The average family earning $25,000 a year in the U.S. spends about $2,400 on financial transactions. Whether it’s the astronomical interest rates of a payday loan or the costs that come with being unbanked, the extractive practices of the financial services industry are effectively keeping the poor in poverty. Lawyer and author Mehrsa Baradaran and economic mobility expert Cate Blackford join Nick and Steph this week to explain why banking while poor is so expensive, and what states can do to rein in the people who profit from it. This episode was originally released in February 2020.
Mehrsa Baradaran is a professor of law at UC Irvine. She writes about banking law, financial inclusion, inequality, and the racial wealth gap. Her scholarship includes the books How the Other Half Banks and The Color of Money: Black Banks and the Racial Wealth Gap.
Cate Blackford was the Director of Outreach and Donor Development at the Bell Policy Center when we recorded this episode, but she is now the Public Policy Director at Maine People’s Alliance. She was the Co-Chair of the 2018 Proposition 111 campaign in CO to limit the interest lenders could charge on payday loans and eliminate fees from payday lending products, which passed with 75% of the vote.
Capitol One to end overdraft penalties as CFPB takes aim at ‘exploitative junk fees’: https://www.washingtonpost.com/business/2021/12/01/capital-one-overdraft-fees/
How the Other Half Banks: https://www.hup.harvard.edu/catalog.php?isbn=9780674983960
The Color of Money: https://www.hup.harvard.edu/catalog.php?isbn=9780674237476
If the U.S. Government Treated Poor People as Well as It Treats Banks: https://www.theatlantic.com/business/archive/2015/10/if-the-us-government-treated-poor-people-as-well-as-it-treats-banks/410614/
CO’s Prop 111 explained: https://coloradosun.com/2018/10/22/proposition-111-colorado-2018-explained/
Briefed by the Bell – Predatory Economy: https://www.bellpolicy.org/2018/09/10/predatory-economy/
How Do Payday Loans Work? https://www.incharge.org/debt-relief/how-payday-loans-work/
Nick’s twitter: @NickHanauer
Goldy: This week we’re rebroadcasting an episode that we originally aired in February 2020 with banking law expert Mehrsa Baradaran and economic mobility expert Cate Blackford about the hidden costs of banking while poor. Whether it’s the astronomical interest rates of a payday loan or the costs that come with being unbanked, banking while poor is extremely expensive. But there are steps to rein in the people who profit from it. For example under mounting pressure from the Consumer Financial Protection Bureau, Capital One recently ended overdraft fees making them the largest bank to do so. Overdraft fees are one of the most pernicious examples of the vampire economy in which financial institutions drain the accounts of the poor by weighing them down with relatively small fees and high interest rates. Hopefully Capital One’s example will put pressure on other big banks to end overdraft fees and other exploitive policies that prey on the poor.
Cate Blackford: Predatory lending practices target the members of our community who have the fewest resources.
Nick Hanauer: And the problem is it’s a death spiral for people, but it’s an increasing returns phenomenon for the practitioners.
Mehrsa B.: It got worse in tandem with neoliberalism and deregulation of the banking sector.
Nick Hanauer: Keeping the poor poor is a great business strategy for people like payday lenders, but it’s terrible for people and for economic growth.
Speaker 5: From the offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics with Nick Hanauer, one American capitalist desperate attempt to save us from ourselves.
Nick Hanauer: I’m Nick Hanauer, founder of Civic Ventures.
Stephanie Ervin: I’m Stephanie Ervin. I run a lot of our advocacy and campaign work here at Civic Ventures. You know, Nick, I think we spend a lot of time talking about and thinking about the ways that wealth compounds and accumulates and power thus leak also compounds and accumulates. Because I think given your history, and frankly the backgrounds of many folks in our office, we’re just more accustomed and exposed to those realities.
Nick Hanauer: We experience the increasing returns aspects of privilege.
Stephanie Ervin: Yeah, totally.
Nick Hanauer: Like we are…
Stephanie Ervin: Absolutely.
Nick Hanauer: Yeah. Every day.
Stephanie Ervin: And we’re much less familiar with the trappings of poverty and the ways that that cycle happens.
Nick Hanauer: Disadvantages compound-
Stephanie Ervin: Totally.
Nick Hanauer: … at the same rate and in the same way that advantages compound.
Stephanie Ervin: Yeah.
Nick Hanauer: But because we’re a gang of privileged suburban people, we haven’t experienced a lot of those that I think you’re dead right.
Stephanie Ervin: And so I thought it would be useful for us to actually look into one of the things that we recently started calling sort of vampires on the poor.
Nick Hanauer: The vampire economy.
Stephanie Ervin: The vampire economy, the sort of predatory lending space, which in and of itself is a product of what we always talk about, which is this neoliberal movement to suppress wages to deregulate industry.
Nick Hanauer: Yeah. And the more closely you look at these policies and practices in the businesses that populate this space, the clearer it becomes how highly tuned they are to take advantage of weakness and to prey on, well, the vulnerable. And it’s actually worse than preying on the vulnerable because by preying on the vulnerable, they inevitably make the vulnerable even more vulnerable. It’s this crazy death spiral that they both animate and participate in that is kind of shocking and awful, and I suppose one of the reasons that we try to do this work.
Stephanie Ervin: Yeah. And until I started doing research for this specific episode, it didn’t occur to me that the fact that I’m under 40 actually means that I’ve only lived in this reality, this neoliberal reality.
Nick Hanauer: Yeah, right.
Stephanie Ervin: And I didn’t know, in this space in particular, in predatory lending, that interest rates weren’t always like this in America or elsewhere. That we didn’t always have these really rapacious practices that just extract every last cent people have available to them.
Nick Hanauer: Yeah. For poor people. Like through payday lending for instance, where… How high can these interest rates go?
Stephanie Ervin: Some go up to like 510% annually, which is just bonkers, impossible to ever get out from under.
Nick Hanauer: That’s right. And meanwhile, somebody like me can take out a [libel 00:04:41] or loan at 3% or whatever it is.
Stephanie Ervin: Is that true?
Nick Hanauer: Yeah. For sure.
Stephanie Ervin: Wow. Yeah, but so in American history, we had forever sort of traditional standard was like at 10% interest rates was sort of how loans in general, of all makes and kinds, operated. And then slowly, especially around the late 1970s, early 80s, we started to really deregulate and allow more high risk loans that came with really high interest rates.
Nick Hanauer: And we’re going to get to talk to some of the people, both some of the people who are working on solving this problem, but some people who actually have been victimized by some of these practices, which will be… Both of those things will be super interesting and informative. I’m really excited today to get to talk to Mehrsa Baradaran, who is a professor of law and writes a lot about banking law, financial inclusion, inequality and racial gap, and she’s the author of How the Other Half Banks and also a new book called The Color of Money: Black Banks and the Racial Wealth Gap. And she’s done just amazing amounts of research on these issues and housing policy and red lining. And it should be just fascinating talking to her about the ways in which the financial system has been deregulated and has begun to prey on people.
Mehrsa B.: So I am Mehrsa Baradaran. I work at UC Irvine School of Law. I have written many articles and several books, two books about banking and inequality, more specifically racial inequality. I’ve done a couple of policy proposals. I’ve consulted with a bunch of the left wing sort of, I guess, left Progressive candidates and some non Progressives on policy. So I wrote recently a 21st century Homestead Act and I’ve been doing a lot of sort of policy work/just general consulting.
Nick Hanauer: So our podcast of course is dedicated to problems associated with inequality and economics, and you’re an expert on inequality in the U.S. financial and banking system. So can you just sort of introduce that concept to our listeners and dimensionalize those issues?
Mehrsa B.: I mean, one of the things that sort of the Progressives understood is that banking policy and credit policy is about democracy and about equality, and just much bigger than just that, banking and credit policy. And I think one of the things that happened in economics, specifically the Milton Friedman sort of monetarist school and Greenspan of course, but kind of deeper than that, is to take the realm of monetary policy and banking policy out of the public forum, out of the democracy and into the federal reserve, sort of like private backdoor meetings and into the realm of sort of macro economic thinking that is very hard to penetrate by the average person. So what you get is a lot of, “Oh…” This is very complicated and only the quants can understand this, but really what we’re talking about when we’re talking about banking policy, credit policy, monetary policy is allocation issues and redistribution.
Mehrsa B.: And these are democratic values. So when you have William Jennings Bryan going to the floor of the House saying, “You’re crucifying on a cross of gold,” this is a monetary policy discussion. He was saying gold is killing the sort of common man, it was a man, of course a farmer, and silver or bimetallism is going to free up credit and lead to more equality. And we just don’t have those debates anymore. We sort of left the gold standard and we’re now in this realm of money that is just ethereal. It is very sort of abstract and these decisions, quantitative easing or the repo market, the stuff that the Fed does, has huge distributional consequences, but there isn’t a debate about it. Not just that, but bank mergers or bank policy, it’s not something that we will ever hear.
Mehrsa B.: Every presidential debate, I joke like, “Oh, will they talk about bank mergers or whatever?” Everyone’s like, “Well, who cares?” And I’m like, “You should care. This is the stuff… You are going to lose your bank. What happens when you lose your bank is you’re going to have to go to a payday lender and a check casher and that’s going to affect your life way more than any of the other things that they talk about.” I mean, not any, but a lot of the other things that they talk about. So that’s sort of what I think has been one of the outcomes of economics in the last sort of 30 years.
Nick Hanauer: Right. Yeah. And we call that neoliberalism, that the only legitimate organizing principle for a society is market competition. And that price is the only thing we should look to, to decide if something is good or bad. And all these associated ideas where we have sucked the important questions out of the debate about participation, inclusion, democracy, power, agency, human welfare, all of these things just got abstracted out. Literally got, by the neoclassical economist, just got divided out of the equations. And so what you’re left with is this set of ideas that largely became a protection racket for rich people, and where the basic rubric was the richer they get, the better it will be for you, which turned out not to be true.
Mehrsa B.: Right. And this is even like beyond price because you can say, “Okay well, the market determines price.” But who decides the mechanism of price, as in money? Like the decisions that you make that end up determining price are also decisions that people make that even heterodox economists aren’t really… I mean, they are starting to now, but by the time you’re talking about price, you’re already past the point of just the monetary system in general.
Nick Hanauer: All the important decisions were made.
Mehrsa B.: Right. A lot of them were, that’s right.
Nick Hanauer: Price is just an expression of power. The price you pay, it’s determined by the power you have. And in a world where the powerful get more powerful, the price you pay will be higher. Which is why, and this was just a shocking statistic, for families earning $25,000 a year, 10% of their income goes to paying for financial transactions. So, that stat just blew our minds. Can you give that stat more dimension?
Mehrsa B.: Yes. So I will tell you a story. I study this stuff and the last place I lived was in Georgia and I went to go set up my water at this office in Georgia. And I got in and it was during lunch and there was this line out the door. And I got in the line and someone came from the back and recognized me as not one of the people that should be on line because there’s class dimensions to this, and pulled me back. And I set up my water and I put it on auto pay. And as I’m leaving, I said, “Well, what is that line?” And she says, “Oh, that’s the people who come in to pay their bill in cash every month.”
Mehrsa B.: And this is something I study so I knew the numbers, but I hadn’t connected that, “Oh, it’s not just the cost that these people pay, but it’s the time and the psychological stress of not being banked and having to go with cash to the water office to pay a water bill. And then with cash to pay your electricity bill and your cell phone bill and your… All of the other things that we all put on auto pay.” When you’re unbanked, you end up having to do a lot of this stuff with cash and then through money orders. So you can’t send cash in the mail so you have to go to get a money order. Where do you get a money order? You go and you have to pay for it. How do you get your paycheck put into cash? You have to go to a check casher and they take off 10%. And then you put it back into a money order and that’s another 10%.
Mehrsa B.: And so these are fees that are paid for exclusively by the poor and who are the unbanked, the unbanked and the poor. And these are things that we get for free. And by the way, not just that, the other sort of added sort of salt on the wound, is that we are actually, our services are subsidized by those who have to pay these fees. So those who pay overdraft fees to banks subsidize my free checking essentially because I have enough money. The bank wants my big deposit because they can lend it out. They don’t want your $1,000 deposit so what they do is they keep throwing these random punitive fees at you. And so people who don’t have enough money make a very rational decision to not have a bank account and to go to a check casher and pay a fee that is very clear. It is the same fee to everyone, it’s not random. So it’s a very rational decision to go to a check casher and the payday lender.
Mehrsa B.: Now, some people don’t have a choice to make because banks have long deserted these areas that are not profitable and so they actually have to go drive 30 miles to an ATM that’s at a gas station where they pay 7.50 per transaction. Every time they take out $100, that’s 7.50. And maybe you don’t do that.
Nick Hanauer: Wow. How new is this phenomenon? I mean, was there a state that was preferable in the past? And has it gotten worse or has it always been horrific and…
Mehrsa B.: It’s gotten worse and it got worse in tandem with neoliberalism and deregulation of the banking sector because what you had in the banking sector was forced geographic restrictions. And so, for most, all of U.S. banking history from the beginning until about the 1980s or so, banks had to stay in one area. So if you had a branch… And I think you’re from Seattle, if you had a Seattle branch, you could only have a Seattle branch. You couldn’t also have a New York City branch tied to that Seattle branch. Why? Because this is Jeffersonian fear that if all banks, if all the money can go to New York, it will go to New York because that’s where the profits are. So all the money’s going to get sucked into these money marketplaces and then the rest of the country is going to be deprived of banking services and credit, which is essential to sort of economic mobility.
Mehrsa B.: So sometime in the 1980s we were like, “Oh.” Banks were like, and the other corporation, “Let’s deregulate.” And then the Riegle-Neal Banking Act and several other laws, Gramm-Leach-Bliley just complete deregulation, which by the way spanned both the Bush, Clinton and then the second Bush administrations,, just completely deregulated the banking industry. And what was feared is exactly what happened, which is that all the money went to New York. You’ve got five or six… Or New York or Chicago, wherever. You’ve got five or six banks that control 80% of the assets and they’re merging the latest merger of BB&T and SunTrust, created the fourth largest bank. And what what BB&T and SunTrust is going to do immediately is they’re going to shut down maybe, what, 50% of their branches because they’re no longer profitable. And those are all in communities that aren’t going to have a bank, probably. A lot of them are not going to have a bank.
Mehrsa B.: And so banks were local community banks. The myth of the George Bailey Bank that we kind of talk about, they were that by law. Banking law forced them to be small and forced them to be local. And when we stopped forcing them, they just conglomerated and became these behemoths. There’s a couple of other laws also that enabled the rise of the payday lending and check cashing industry, which was the complete deregulation of usury, which is interest. It used to be that we had strict caps state by state, and in 1978, the Supreme Court sort of caught up in this wave of neoliberalism, just kind of lifted the cap that you can go to any state and export those rates.
Mehrsa B.: So now you’ve got states like Idaho and Utah and places and in the Midwest who have no interest rate caps. And so if you’re a payday lender, you’re going to go to that state and then you’re going to lend everywhere else. So if you’re a state like New York or Georgia that cares about payday lending actually and doesn’t want that stuff in your state, you actually have a really hard time enforcing your own laws against those lenders.
Nick Hanauer: What are the other predatory practices of the financial services industry that are contributing to this problem? Can you help us understand those?
Mehrsa B.: I mean, there’s a ton of sort of slow drip type things that I don’t know if you’d call it predatory, but you certainly… I mean, it’s just extractive. So you’re taking money from these communities. So, you’re seeing the rebirth of contract lending in mostly black and brown communities where they come in, a bunch of private equity firms own up all their homes and then they sort of give them like a “mortgage”. There’s essentially a contract on a house, which is you’re paying as much as you would on a mortgage, but the private equity firm actually owns the land. And by the way, you’re paying more than you would if you had owned the house. That’s something that historically has been something that black and brown communities have constantly been predated upon. We have some attention to the reverse mortgages during the financial crisis, but this is something that’s worse.
Mehrsa B.: I mean, student lending, I know you’ve talked about on your program, but that’s for profit colleges. That’s like an obvious one. And then there’s just the little drip drip, the overdraft fees that just kind of pile up or the payday lender sort of fees and insurance products. The most recent sort of ballooning of debt right now is auto loans and consumer finance loans. These are the sort of next debt crisis and there’s a whole variety of things that it’s causing this. Mostly people aren’t making enough money to live and so they have to take out money to make their rent. And so you’re seeing a lot of things pop up in states where, let’s say payday lending is illegal like in Georgia, you see title lending and title lending is even worse because you lose your car, you’re paying just as much. And then they will put a thing on your car with it, they’ll freeze it. You aren’t even able to use your car to get to work because they sort of kind of have that as collateral.
Mehrsa B.: I mean, there’s a variety of these debt products that you and I don’t know about yet they’re just really prevalent in these areas. And now, I’ve spent time sitting with payday lenders at pawn shops and just watching the people come in the door. And what’s shocking to me, and I know you’ve talked about it a lot on your show, is that these are not “poor people”, they’re “the middle class”. These are single moms.
Nick Hanauer: [crosstalk 00:19:18].
Mehrsa B.: Right. Yes. Single moms who will pawn and this is what one pawn shop guy told me, this woman had been in and pawned her laptop over and over and over again. And the pawnshop doesn’t want the laptop, they want the fees on the loan so they make money on the interest rate. But that mom is losing her laptop every couple of months periodically because she needs a loan. And so I don’t know what she can’t do with her laptop, but I do a lot on my laptop. So I’m thinking it’s a burden on her to not have that laptop during that time.
Nick Hanauer: Yeah, yeah, yeah. For sure. I’m always of two minds about this stuff. On the one hand, we need to push back against these exploitive policies and regulations. On the other hand, the way to solve it is just to pay people enough so they don’t need these services. Like there is a really simple answer to how to solve these problems, which is just to pay people more. And then you don’t need a payday loan. On the other hand, you also want to go after the most pernicious practices. As I was thinking about the conversation that you and I were going to have, I was trying to think through what kind of regulation changes we should enact to make the economic system, to make the financial services industry just sort of fair to all citizens. So do you have a sense of what we should do? Like if you were dictator for the day, what would you do?
Mehrsa B.: Oh yeah. I mean, I love this question because I constantly think about being dictator for the day or for the month. I’ll take it for the year. I mean, look, I think we have a lot of myths when it comes to banking and credit policy and these myths end up standing in the way of real reform. And one of the myths that I’ve been going after, and this is the one that takes hold of the left and the right, is this idea that we’re going to kind of come back to the day where community banks are going to save us, the small grassroots good banks. And the credit union was a great idea in the early 20th century and in the 19 sort of 10s when it was formed. But that genie has sort of left that bottle. So stop pining for these wrong gone eras and go for what we’re actually trying to achieve.
Mehrsa B.: What was the point of the credit union, these small banks? And it was to equalize access to credit because it’s not just about how much you get paid, but it’s your access to get a mortgage, which is wealth building and get a student loan that’s not going to crush you. Low interest loans actually ended up building wealth in the same way that high incomes do. So you talked about getting paid more, but I also think credit is really important.,The right kind of credit. Credit can be very wealth building and so my dictator for the day idea is to do public option and banking. I’ve suggested the postal bank as an idea of getting all those areas that don’t have banks, just go to your local post office and get a checking account there, have an ATM and not pay 10% of your income to use your money. It’s been called a radical idea. When I proposed it, it was like, “Oh, this is crazy.” But we did this in the U.S. from 1910 to 1966. We had a robust postal banking sector. It just makes sense.
Mehrsa B.: The other is to just actually call banking what it is, which is a public utility. So, if I’m going big and dramatic is look, you have this monetary policy mechanism by the federal reserve that pumps money into the economy. And the way that we’ve chosen to do it is to pump the money into banks and hope that it trickles down. This other aspect of trickle down economics is to give the banks incentives, like quantitative easing was just patting the banks balance sheets, or interest on reserves. We actually pay banks money to park their money as a federal reserve. It’s just sounds crazy, but we do it because the hope is that they’ll pass that along and they’re not. They’re not passing it along. So just give it directly, create a way for the federal reserve to actually do the thing that it was meant to do, which is to promote egalitarian access to both payments and the credit system, which are now monopolized by banks. So that’s my dictator for the day banking solution.
Nick Hanauer: For sure using the post office as a way to provide people with these basic financial services, it’s a really interesting idea. Could a state do something like this? Do you know any examples of states that have done something interesting? Because at Civic Ventures, we’re always looking for these opportunities.
Mehrsa B.: Yeah. So North Dakota has a public bank. It’s the only state that does it. And what they do is that they use a public bank for municipal funding, student loans, mortgage loans, big loans, not deposits. But it’s been a very successful public bank and it’s a very conservative state so bi-partisan, they’ve done it really well. California just passed a bill in the legislature that is opening up the legislature to applications for public banks. So these will be local banks in cities that have a specific sort of mission that they want to do, that they can apply. We don’t have one yet, but I’m working with a couple of groups to maybe think about that. So there are state level things. The benefit of having it be federal is that you have a federal reserve that that can basically print money essentially.
Mehrsa B.: I mean, not at a maximum, but you really can do lots of creative things. And then the treasury backing, you have the full faith and credit of the federal government, which allows you to do actually more safe banking and have it backstopped by the treasury, the way that the FDAC fund is backed up by the treasury. So the reason we all trust banks with our deposits is because the treasury essentially says, “We’re good for it.” And we believe the treasury because it’s never defaulted before. So that’s the benefit of federal. That is not to say that a state could not also mobilize resources and do it.
Nick Hanauer: For sure as we think about cracking these problems, what seems to be the case is that federal action rarely isn’t preceded by a bunch of experiments in cities and states where people have done cool and interesting and effective things that then can be translated into larger federal programs. I’m just intrigued by the idea 3.5% of people in Seattle, Bellevue are unbanked.
Mehrsa B.: So unbanked is don’t have a bank account, and then under-banked is probably a bigger percentage. I would put that probably around 11, 12%, something like that. And that’s probably… Those are people who maybe have a relationship with a bank, but that’s not what they’re using primarily. One of the things I think policymakers and the sort of the Academy who doesn’t understand poverty tends to say is like, “Oh well, they just need financial education.” And the thing that really gets under my skin about that is that all the studies show that poor people actually know where every dollar is going because you have to. One mistake can cost you a lot of money, which you don’t have. But I do think financial education is really important for the policymakers and for the academics who have never spent any time being poor and don’t understand all-
Nick Hanauer: Or in a line to pay their water bill in cash.
Mehrsa B.: Exactly. Right. Exactly. And they just assume that being poor is being them with less money, and it’s not. It’s a whole ecosystem of other things. There’s exposures, there’s vulnerabilities that they just don’t know. I mean, outside the realm of this conversation is it’s exposure to violence and the lack of recourse. So there’s all these things that are involved that I think policymakers could have a course in financial education for poverty.
Nick Hanauer: Yeah. So interesting. Well, we always ask this question of all of our guests, which is, why do you do this work?
Mehrsa B.: I do this work because I think the stories and the myths that we tell about the economy, about simple things like banks, credit, the bootstrapism end up affecting people’s lives. I think there’s a lot of shame and just emotions wrapped up in money and class. And I’ve lived poor, I’ve lived middle-class and I know that when you’re poor, you don’t want to talk about this stuff. So I am taking the privilege that I have now as a no longer a poor person to try to demystify and to take the shame out of some of these effects, because I think most poor people are actually making the best decisions that they can. And I think the wealthy don’t understand that.
Nick Hanauer: Well, thank you very much for being with us.
Mehrsa B.: Thank you. Thank you so much.
Nick Hanauer: It’s been an amazing conversation.
Mehrsa B.: Likewise.
Nick Hanauer: Talk soon.
Mehrsa B.: Okay, thanks so much.
Nick Hanauer: Okay. Take care. Bye.
Mehrsa B.: Bye.
Stephanie Ervin: So Nick, you got to have this great conversation with Mehrsa really at the high level of sort of what’s happening, maybe some solutions and what can be done. But now we get to talk to this fascinating woman Cate Blackford who’s on the ground in Colorado and actually was the campaign co-chair of this 2018 initiative that dramatically reduced what payday lending companies could charge as interest rates. It’ll be fun to talk to her.
Nick Hanauer: Yeah, it’d be interesting to hear about that campaign and what they did to win.
Stephanie Ervin: Yeah.
Cate Blackford: My name is Kate Blackford and I am the director of Outreach for the Bell Policy Center. I lead the financial equity coalition and I also had the privilege of serving as the co-chair at the Proposition 111 campaign.
Nick Hanauer: Yeah. So let’s dive right into it. Proposition 111 was aimed at predatory lending, the payday lending industry. Tell us about it and just sort of give listeners’ perspective.
Cate Blackford: So Proposition 111 here in Colorado passed in 2018 by more votes than any citizen initiative ballot measure in the history of Colorado.
Nick Hanauer: Holy crap.
Cate Blackford: We won by… Yeah, we won by 77%. we won with over 1.8 million votes and it absolutely showed that Colorado voters are hungry for this kind of consumer protection. What the campaign did was it capped the interest rates on predatory payday loans at 36% inclusive of the fees and that ended triple digit interest rates on small dollar loans that were tied to borrowers bank accounts in Colorado. Previously, we had passed reforms back in 2010, after a few years of effort, and that capped interest rates at 45% and then extended the minimum loan term from two weeks to six months. So that did a lot. It brought interest rates down from over 400% but it still meant that payday loans on average were charging 129% APR when you included the origination fees and the monthly maintenance fees.
Nick Hanauer: Wow.
Cate Blackford: Sometimes that was up to 214% APR on those small dollar loans.
Nick Hanauer: Can you zoom out a little bit and try to paint a broader picture of what the issues and what the problems are? Because I know you understand it really well, we understand a little bit about it. But just tell us about predatory lending and the payday loan industry and the ways in which it… The degrees to which it harms poor people.
Cate Blackford: Predatory lending practices target the members of our community who have the fewest resources and the lowest or smallest cushions. These loans, just the payday loans in Colorado, they were stripping over $50 million a year out of the Colorado economy from the households that were least able to afford it. And the way that these loans were designed with to make sure that you were trapped in a cycle of debt, that more often than not, you’ve got a new payday loan to pay off your previous payday loan because the interest rates and fees were so high. And so it meant that people were not able to build financial stability and instead were trapped in cycles of debt.
Nick Hanauer: How pervasive is it? How big a problem is this?
Cate Blackford: In Colorado, these payday loan shops were concentrated, especially around our military bases and in our lower income communities and our communities of color. They were both in rural and urban parts of Colorado and they were especially targeting those folks who were on fixed income or were at the sort of lower end of the economic spectrum. But they were not just here, say in Denver, they were statewide.
Stephanie Ervin: I’m just going to ask the obvious question, which is why limit the interest rate to 36% instead of sort of getting rid of payday lenders entirely?
Cate Blackford: So 36% is actually the state usury limit for Colorado. So that means that for the most part, loans in Colorado must charge 36% APR or less. And so what Proposition 111 did is put payday loans in line with the state usury cap and included any fees in that calculation of the APR. Now unfortunately, Colorado has pretty strict rules around how you write laws and propose ballot measures. And so we could only do one single subject, which meant that we couldn’t go after all different areas of lending statutes in Colorado, but we had to just pick one.
Nick Hanauer: Right. Yeah, we have the same. I mean, this is quite a sensible provision in initiative language to make sure they’re not confusing to people. We have the same standards here in Washington State. And so, I guess my question is when you enacted these changes, what happened to the industry? Of course, they must’ve fought you like crazy.
Cate Blackford: Actually, we had kind of a strange experience with the industry here in Colorado. So they absolutely fought us while we were working to get on the ballot. They tried to use confusing ballot language so that we would have to refer to them as deferred deposit loans rather than what they are known as, which is payday loans. They also helped fund a declined to sign campaign trying to prevent us and other measures from getting onto the ballot by collecting enough valid signatures. But then, once we made it to the ballot, we kept expecting fire and really broad media campaigns and we never got it. We were kind of looking over our shoulder from the time we qualified until election day and it never came.
Nick Hanauer: You’re trusting, that’s… I mean, they may have looked at the polling and said, “Well, this is helpless.”
Cate Blackford: Yeah. In fact, I think what they decided to focus on instead is how to work around this limit. What we’re finding anecdotally is that payday lenders have moved into a different section of state statute and are doing installment loans instead, which have a higher dollar limit but also have really high allowable APRs. And they’re not secured by a borrower’s bank account so they’re not technically a payday loan. And so we think that they’ve moved into that space. We’re working with the Attorney General’s office to try and collect data on increases in installment lending in Colorado since then. But if you do a quick Google search for payday loans or installment loans in Colorado, you find all the former payday lenders offering installment loans.
Cate Blackford: And so, we’re trying to understand if that really is the direction that they headed. But that’s why this campaign was really structured as part of a longer term strategy. Proposition 111 went after one bad practice, but we didn’t magically create universal access to safe and affordable credit, and that’s really the goal. So we are continuing to work on how do we get to the place where we don’t need predatory lending in Colorado and there really isn’t a market for it.
Nick Hanauer: Right. Of course the reason that most people need to use these services is their employers don’t pay them enough to get by without them so…
Cate Blackford: Yap.
Nick Hanauer: And so, reasonable wages cure almost all of these ills, which is part of the foundational argument we make in the podcast, that if we had an economy which compensated people reasonably for their work, so many of the pathologies of not just the economy but of our democracy and society would melt away. But beyond that, tell us more about what are the other awful practices that companies use to prey on poor people in this domain?
Cate Blackford: Oh, there are so many, unfortunately. There are a whole host of other predatory financial products that are out there and other ways in which consumers really need stronger protections. There are a lot of auto loans that are really predatory, especially the buy here pay here places. The installment lenders like OneMain are definitely charging ridiculously high interest rates. Debt buyers and default wage garnishment are also preying on Coloradans. For us, we really think that fighting them begins with robust data collection on the loans that they’re issuing, the impacts of those loans and judgments and other actions and the trends across their industries. Because that data was what helped us fight for the initial reforms that passed in Colorado in 2010 and were hugely important to the 2018 ballot fight.
Cate Blackford: We need to show how broad these issues are and how deep the impacts of these predatory lending products. But at the same time, we are absolutely working to connect with not only existing financial institutions like banks and credit unions, but also with the communities that were a huge part of this campaign and beyond who are the primary targets of these predatory lenders, and talk with them about what’s working and what’s not working in our existing financial system and how do we create really robust universal access to safe and affordable credit? And what does that look like in Colorado?
Stephanie Ervin: So does that speak to… I mean, are you guys working on actual alternative products that would replace for low income people the need to get payday loans?
Cate Blackford: So here in Colorado as in many other parts of the country, we have a two-tiered financial system where some Coloradans get access to safe and affordable banking and credit. Usually, those are white Coloradans and better off economically Coloradans or Coloradans who are better off economically. But a huge portion of our population, especially our black and brown neighbors are not served by those systems and they pay a whole lot more for their banking and credit services.
Cate Blackford: We don’t just want to make that second tier better and more affordable, we want to eliminate the market for a second tier in the financial services industry. And so we are talking with people instead of about what alternative loans or financial products we can create, we’re talking instead about how do we combine an expansion of safe and affordable bank accounts with free one-on-one financial coaching, which really centers the participants goals and the skills that they want to develop, with resources to access credit building loans and help increase people’s credit scores. And we’ve seen evidence and data that at the municipal level, this has really had a tremendous impact on decreasing debt, increasing savings, raising credit scores and increasing financial stability. And so, we’re working right now on how can we expand that locally-led, locally implemented model that’s really tailored to local needs statewide?
Stephanie Ervin: So are you speaking to a specific example that exists already in Colorado?
Cate Blackford: We are. So The Bell Policy Center has been partnering with a number of folks from the Financial Equity Coalition. And The Cities for Financial Empowerment Fund, they previously have supported the City of Denver in the creation of an office of financial empowerment. And that’s really what got our juices flowing around this idea with seeing the data around Denver successive as well as other cities around the country where they’ve been able to increase financial stability, decrease debt and increased savings. So we’re exploring whether or not that model really holds water in other communities and the responses that we’re getting are really supportive. People are saying, “Yes,” that they would like to see this done in slightly different ways with slightly different priorities in different communities around the state.
Nick Hanauer: And as important as it is to recognize that these practices, what have you, these products, these predatory products, harm the most vulnerable people, poor people, the broader issue is that more and more Americans find themselves in financial precarity. That financial precarity used to be a thing that afflicted the bottom two deciles of Americans and now it’s a thing that afflicts the bottom seven, eight or nine deciles of Americans. That there are a huge proportion of American families that can’t afford a three or $400 emergency, that basically are living paycheck to paycheck, barely hanging on. And if you let these predatory practices stand, it creates, essentially a death spiral because more and more people get sucked into these systems of predation and it affects a bigger and bigger swath of the economy.
Nick Hanauer: And the problem is it’s a death spiral for people, but it’s an increasing returns phenomenon for the practitioners because the more people who need these services and the more people who get sucked into it, the bigger those businesses and practices become, and the more politically powerful they become. And before you know it, half the population is using loan sharks, which is essentially what these people are, to get by. And so it’s a very dangerous practice to let stand. You definitely don’t want it to exist in the economy and you want to probably squish it out of existence so that you can find ways to help people economically that aren’t this sort of malicious way of just taking advantage of them. To me, that’s the really big issue.
Cate Blackford: I completely agree. I completely agree that any of the work we’re doing around financial stability hopefully will help people weather life storms, but we are not solving our wage crisis with these initiatives. We’re hopefully helping create some stability and helping people save a little bit for emergencies. And mean that when something comes up, they can manage it rather than being left devastated. But absolutely, the major forces at play in our economy are not going to be righted through these particular systems alone.
Nick Hanauer: Yeah. And what’s super scary to me is that if you let these businesses get big enough, before you know it, Bank of America will be in to it.
Cate Blackford: We know that major banks were often the ones providing the credit for the payday lenders.
Nick Hanauer: Yeah, for sure. Like it’s very, very dangerous to let these things get out of control. They’re already out of control.
Stephanie Ervin: It feels a little like payday lenders or sort of predatory lenders at large, are really out running the regulations that we create. Is there a way that we can be better at outrunning them? Like what’s the next, if you take on installment loans, what’s after installment loans? Or how do we get in front of their ability to sort of recreate themselves?
Cate Blackford: It’s amazing, their ability to find loopholes. I mean, even if we had all of the regulations we needed at the state level around all of these issues, there are federal loopholes to circumventing state powers and state laws. And so, that’s one of the reasons that we’re so focused on how do we make sure that we’re competing at the market level, that we’re offering robust and safe, affordable alternatives for consumers because we don’t think that we’re going to be as sneaky and tricky and able to get out in front of every FinTech or predatory lending product that’s going to try and come into our space.
Stephanie Ervin: Well, and thanks for spending time with us today. One thing that we ask all of our guests is, why do you do this work? What drives you?
Cate Blackford: Do you know the Paul Wellstone quote, we all do better when we all do better?
Stephanie Ervin: Mm-hmm (affirmative).
Cate Blackford: So right now our economy feels rigged and how hard it is to lead even a middle class life is so real, but I don’t believe it has to be that way and I want to be part of that change.
Nick Hanauer: That’s a good answer. Thank you so much for spending time with us. Super interesting. And congratulations-
Cate Blackford: Thank you so much for having me.
Nick Hanauer: Congratulations on your success and I hope you have more.
Cate Blackford: Absolutely. And if you all are working on ways to get out in front of these folks, keep me posted.
Nick Hanauer: Okay.
Stephanie Ervin: Yes, we want to be in touch. We like the breadth of work that you’re doing at The Bell Policy Center and would love to talk more about that.
Cate Blackford: Absolutely. Anytime.
Stephanie Ervin: Well, thank you so much.
Nick Hanauer: Thank you. Nice to talk to you.
Cate Blackford: You too. Bye.
Stephanie Ervin: When we talk about things like payday loans, I have never had that experience and I really wanted to talk with someone who did. So we went and found this great guy, Demetrius, who actually took out a payday loan and can tell us about his story and experience afterwards.
Demetrius J.: My name’s Demetrius Johnson and I’ve worked in finance for 20 years or so now. I took kind of a nontraditional route to finance. And so my story I think is a little atypical from most payday lenders. I was advised that I was soon to be laid off from a company and I kind of foresaw a gap in pay that was going to be coming up and I said I got to prepare myself. And I had some money in savings that I didn’t want to tap into. And I knew that I was going to have to take unemployment so I was kind of taking steps and preparing myself because the company that I had worked for had already gone through two series of layoffs and they kind of put us on notice as it were. And so I said, “All right, well let me start getting things together.”
Demetrius J.: And one of the things that I did was I took a payday loan. I was familiar with payday loans in that I’ve known people that had taken them and I was kind of warned a little bit about them, but I just kind of walked in there and I said, “It’s 500 bucks. It’s not a whole lot of money.” I didn’t think that I was going to have a hard time finding another job. I took the payday loan, it was pretty easy to get, it was like a one-page application. What they said was that it was a $500 loan and that if I paid within 30 days, that it would be, I think it ended up being like 725 total. And I got to thinking, “Oh, that’s pretty high for what would be 30 days?”
Demetrius J.: And then they said, “Well yeah, you can make payments on it and what have you.” But what they neglected to inform me was that the interest would continue to accrue at a very high rate, triple digit rates. That was not very transparent. Based on the calculation, based on the way that they have things set up, there is a way in which you can end up paying on these payday loans for quite some time. It’s difficult when making the minimum payment to defeat the rate of interest that’s being applied. So very similar to credit cards, but to a greater degree.
Demetrius J.: It’s not one of those things that can positively affect your credit in any way. They don’t report to any credit agency, and not positively anyway. They only report negatively. So when you don’t pay, then of course they report you, but your payments that you make towards them don’t really help you at all credit wise. What ended up happening was I was kind of denied my unemployment ultimately and then I wasn’t able to find a job fast enough to make the first payment. And so I said, “All right, well maybe I will… What I’ll have to do is start living off of some of my retirement money until I find a job.” And so I started pulling money out of retirement assets. And I’m subject to child support and things like that and so that payday loan was not necessarily the highest priority over child support. And then paying bills and things were kind of the highest priority. And then what ended up happening was put it on my credit and then it was sent to an attorney and then…
Demetrius J.: It had been on my credit for quite some time. And I think it may still be on there. Because I work in finance, it became difficult for me to become gainfully employed in the career field of choice. I got offers at Fidelity and other firms but then you have a ding like that on your credit and it’s a financial ding like for a loan or whatever and they’re like, “No, we’re not going to touch you.” And I’m like, “Well, that’s kind of why I’m looking for this job so that I can pay bills and things like that.” So it was kind of one of those catch-22 situations where I’m attempting to pay off some debt, but because of the type of career field that I’m in, the further I got into to debt, the more difficult it became for me to find a job in my career field. It just kind of snowballed into something that I’m just now recovering from.
Demetrius J.: So it’s been challenging. $500 ended up costing me quite a bit. I will never, ever, ever take out another payday loan ever again. There are so many other alternatives to payday loans that people can utilize and should be made aware of. The company itself was just not very transparent and the effect that it had on me, I was like, “Wow, like if this could happen to me, it could happen to anybody.”
Nick Hanauer: So those were fascinating conversations with activists, policy thinkers and leaders and a person who actually personally intersected with the whole vampire economy and it’s just really unbelievable. And it’s really clear that keeping the poor poor is a business strategy for people like payday lenders, but it’s terrible for people and for economic growth. And I think all Americans have a stake in trying to make it hard for these financial predators to continue to exist.
Stephanie Ervin: One thing that came up in your conversation with Mehrsa is this statistic about families that are earning $25,000 or less and that every year they spend about 2,400 on financial transactions. So more than they spend on food, they’re spending on banking fees and overdraft fees and other bullshit.
Nick Hanauer: It’s just unbelievable. I mean, it’s 10% of their income goes to nonsense like this. And it does come down to just incredibly simple things that the fee on an ATM machine is, what is it? Three bucks every time. And if you take out 20 bucks, it’s 15%.
Stephanie Ervin: Right. And when you look at even the more specifically predatory practices, things like payday lending that we got to talk with Cate about, over 12 million Americans annually take out payday loans. 12 million Americans costing them $9 billion in loan fees.
Nick Hanauer: It’s just crazy.
Stephanie Ervin: I mean, payday loans have become the face of predatory lending because of this practice. They go into low income neighborhoods, they can act like they’re not targeting specific folks.
Nick Hanauer: Yeah.
Stephanie Ervin: But they go into low income neighborhoods and open up a storefront. And as Demetrius told us, you can go in for five minutes and walk out the same day with the cash that you need to pay an emergency bill or just cover the rent that month. And people who need that kind of access to available capital quickly have one of these things as their only options.
Nick Hanauer: Yeah.
Stephanie Ervin: The other thing I learned from Demetrius… I mean I asked him, “Did you have other options available to you?” Because certainly in my life, if I was short a few bucks, I wouldn’t think about going to a payday lender, I’d think about going to my parents, mom and dad, or I’d think about going to a really close friend or other family member and asking for sort of a short term, can you help me out?
Nick Hanauer: Yeah. There were probably 10 or 20 good options you had before you got to the payday lender.
Stephanie Ervin: Absolutely. And I asked Demetrius if he had considered those options or had those options available to him, and he shared with me that he was the guy in his family who other people went to for that. So you can imagine not only when Demetrius went down his own death spiral after taking a payday loan, and had his own ability and path towards financial stability get really ruined for a long period of time, but also the entire social network of people who rely on Demetrius to be their guy when they’re in a hard spot-
Nick Hanauer: Yeah. Wow. Yeah.
Stephanie Ervin: It’s just really troubling that we allow these kinds of practices to continue. And you said at the start of the show, but I completely agree, we need to absolutely everything we can, not just to raise wages and make it so folks have the kind of income they need to-
Nick Hanauer: Not need payday loans.
Stephanie Ervin: Not need things like payday loans are paying or will be subject to overdraft fees and all the rapacious practices on the backend, but we also need to really reign this shit in. I mean, we have regulations for a reason.
Nick Hanauer: Yeah. And the problem is the neoliberal view would be that people are rational calculators of their self interests, that people… I mean, neoclassical economists literally believe that people have infinite willpower and can see the future and predict the future and do Bayesian analysis of risk and return and all this crazy stuff. And the truth is that that’s not what people are like at all. People make emotional short term decisions when they’re under pressure. We all do it. And if your range of options is narrow and crappy, you will almost certainly make a crappy decision, which will force you in the future as it did in Demetrius’s case, to make even other crappy decisions in a downward spiral that is very, very difficult to get out of. And I think it’s-
Stephanie Ervin: When you only have crappy options, you can only make crappy decisions.
Nick Hanauer: Right. And the role of regulation is to eliminate crappy options and to substitute crappy options with good options.
Stephanie Ervin: Yeah. And there’s a pushback in the payday lending space in particular, that if we didn’t have payday lenders, low income people would have no access to capital at all. And I think there’s some substance to that argument. But lo and behold, there are hundreds of years in our own American history where we actually didn’t just have legally rapacious ways to take total advantage of people.
Nick Hanauer: And if we made the worse practices is illegal, I guarantee you that somehow capitalists would find a way to serve these people without being as rapacious and awful.
Stephanie Ervin: Right. And thankfully, we have people like Mehrsa and others who are developing and innovating other solutions that would really allow low income people access to products that better serve them and our economy.
Nick Hanauer: That’s right. That’s right. And I mean, the people who used to make canned food argued for a long time that it was implausible to require them not to poison you with botulism and stuff like that, and that if we held them to that standard, no canned food would be available. But somehow magically, you can have a can of tuna fish or whatever it is today and not get botulism. And we could have lending to poor people that wasn’t as predatory and awful as it is today.
Stephanie Ervin: Yeah. Something to think about and work on.
Nick Hanauer: Yep.