How Community Organizations Can Help Address Financial Inequities and Predatory Lending Practices
March 8, 2022
Overview
This article is one in a series produced through a partnership between the Network and the East Side Health and Well-being Collaborative in St. Paul, Minnesota. The Collaborative works with more than 20 local community organizations to advance coordinated initiatives that strengthen the health of their communities. As a member of the Collaborative, the Network provides training on the intersection between health, public health, and law and policy; and helps identify specific policies that support the Collaborative’s program goals.
Financial disparities exist in a multitude of areas including home ownership, credit scores, and access to banking services; and are linked to health disparities in maternal and child health, mental health, and substance use disorders. Home ownership is a primary way in which families develop generational wealth. In Minnesota, a 2017 study by the Urban Institute found that the cities of Minneapolis, St. Paul and Bloomington had a 51 percent gap between White and Black people in home ownership, the largest of any metropolitan area studied. A 2019 study found that across the state of Minnesota, the home ownership of Black people rate was only 25.3 percent.
In Minneapolis, the average credit score for majority-minority zip codes is 570, which is categorized as poor credit. In white-majority zip codes the average credit score is 725, which is categorized as good credit. As highlighted in this article, 8 Side Effects of Having a Bad Credit Score, a poor credit score can have a number of negative impacts, including lack of access to mainstream lenders, higher interest rates, and greater difficulty building wealth and retiring.
Perhaps even more fundamental to financial wellness is access to banking services. Banks and credit unions ensure that people have a safe place to save and access their money and provide loans for acquiring important assets like cars and homes. Startlingly, in 2019, one in five St. Paul households of color did not have access to a bank account. When community members do not have access to banks and credit unions, they may turn to predatory options like payday loans. Indeed, the demand for payday loans has increased over the last several decades, alongside poverty rates. Mehrsa Baradaran, a law professor and expert in banking and financial inclusion, notes that consumers typically seek payday loans as a last resort.
According to Exodus Lending, a Minnesota-based nonprofit that provides zero interest loans to help break the cycle of payday loan debt, in 2020, 12,737 payday loans were issued to 2,679 borrowers in Ramsey County, Minnesota, the state’s second most populated county. The average loan amount was $435, and the average interest rate was 185%. High interest rates and loan rollovers make it extremely difficult to manage and pay off these loans, which in turn negatively affects credit scores and homeownership rates. The result is a vicious cycle of debt and lack of access to fair credit terms.
While many states have laws limiting the amount of interest and fees that can be charged on a payday loan, a number of federal laws and regulations exempt banks and payday lenders from compliance with state requirements. This is often referred to as the rent-a-bank scheme. The National Consumer Law Center’s 2021 priorities on predatory lending provide a brief overview of the complex federal rules that allow organizations to evade state law.
Addressing these disparities will require a multi-pronged approach that includes law, policy, education, and community involvement, among other initiatives. In the “Twin Cities” of Minneapolis and St. Paul, several community organizations are actively engaged in assisting residents in achieving their financial goals. For example, Exodus Lending is working to help Twin Cities’ residents escape the payday loan debt cycle. Individuals can transfer their loan from a pay day lender to Exodus where they will make payments at a zero percent interest rate. There are also multiple community agencies in the Twin Cities that help households increase their credit scores, such as Prepare + Prosper and LSS Financial Counseling. Other agencies such as Model Cities, and Community Action Partnership of Hennepin County work with families to provide education and support in buying a home. In addition, community-based credit unions, which focus on serving underrepresented populations in their communities, can be part of the solution.
Financial literacy education is another important tool for addressing financial disparities in the Twin Cities and across the country. Research shows that students who receive personal finance education in high school have better financial outcomes and are significantly less likely to utilize predatory lending, such as payday loans, in the future. Unfortunately, researchers have also found that many students, in particular low-income students, do not receive personal finance education in high school. Only 21 states require high school students to take a course in personal finance, and only six states require that the course be standalone, as opposed to integrated with other subjects. Minnesota requires high school students to complete a course in economic and financial literacy and has K-12 financial literacy standards (see “current social studies standards”).
BestPrep, a Minnesota-based nonprofit organization that provides educational programs to students in grades 4-12, has a number of different programs that provide personal finance education. They educate students on budgeting and investing in the stock market and provide career mentorship and more. According to BestPrep, the organization worked with 586 public school students in the East Side of St Paul, as well as 3,641 total students across the St. Paul public school system in the 2021 school year. Studies have shown that personal finance education for young students causes a positive effect on their credit scores, greater asset accumulation, and lower debt delinquency rates. More than anything, it gives them a strong start to their financial wellness journey.
Addressing financial disparities requires a complex, intertwined, and multifaceted approach. In Minnesota, community organizations play a critical role in providing financial education and access to banking services with fair lending terms. Given the research showing the positive impact that financial literacy education has on high school students, states should incorporate personal finance education into their education standards and make completion of a standalone course a graduation requirement. More complicated is addressing the federal and state regulations that allow extremely high interest rates and predatory lending practices to flourish.
This post written by Caleb Erickson, East Side Health and Well-Being Collaborative; and Carrie Waggoner, JD, Deputy Director, Network for Public Health Law’—Mid-States Region Office.
The Network for Public Health Law provides information and technical assistance on issues related to public health. The legal information and assistance provided in this document do not constitute legal advice or legal representation. For legal advice, readers should consult a lawyer in their state.
Support for the Network is provided by the Robert Wood Johnson Foundation (RWJF). The views expressed in this post do not represent the views of (and should not be attributed to) RWJF.