Payday Loan Firms Succeed in Rural Areas With Few Options

Inside Subprime: May 1, 2019

By Aubrey Sitler

Recently, the Chairman of the Federal Reserve, Jerome Powell, paid a visit to Mississippi Valley State University, a public, historically black university in the town of Itta Bena, Mississippi. It was the first time that a sitting Federal Reserve chairman had officially visited the Mississippi Delta.

While speaking at an event hosted by Hope Enterprise Corp., Powell outlined a number of crucial steps that would improve economic mobility in communities facing dire poverty challenges, such as Itta Bena, where 43.5% of residents are living on incomes below the national poverty line. One of the underlying levers informing these steps is the Community Reinvestment Act (CRA), which is intended to target and meet low- and moderate-income communities’ credit needs.

Powel described that “access to safe and affordable financial services is vital, especially among families with limited wealth — whether they are looking to invest in education, start a business, or simply manage the ups and downs of life.” Later in his remarks, Powell further commented that increased bank consolidation “has led to a long-term decline in the number of community banks.”

As community banks close, communities’ options for safe and affordable financial services also wane, and predatory payday loans and other high-cost financial service providers tend to increase. The CRA drives banks to be the single largest source of funding for community development financial institutions (CDFIs), but CRA reform is needed to prioritize and incentivize investment in rural areas with few financial services options.

Specifically, Powell noted in his Itta Bena speech that “revisions to the CRA’s implementing regulations should more effectively encourage banks to seek opportunities in underserved areas.” Policymakers need to ensure they place a priority on incentivizing investment in underbanked, high-poverty, and rural communities for this vision to become reality.

Each bank has a CRA assessment area, but because this area is based mainly on where its branches are, that area can shift dramatically when branches close. This often results in high-poverty areas becoming increasingly vulnerable and disinvested.

The Housing Assistance Council recently published research indicating that rural America has lost over half of its banks in the last few decades, further decimating rural communities’ financial vulnerabilities and isolation. This research also found that about one in eight rural counties have zero or one bank left.

Chairman Powell noted in his speech that Fed research has found that “the loss of [a local bank] branch often meant more than the loss of access to financial services; it also meant the loss of financial advice, local civic leadership, and an institution that brought needed customers to nearby businesses.”

American Banker advocates for key CRA reforms to ensure that rural, persistently impoverished, and underbanked communities can benefit from mainstream banking services and other opportunities associated with financial access, rather than relying on predatory payday lenders to meet their financial needs. They push for the following reforms:

  1. Expand CRA assessment areas to include more rural communities, and to give CRA credit to banks with minimal branches in those communities that still choose to invest in them.
  2. Give banks CRA credit not just for offering financial services and products to underbanked communities, but also for partnering with CDFIs to innovate capacity-building solutions to benefit communities, small businesses, and individuals.
  3. Incentivize new forms of financial activity within these highly vulnerable and under-resourced areas by providing CRA credit for bank activity or investment in CDFIs serving remote rural areas.

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