Blog sponsored by Bankrupt-Law.com


Leslie Fulbright, Chronicle Staff Writer
Tuesday, July 18, 2006
(07-18) 04:00 PDT Washington -- Low-income residents of 13 cities across the
nation pay extra for many everyday services, sometimes thousands of dollars
more over a whole year, a study to be released today shows.
By taking out higher-interest mortgages, shopping at rent-to-own furniture
stores, using check-cashing businesses instead of banks and buying groceries
at convenience stores, the nation's working poor households pay much more
than moderate- and high-income households for life's essentials, says the
Brookings Institution study, which analyzed services in San Francisco,
Oakland and 11 other cities.
The report -- "From Poverty, Opportunity: Putting the Market to Work for
Lower-Income Families" -- calls on government officials to create laws to
curb services that gouge low-income consumers, and it proposes reproducing
fledgling programs the authors found across the country.
Matt Fellowes, the report's main author, praised San Francisco's new push
for mainstream financial services in poorer areas as an example.
"Reducing the fees by just 1 percent would add up to $6.5 billion in new
spending power for the families," said Fellowes, a senior research associate
at Brookings.
"It would enable low- and modest-income residents to save for and invest in
assets, like homes and retirement savings or pay for child expenses like
health care and education," Fellowes said.
Among the cities Brookings studied, San Francisco stood out most for its
high concentration of short-term loan providers and check-cashing
businesses -- where customers pay $5 to $50 to cash a check. Its poor
neighborhoods have the second-highest concentration per capita. Seattle's
are first.
In San Francisco, you are nearly five times more likely to find a
check-cashing business in a poor area than any other neighborhood. In the
Tenderloin, the city's poorest area, there are 10 check-cashing businesses,
where the annual percentage rate can top 390 percent. In Pacific Heights, a
rich neighborhood, there are none.
Check cashers charge 2 percent or more to cash a payroll check; banks allow
deposits for free. Payday lenders, who offer cash for a consumer's own
post-dated check, charge 500 percent-plus in annual interest.
"Check cashing and payday lending are probably the biggest financial
impediments facing low-income people," said Kevin Stein, associate director
of the coalition. "It is a huge problem in San Francisco."
Poorer people use high-cost financial services because banks are less
accessible to them, they have had negative and expensive experiences with
mainstream banks, and they get immediate access to their cash and don't need
to wait out the holding periods banks often impose.
In other arenas, San Francisco fared a bit better. In mortgage lending and
in loans for furniture and cars, there was a smaller difference between what
rich and poor buyers paid in San Francisco than there was in other cities.
But that is in part due to the cost of living in San Francisco.
"The high-cost mortgages were a tiny share in San Francisco because there
are not a lot of lower-income people buying houses," Fellowes said. "And the
other services like furniture stores don't go to cities where there is not a
lot of business opportunity for them."
To account for increasing disparities between what rich and poor people pay
for goods and services, the report cites an increase in the labor force
since the mid-1990s, which created a greater demand for basic necessities,
and greater reliance by all kinds of businesses on consumers' credit scores.
"Over the past decade, sweeping economic, market and policy changes all
interacted to create millions of new customers," Fellowes and his colleagues
wrote. "The roaring economy of the late 1990s helped contribute to income
growth and the decline of concentrated poverty.
"Additionally, a major wave of new immigration to the U.S. also boosted
demand for an array of goods."
Because of the burgeoning use of credit scores, poor residents were able to
get much more credit -- but at higher rates than better off people because
their credit scores were worse.
As millions of new poor consumers entered the market, tens of thousands of
high-priced alternative financial services arose to meet the new demand for
check cashing, short-term loans, tax preparation and money wiring.
Fellowes said San Francisco leaders are at the forefront in recognizing the
bind that poorer households are in.
Mayor Gavin Newsom and city Treasurer Jose Cisneros are working on a program
called "Bank on San Francisco," which is intended to entice banks to compete
for the business now dominated by high-priced check-cashing services.
"The conversation is the first of its kind in the country," Fellowes said.
"San Francisco's leaders are setting themselves apart in the seriousness
with which they are taking on these issues."
Oakland last year banned new check-cashing and payday services from locating
within 1,000 feet of each other or within 500 feet of schools, churches and
liquor stores. Many cities have placed moratoriums on licenses for
check-cashing businesses. "It makes sense for leaders to focus more on
finding banks and credit unions and talking to them about what they need to
succeed," he said. "It takes more than getting rid of check cashing."
Stein agreed that regulators must use more muscle.
"We need to impose stronger protections around the cost of payday loans, and
banks need to get back into the business of making short-term consumer loans
that are fair and reasonable," he said.
The California Reinvestment Coalition is advocating for a low-fee account
known as the Essential Bank Account, an alternative to payday loans with
lower fees and lower interest rates and a longer repayment period.
Washington Mutual started offering the accounts in California last week