DC Not Source of Solutions But Problems for Poor, Minorities

Making ends meet is much more difficult today than one year ago or before the pandemic.

Runaway inflation at 8.3% forces Americans to work harder just to buy less. If you weren’t working with significant earnings to start, rising costs on essential items are stealing your quality of life and ability to move up in America.

That’s why many Americans find the White House celebration of the Inflation Reduction Act on Tuesday insulting to their hardship.

The misleadingly named bill will not slow inflation as nonpartisan analysis confirms, but in the near run may increase it according to Penn Wharton’s Budget Model. Meanwhile, grocery bills rose 13.5% in August from a year prior as food prices rose at a pace not seen in 43 years.

Americans need solutions to paying for groceries, haircuts and home heating bills. Right now, Washington is not the source of solutions, but of problems, especially if they enact policies that restrict poor Americans’ and minorities’ access to cash when they need it.

Many minorities, especially women, were carving out better lives for themselves and their families while working in lower-paying jobs. Then a pandemic hit. It exposed how vulnerable the industries (minority) women tend to be concentrated in — leisure and hospitality, human services, and retail — were to prolonged shutdowns and an uneven recovery.

Today, there are 1.2 million fewer jobs in leisure and hospitality than just before the pandemic began.

Two and a half years later, Black and Hispanic families should be getting their feet under them, but inflationary policies such as President Biden’s American Rescue Plan forced real earnings down 3.4% last month.

A recent NPR/Harvard poll indicates that because of inflation, Black Americans are substantially more likely than whites to report serious financial problems (55% to 38%), are more likely than whites to report not having enough emergency savings of one month of expenses (58% to 36%) and affording food (32% vs. 21%). No wonder over half of the non-white voters (54%) disapprove of the job the president is doing.

Many non-white families are unbanked and cannot access traditional sources of credit or bank loans for unforeseen expenses. An estimated 5.4% of U.S. households (approximately 7.1 million) were unbanked in 2019. They tend to be non-Asian minorities, low-income households, less-educated households, young households and households with disabled members are more likely to be unbanked.

They depend on short-term installment loans (pejoratively known as payday loans) often to pay a bill until they receive their paychecks. These products often carry nominally high Annual Percentage Rate (APR) interest rates.

If not repaid in a timely fashion, the loans can get very expensive. However, most borrowers pay back the initial amount borrowed within six months, according to research.

It’s common for those who claim to care about poor people to deride the short-term lending industry. Even worse, lawmakers want to effectively wipe out these financial institutions by imposing arbitrary interest rate caps. The Senate is considering a national interest rate cap of 36%.

The unintended — or perhaps intended — consequences of rate caps would be to stop lenders from offering these loans. Higher interest rates reflect the risk of lending to someone with poor or nonexistent credit.

As a Federal Deposit Insurance Corporation (FDIC) paper concluded, “the fixed operating costs and high loan loss rates justify a large part of the high APR charged on payday advance loan.” For the unbanked, these loans are a better option than more expensive and, frankly more dangerous, alternatives.

Surprisingly, now even institutions that we trust to weed out scammers and bad businesses have targeted small-dollar lending. The Better Business Bureau (BBB) released a new investigative report into payday loan scams.

Operating in the shadows of legitimate industry, individuals engage in fraudulent activity by taking advantage of vulnerable people.

The report is right that fraud is illegal and should be prosecuted. Unfortunately, the BBB unfairly lumps small-dollar lenders in with scammers as though they are one and the same.

To be clear, most small-dollar lenders don’t earn an F rating from the BBB, and at least half earn an A. But the BBB is promoting industry criticism and latching onto rate caps proposals that would make offering those loan services financially untenable.

The outcome would be disastrous, leaving vulnerable Americans worse off. When Georgia enacted a rate cap, borrowers bounced more checks, complained more about lenders and debt collectors, and were more likely to file for Chapter 7 bankruptcy.

Inflation is not disappearing, so helping unbanked Americans access resources to meet their unexpected needs is critical. This is the message that minorities want to hear from the president and national leaders.