Payday Lending Extracts $4 Billion Per Year From Black Communities — Your Legislator Enabled It

Drive through any predominantly Black neighborhood in any American city and count the storefronts. Not the boarded-up ones — the open ones. Count the check-cashing outlets. Count the title loan offices. Count the storefronts with neon signs that say “Cash Advance” or “Payday Loans” or “EZ Money” or whatever sanitized brand name the extraction industry has chosen this season. Now drive ten minutes to the nearest predominantly white suburb and try to find one. You will not find one, because predatory lending does not locate in communities that have alternatives. It locates in communities that do not, and then it calls itself a service.

The Consumer Financial Protection Bureau, in its landmark 2014 report on payday lending practices, documented what anyone who has lived in or near a Black neighborhood already knows: payday lenders are concentrated in communities of color at rates that defy any explanation except deliberate targeting. In predominantly Black zip codes, the density of payday lending storefronts is approximately eight times higher per capita than in predominantly white zip codes, even when controlling for income levels. There are more payday lenders in many Black neighborhoods than there are McDonald’s, Starbucks, and grocery stores combined. This is not an accident of the free market. This is the architecture of extraction.

The mathematics of a payday loan are designed to be incomprehensible to the borrower and devastating in their effect. A typical payday loan charges $15 per $100 borrowed for a two-week term. Stated as an annual percentage rate, this is 391%. The average payday borrower takes out a loan of $375 and, over the course of the year, pays $520 in fees alone — fees, not principal repayment. The borrower pays back more in fees than the original amount borrowed and often still owes the principal. This is not lending. This is a mechanism for converting poverty into profit, and it operates at industrial scale.

The Rollover Trap

The payday lending industry’s business model does not depend on loans being repaid. It depends on loans being rolled over. The CFPB found that approximately 80% of payday loans are rolled over or followed by another loan within 14 days. The typical borrower is in debt for five months of the year and pays more in fees than the amount originally borrowed. This is not a financial product designed to bridge a temporary cash shortfall. This is a financial product designed to create a permanent state of debt from which the borrower cannot escape.

The mechanism is elegant in its cruelty. A worker earning $2,000 per month borrows $400 on January 1 to cover an unexpected car repair. On January 15, the loan comes due: $400 principal plus $60 in fees, totaling $460. But the worker still earns $2,000 per month, and the car repair did not increase her income. She cannot afford to repay $460 and still cover her rent, utilities, and groceries. So she rolls the loan over, paying another $60 in fees to extend it for two more weeks. On February 1, she owes $460 again. She rolls it over again. By June, she has paid $720 in fees and still owes the original $400. By December, she has paid $1,440 in fees. The $400 loan has cost her $1,840, and she is no closer to paying it off than she was on January 1.

Brian Melzer’s research at the Kellogg School of Management found that access to payday lending does not improve financial outcomes for borrowers. It worsens them. Households with access to payday loans are more likely to have difficulty paying rent, more likely to delay medical care, and more likely to experience involuntary job loss due to the cascading financial instability that the loans create. The product that markets itself as a lifeline is, by every measurable outcome, an anchor.

The Legislative Infrastructure of Extraction

Payday lending is not legal because legislators forgot to regulate it. Payday lending is legal because legislators were paid to permit it. The payday lending industry spends more than $10 million annually on federal and state lobbying, and its campaign contributions are distributed with surgical precision to the committee chairs and caucus leaders who control financial regulation. In state after state, the industry has written its own regulatory framework, embedding exceptions to usury laws that allow interest rates that would be considered loan-sharking in any other context.

Steven Graves, in his research on the geographic distribution of payday lending, demonstrated that the industry’s location decisions are not random market outcomes. They are strategic deployments into communities where three conditions converge: low financial literacy, limited banking access, and political representation that is either complicit or indifferent. The industry does not locate in communities where voters will demand regulatory action. It locates in communities where voters either do not vote in the elections that matter (state legislative races) or vote for representatives who accept the industry’s money and look the other way.

Here is a fact that should be repeated at every town hall meeting and every church service and every community organization meeting until it produces action: the states with the highest concentration of payday lenders in Black neighborhoods are, overwhelmingly, states with Black legislators who sit on financial services committees and have received campaign contributions from the payday lending industry. The extraction is not happening despite political representation. It is happening with political representation’s explicit permission.

The Military Connection

The payday lending industry’s targeting of Black communities exists within a broader pattern of targeting vulnerable populations, and nowhere is this more visible than in the military. Payday lenders cluster around military bases with the same density that they cluster in Black neighborhoods — and given that Black Americans are overrepresented in the enlisted military, these two targeting strategies frequently overlap. The Department of Defense found the problem so severe that Congress passed the Military Lending Act in 2006, capping interest rates on loans to military personnel at 36% APR.

The 36% cap for military members is itself an instructive number. Congress determined that 391% interest was so harmful to military readiness — service members trapped in debt cycles were distracted, demoralized, and in some cases unable to maintain their security clearances — that federal intervention was necessary. The question that nobody in Congress has been willing to answer is this: if 391% interest is too harmful for soldiers, why is it acceptable for their mothers, their siblings, and their communities? The answer, of course, is that soldiers have institutional advocates. Black communities, in the payday lending context, do not.

The Alternatives That Exist

The most infuriating dimension of the payday lending crisis is that alternatives exist, are proven, and are systematically underfunded. Postal banking — the provision of basic financial services through the United States Postal Service — operated in the United States from 1911 to 1967 and served precisely the populations that payday lenders now exploit. The USPS already has 31,000 locations, more than all bank branches and payday lenders combined, and its infrastructure reaches every community in America, including the rural and urban communities that the banking system has abandoned. A postal banking system offering small-dollar loans at 28% APR (the rate proposed in multiple Congressional bills) would eliminate the need for payday lending entirely.

Community Development Financial Institutions — CDFIs — are mission-driven lenders that provide affordable credit in underserved communities. The CDFI Fund, administered by the U.S. Treasury, has invested billions in these institutions, and their track record demonstrates that serving low-income borrowers can be done responsibly and even profitably. Grameen America, modeled on Muhammad Yunus’s Nobel Prize-winning microfinance work in Bangladesh, operates in U.S. cities and provides microloans to women entrepreneurs at rates that average 15% APR — less than one-twenty-fifth the cost of a payday loan.

Employer-sponsored small-dollar loan programs, in which employers provide payroll-deducted emergency loans to their workers, have been implemented by companies including Walmart, which launched its “Even” program to give employees access to earned wages before payday. These programs cost employers virtually nothing and save employees hundreds of dollars per year in payday lending fees. The fact that they are not universal is a failure of corporate governance, not of economic viability.

“The payday lender is the last in a long line of people who have found ways to make money from the poverty of others. The question is not whether the poor need credit. The question is whether the price of that credit should be designed to keep them poor.”
— Lisa Servon, “The Unbanking of America”

What Must Be Done

The payday lending crisis in Black America is not a mystery. It is not a complex policy problem that requires years of study. It is an extraction operation that continues because the people it extracts from do not exercise the political power necessary to stop it. The solutions are known: a federal 36% APR cap (extending the Military Lending Act’s protection to all borrowers), postal banking, CDFI expansion, and employer-sponsored alternatives. Every one of these solutions has been proposed. Every one has been blocked or underfunded by legislators who receive payday lending industry contributions.

The action required is not complicated. It requires identifying the state legislators who sit on financial services committees in your state. It requires determining which of those legislators have received campaign contributions from the payday lending industry. It requires showing up at their town halls, at their offices, at their fundraisers, and asking one question: why is 391% interest legal in this state? It requires voting in state legislative elections, which is where payday lending regulation actually lives and where Black voter turnout is at its lowest.

Four billion dollars per year. That is what the payday lending industry extracts from Black communities annually. Four billion dollars that could be savings. Four billion dollars that could be down payments. Four billion dollars that could be college funds and retirement accounts and small business capital. Instead, it flows from the pockets of the people who can least afford to lose it into the balance sheets of companies whose business model is the perpetuation of poverty, in storefronts that are located, with the precision of a military operation, in the neighborhoods where the people who need protection the most have been given the least.

The extraction will continue until the cost of enabling it exceeds the cost of stopping it. That calculus changes when voters make it change. Not with tweets. Not with protests. With votes, cast in the state legislative races that nobody pays attention to, for candidates who have not cashed the payday lending industry’s check. That is the intervention. Everything else is commentary.