are due to the financial crisis and automation technologies, it's also because of new rules: "New regulations will also cut deeply into revenue, including restrictions on fees for overdraft protection -- a major moneymaker on accounts aimed at lower-income customers." No ability to fleece the poor? Better close up shop! And as the traditional banks close, it leaves communities of color exposed to predatory practices, particularly payday lenders. A new report by National People's Action notes, "Neighborhoods with a high population of African-Americans or Latinos have on average two payday lending locations within one mile, six payday lenders within two miles, and 12 payday lenders with 3 miles. Predominately white areas, in comparison, had an average of two payday lenders within two miles, and about four payday lenders within three miles."
It's important to rein in predatory practices. But we'll also have to make sure credit -- the non-predatory kind -- remains accessible for everyone.
Bryce Covert is Assistant Editor at New Deal 2.0.