Alternative financial services in los angeles

Alternative Financial Services in Los Angeles Evaluating Policy Options for Financial Access Initiatives Aimed at Low-Income Consumers

The Applied Policy Project April 26, 2012 Dr. Robert Jensen, Faculty Advisor

Ricardo Gutierrez Sarab Sarung Singh Khalsa Joshua Low Elycia Mulholland Tom Schumacher

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Acknowledgements This report was prepared in fulfillment of the requirement for the Master of Public Policy degree from the Luskin School of Public Affairs at the University of California, Los Angeles. The views expressed herein are those of the authors and not necessarily those of the UCLA Department of Public Policy, the UCLA Luskin School of Public Affairs, the University, or the client.

This report was partially funded through the generous support of the W.K. Kellogg Foundation, the UCLA Luskin School of Public Affairs Social Justice Initiative, and the Ralph & Goldy Lewis Center for Regional Policy Studies.

Special thanks to our advisor Professor Robert Jensen, for his assistance, guidance, patience, and feedback through the writing of this report. We would also like to thank Professor Meredith Phillips, Professor Mark Peterson, and Professor Mark Kleiman for their advice and feedback.

We are also thankful to the numerous researchers and practitioners we interviewed for sharing their knowledge, experience and advice and to the community-based organizations that we conducted focus groups with for opening their doors to us and helping us incorporate their clients in this policy discussion. We would especially like to thank Thomas Tseng and Daniel Tellalian for their guidance and assistance. Lastly, we are particularly grateful to Andrea Luquetta for her support throughout this project.

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Table of Contents Executive Summary 5 I. Introduction 7 Barriers to Banking 9 Background of AFS 12 The Financial Ecosystem 17

II. Methodology 19 III. Data Analysis: Implications for Financial Ecosystem Goals 22 General Results from Primary Data Collection

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Access Issues 25 Sustainability Issues 27 Affordability Issues 29

IV. Archetype Analysis 34 Unbanked Archetype 34 Banked Archetype 38 Payday Loan Archetype 42

V. Policy Criteria and Options

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Criteria 46 Criterion 1: Operational Feasibility 46 Criterion 2: Political Feasibility 47 Criterion 3: Consumer Related Affordability

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Criterion 4: Location Access 47 Criterion 5: Product Access 48 Criterion 6: Sustainability 48 Weighting and Scoring Criteria 48 Policy Options 49 Policy 1 - Payday Loan Rate Cap

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Policy 2 - Amend California’s Deferred Deposit Transaction Law

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Policy 3 - Improving Payday Loan Disclosure Requirements

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Policy 3 - Establish An Office of Financial Empowerment in Los Angeles

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Policy 5 – Amendment of Community Reinvestment Act

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Policy 6 - Banking Development Districts

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VI. Policy Recommendations and Conclusions

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Recommendations 70 Conclusion 72

Appendices 74 Appendix A: Overview of AFS Products

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Appendix B: Political Landscape Analysis

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Appendix C: Stakeholder Interviews 84 Appendix D: AFS Consumer Survey General Results

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Appendix E: Focus Group Community-Based Organizations

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Appendix F: GIS Location Access Analysis

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Appendix G: Data Analysis 105 Appendix H: Archetype Analysis 106

Bibliography 118

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Executive Summary Over one quarter of American households conduct their financial business outside of mainstream banks or financial institutions. Many of these households have turned to Alternative Financial Services (AFS) such as check-cashing, bill payment, and payday loans in order to conduct their financial transactions. These AFS products are typically provided at higher cost than comparable bank products. The market for AFS has grown rapidly over the last twenty years with 2010 estimates equaling $320 billion in transaction volume and $35 billion in fee and interest revenue.

There is significant debate on why this rise has occurred and whether or not consumers are better off through AFS use. Consumer advocates claim that AFS providers use predatory tactics and locate specifically in low-income areas and communities of color, trapping those households with high fees and placing them in a negative debt spiral. The AFS industry sees their products as a supplement to traditional banking services, offering products that meet the flexibility, convenience, and demand for liquidity that may otherwise be out of reach for many of their customers. Understanding these dynamics is an important component for policy makers who seek to increase economic opportunity.

Particularly in a time of economic uncertainty, a critical question is how to ensure households are able to retain more of their earned money while preserving the access to credit and convenience that meet their needs. The purpose of this report is to evaluate public policy solutions that increase consumer access to mainstream financial options and reduce consumer reliance on expensive AFS in the City of Los Angeles. By reducing AFS use, consumers can divert the funds usually spent on those products towards savings and financial stability. Our client, the

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California Reinvestment Coalition, seeks to use this analysis as an advocacy tool to bring about policy change in order to reduce reliance on AFS.

The policy solutions we evaluated seek to make improvements to the “financial ecosystem” that supports low-income households. We judge the effectiveness of our proposed policies based on their ability to: 1) reduce costs of financial services; 2) increase access to financial services; 3) promote long-term sustainability for consumers; and 4) maintain operational and political feasibility. Analyzing our policies with these criteria helps balance improvements in consumer welfare against the feasibility considerations of the financial industry.

In order to understand how AFS use affects consumers, we develop an “archetype analysis” of how a typical AFS consumer might behave in their financial transactions. Using this archetype, we gain an understanding of how various public policies might shape the financial life of this individual. For example, we project that by having access to a bank account, our unbanked archetype can save approximately $458 annually.

Based on our archetype analysis, data we collected through academic literature reviews, secondary data analysis, consumer focus groups, and stakeholder interviews covering AFS suppliers, consumer advocates, and government program managers, we present the following conclusions to decrease AFS use:

1.

Enact legislation in the California State Legislature to clarify information disclosures surrounding payday loans

2. Lobby local leaders in Los Angeles to include consumer welfare enhancing criteria for the proposed Banking Development Districts 3. Create an Office of Financial Empowerment in the City of Los Angeles with the specific intent of reducing AFS use and promoting a healthy financial ecosystem 4. Amend California’s Deferred Direct Deposit Law to mirror policies in the state of Washington designed to curb use of payday lending

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

I. Introduction Over one quarter of American households conduct their financial activities outside of federally insured banks and thrifts or similar mainstream, regulated financial institutions (hereafter referred to as banks), limiting their access to efficient financial products.1 These households are disproportionately low-income and minority.2 An estimated eight percent of U.S. households (approximately 9 million households) are unbanked, lacking access to checking or savings accounts.3 Another 18 percent of U.S. households (approximately 21 million households) are underbanked, having access to checking or savings accounts, but also using high cost non-bank service providers.4 These unbanked/underbanked households manage their financial affairs using Alternative Financial Services (AFS), which operate outside of regulated banks, for products including check-cashing, payday loans, prepaid debit cards, pawn brokering, money orders, and bill payments.5

American unbanked/underbanked households live in a precarious financial world, often having multiple strains on their ability to keep up with the cost of living, pay bills, save for emergencies, and build assets. U.S. households’ abilities to withstand financial shocks are extremely limited.6 If faced with a financial shock of $2,000 (a common measure of financial fragility), one quarter of Americans could not come up with funds in 30 days to cope, while an additional 19 percent could only cope by pawning off assets or taking out small dollar loans.7 Three quarters of low-income households do not perceive they have the capacity to pay their monthly bills and save for the future.8 In addition, overall economic distress, the large and prolonged increase in unemployment, and a 9.5 percent aggregate decrease in U.S. household wealth have intensified public concern for the financial stability of low-income American households.9

1 Federal Deposit Insurance Corporation. “National Survey of Unbanked and Underbanked Households.” December 2009.

2 Ibid 3 Ibid 4 Ibid 5 Federal Deposit Insurance Corporation. “Alternative Financial Services: A Primer.” FDIC Quarterly 2009, Volume 3, No. 1.

6 Annamaria Lusardia, Daniel Schneider and Peter Tufano. “Financially Fragile Households: Evidence and Implications.”

May 7, 2011.

7 Ibid 8 Tseng, Thomas, Daniel Tellalian and Eleni Constantine. “Unbanked By Choice: A Look At How Low-income Los Angeles Households Manage The Money They Earn.” PEW Health Group, July 20, 2010.

9 Board of Governors of the Federal Reserve System. “Balance Sheet of Households and Nonprofit Organizations.” December 2011.

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Unbanked/underbanked households’ reliance on AFS generally results in higher costs than basic services at banks.10 While banking products generally offer cheaper, safer, and more efficient financial solutions, the context in which these higher costs are incurred is critical. We do not presume that mere access to banks or the absence of AFS products will lead to increases in low-income consumer welfare. There are a variety of reasons why low-income households lack access to banking or choose AFS products. Low-income households may choose to be unbanked if they are faced with high or unexplained fees. Additionally, higher sticker prices of AFS products may be offset by lower “unpriced” attributes, such as convenience, liquidity, or lack of true substitutes. Lastly, banks and AFS providers face both perceived and real costs in serving low-income populations.

In this report we explore policy options and financial access initiatives that may improve the welfare of unbanked/underbanked households. We qualify the barriers to banking and quantify the costs of households being unbanked/underbanked. Additionally, we spend extra attention on payday lending, as it has become a policy “hotspot.” Our particular focus is on the City of Los Angeles, but much of our analysis and recommendations can be generalized to a wider scope.

Chapter 1 of this report examines barriers to banking, the background of financial services, and how those services relate to the financial ecosystem. Chapter 2 discusses our methodology for data collection and analysis. Chapter 3 reviews our data analysis which further quantifies the unbanked/underbanked issue in Los Angeles. Chapter 4 lays out our findings about AFS consumers. Chapter 5 focuses on our evaluative criteria and policy recommendations to improve the welfare of low-income households. Chapter 6 concludes our findings.

The Client The California Reinvestment Coalition (CRC) is a statewide advocacy group, which promotes fair and equal access to credit and finance for communities throughout California. Acting as a coalition, CRC represents the interests of 300 non-profit membership organizations including consumer advocates, community organizers, affordable housing developers, small business technical assistance providers, and more. CRC conducts an array of activities to advance fair-

10 Michael Barr. “Banking the Poor: Policies to Bring Low-Income Americans Into the Financial Mainstream.” John M. Olin Center for Law & Economics Working Paper Series 48 University of Michigan Law School, 2004.

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ness and access to credit, including meeting with bank representatives to ensure that financial needs of low-income communities are met and public policy advocacy to develop regulations that seek to protect consumers.

The CRC asked our group to conduct an independent analysis to quantify the direct costs of AFS products on low-income consumers and to weigh potential AFS policy options. While CRC is an advocacy organization and will use the findings in this report to advance its legislative agenda, the views expressed in this report are those of the authors and should not be attributed to CRC.

Barriers to Banking There are numerous and complex reasons for the persistence of unbanked/underbanked households as shown in Table 1. Households face both “soft” barriers to banking, the deliberate reasons why households choose not to be banked, and structural, or “hard” barriers, which prevent even households that demand banking services from opening or keeping bank accounts.

“Soft” Barriers1

“Hard” Barriers2

Perceived lack of funds by households

Past problems in the banking system

High fees or minimum balance requirements

Low credit scores

Lack of trust/understanding of banks

Insufficient identification/documentation

Preference for convenience in locations or hours of AFS locations

Language barriers

“Soft” Barriers to Banking According to a 2009 Federal Deposit Insurance Corporation survey, most respondents never opened a bank account because of, lack of funds, high fees or minimum balances, or lack of trust and comfort with banks.11 This indicates that current bank products are ill-fitted to the financial needs of low-income households. Consumers who cannot meet the account balance minimums, which are often onerous for households living paycheck to paycheck and with “thin” monthly cash flow profiles, often pay monthly fees. In addition, nearly all banks charge Federal Deposit Insurance Corporation. “National Survey of Unbanked and Underbanked Households.” December 2009.

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Table 1 Barriers to banking

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fees upwards of $20 per item for bounced checks, non-sufficient funds, or overdrafts.12 Lowincome households with little savings and tight monthly budgets face a high risk of paying these overdraft fees. Additionally, banks often place holds or limits on the availability of funds when depositing money or cashing checks. Households may be revealing their willingness to pay for liquidity and convenience by choosing higher-priced but more convenient options, such as check-cashing.

Additional surveys indicate a high level of mistrust of banks.13,14 Survey respondents also lack understanding of the banking system, do not understand when and how fees are applied to their accounts, or have had negative experiences with banks in the past.15

“Hard” Barriers to Banking Unbanked households also face structural barriers to being banked. Some unbanked households have difficulties in opening or qualifying for an account because of past problems in the banking system or impaired credit scores.16 Records of prior problems are kept for five years in the ChexSystem (which banks access to determine account approval), effectively barring accounts for any individual on file.17

Identification and language barriers, particularly relevant to immigrant communities, pose barriers to becoming banked. 18 Many immigrant households cite lack of proper identification documents as a major reason for being unbanked.19 Some households actually lack proper identification, while others are unsure or discouraged by the requirements. There is also a degree of flexibility in the type of identification requirements and financial institutions often have varying policies or uninformed staff.20 Federal Deposit Insurance Corporation. “FDIC Study of Bank Overdraft Programs.” November 2008.

Tseng, Thomas, Daniel Tellalian and Eleanor Blume. “Slipping Behind: Low-Income Los Angeles Households Drift Further from the Financial Mainstream.” PEW Health Group, October 8, 2011.

14 Federal Reserve Bank of Kansas City. “Study of Unbanked & Underbanked Consumer in the Tenth Federal Reserve District.” May 2010.

15 Tseng, Thomas, Daniel Tellalian and Eleanor Blume. “Slipping Behind: Low-Income Los Angeles Households Drift Further from the Financial Mainstream.” PEW Health Group, October 8, 2011.

16 Michael Barr. “Banking the Poor: Policies to Bring Low-Income Americans Into the Financial Mainstream.” John M. Olin Center for Law & Economics Working Paper Series 48 University of Michigan Law School, 2004.

17 Ibid 18 Federal Reserve Bank of Kansas City. “Study of Unbanked & Underbanked Consumer in the Tenth Federal Reserve District.” May 2010.

19 Patrick Contreras and Eric Robbins. “Strategies for Banking the Unbanked: How Banks are Overcoming Entrance Barriers.” Federal Reserve Bank of Kansas City, January 2006.

20 Ibid 12 13

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Network systems also play an important role in the ability of a household to become banked. A household cannot use specific forms of payment unless others in their network of transactions accept the same means of payment.21 Particularly in low-income neighborhoods, landlords will not accept personal checks as rent payments, which require cash or money order payments.22 Many businesses, such as convenience stores, do not accept debit or credit cards as payment options. Lastly, a significant number of unbanked report that they know “none” or “few” friends and family members that have checking or savings accounts.23

Lack of financial education in some low-income households is a significant barrier to account ownership.24 Some individuals’ failure to save is due to underestimating the gains from acquiring savings or overestimating the costs associated with cutting current spending.25 Although, many households lack a strong foundation in financial literacy with respect to budgeting, credit management and account ownership, education at any scale is likely to be under-funded without public subsidy.26

Business models pose additional barriers to banking. Retail banks, in general, have a relationship-based business model, earning revenue from the provision of a suite of products and serving the life-stages of their customers.27 Banks tend to prefer low-transaction, high-balance accounts and customers who can be cross-sold various financial products such as loans, mortgages, credit cards, etc.28 These customer preferences do not coincide well with the resources and needs of low-income consumers. Banks generally face high fixed costs to administer checking accounts, which are typically offset by high account balances and cross-selling of higher margin products.29 The costs of administering accounts will often be higher for low-income

21 Center for Financial Services Innovation. July 2005. A Financial Services Survey of Low-and Moderate-Income Households.

Accessed on February 28, 2012.

22 Ibid 23 Ibid 24 Michael Barr. “Banking the Poor: Policies to Bring Low-Income Americans Into the Financial Mainstream.” John M. Olin Center for Law & Economics Working Paper Series 48 University of Michigan Law School, 2004.

25 John Caskey. “Can Personal Financial Management Education Promote Asset Accumulation by the Poor.” Networks Financial Institute at Indiana State University, March 2006.

26 Michael Barr. “Banking the Poor: Policies to Bring Low-Income Americans Into the Financial Mainstream.” John M. Olin Center for Law & Economics Working Paper Series 48 University of Michigan Law School, 2004.

27 Financial Service Center of America. “Economic Inclusion: Meeting the Financial Needs of Consumers Through Financial Service Centers.” Presentation to FDIC Advisory Committee on Economic Inclusion. October 2007.

28 Ibid 29 Michael Barr. “Banking the Poor: Policies to Bring Low-Income Americans Into the Financial Mainstream.” John M. Olin Center for Law & Economics Working Paper Series 48 University of Michigan Law School, 2004.

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consumers, and may exceed what most unbanked households would be willing to pay for accounts. If there are questions of profitability or high start-up costs, banks may be reluctant to expend the resources necessary to offer banking products tailored to low-income customers.

Background of AFS Alternative Financial Services (AFS) describes the wide array of financial services and products offered by non-bank providers. Once a small industry of pawnshops and check-cashers, AFS providers experienced explosive growth in geographic locations, transaction volumes, and product variety over the last two decades. In the late 1980s there were approximately 2,200 AFS locations throughout the United States.30 The Financial Service Center of America, a trade industry for AFS, currently estimates there are over 13,000 locations nationwide.31 Transaction volume for AFS providers is estimated at $320 billion in 2010, which generates approximately $35 billion in fee and interest revenue.32,33

AFS products broadly consist of transaction products and credit products list in Table 2.34 Transaction products and services allow consumers to convert funds into another form (such as cash or money order), to send funds, and to transact with funds. Consumers of these services are employing the “cash-and-carry” method of financial management, using non-bank transaction products and services to quickly convert income to cash, pay bills, wire funds, and make marketplace transactions.35 AFS-provided credit products enable consumers to borrow funds on a short-term basis.36 These credit products are generally not offered by banks or other financial institutions and provide liquidity to otherwise credit-constrained consumers.37

30 John Caskey. “Check-cashing Outlets In a Changing Financial System.” Working Paper No. 02-4. Federal Reserve Bank of Philadelphia, February 2002.

31 Financial Services Centers of America. “FISCA Fact Sheet.” Accessed on February 23, 2012 at 32 Federal Deposit Insurance Corporation. “Alternative Financial Services: A Primer.” FDIC Quarterly 2009, Volume 3, No. 1.

33 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2.

Accessed February 2, 2012.

34 Federal Deposit Insurance Corporation. “Alternative Financial Services: A Primer.” FDIC Quarterly 2009, Volume 3, No. 1.

35 Michael Barr. “Banking the Poor: Policies to Bring Low-Income Americans Into the Financial Mainstream.” John M. Olin Center for Law & Economics Working Paper Series 48 University of Michigan Law School, 2004.

36 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2.

Accessed February 2, 2012.

37 Federal Deposit Insurance Corporation. “Alternative Financial Services: A Primer.” FDIC Quarterly 2009, Volume 3, No. 1.

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Table 2 Alternative financial services

AFS Transaction Product 2010 Market Size $7.4 ($Billion)

Walk-in bill pay $1.9

Prepaid cards $1

Check cashing $1.8

Remittance $2.4

Money orders $0.3

AFS Credit Product 2010 Market Size $17.0 ($Billion)

Rent-to-own $5.1

Payday lending $7.4

Refund anticipation loans $0.6

Auto title lending $1.5

Pawn lending $2.4

This chart represents some of the most prevalent AFS products, yet it is not an exhaustive list. A detailed description is provided in Appendix A. In the following sections we focus primarily on check-cashing and payday loans, as these are the two primary products used by unbanked and underbanked households and are the main focus of our report.

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Check-Cashing Check-cashing services convert checks such as payroll checks, personal checks, and government benefit checks into cash. Check-cashing services provide immediate cash conversion without holding funds and without a bank account.38 Check-cashing service fees range from 1 percent to 4 percent of the face value of payroll or government checks and as high as 15 percent for personal checks.39 Approximately 85 percent of checks cashed at check-cashing outlets are low-risk payroll or federal benefit checks.40 The volume of check-cashing services is approximately $58 billion, generating $1.8 billion revenue for firms in 2010.41

Payday Loans A payday loan, otherwise known as deferred deposit loan, is a small, short-term loan repaid on the borrower’s next payday. Nationwide, loan sizes are typically between $100 and $500, although in California loans have a maximum of $300 with a typical term of 14 days.42 The borrower visits a payday loan store with proof of income.43 The borrower writes a post-dated check or grants the payday lender access to draw from a checking account.44 The check (or bank access agreement) includes a fee, usually between $15 and $20 per $100 borrowed. When expressed as an annual percentage rate (APR), these fees range from 391 percent to 572 percent.45 In California, the legal maximum fee is 15 percent of the face value for the check. For example, the maximum loan proceed is $255 ($300 x 15 percent = $45 fee). At the next payday, either the borrower pays the loan amount and the fee or the payday company cashes the check or accesses the borrower’s bank account. Some states allow customers to “roll” the loan by paying the fee and refinancing the original loan. Other states, including California, do not allow “rollovers”

ACE Cash Express, www.acecashexpress.com, access on February 29, 2012 Fannie Mae Foundation and Urban Institute. “Alternative Financial Service Providers.” 2004.

40 Federal Deposit Insurance Corporation. “Alternative Financial Services: A Primer.” FDIC Quarterly 2009, Volume 3, No. 1.

41 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2.

Accessed February 2, 2012.

42 Department of Corporations. “California Deferred Deposit Transaction Law.” December 2007.

43 Gregory Ellihausen. “An Analysis of Consumer’s Use of Payday Loans.” The George Washington School of Business, January 2009.

44 Gregory Ellihausen. “An Analysis of Consumer’s Use of Payday Loans.” The George Washington School of Business, January 2009.

45 Sheila Blair. “Low-Cost Payday Loans: Opportunities and Obstacles.” Baltimore: Annie E. Casey Foundation, June 2005.

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but do allow subsequent loans in which the borrower must repay the original loan in entirety, and can immediately take out a new, “consecutive” loan (also known as churning).46,47

The Growth of the Industry The rise of the payday lending industry has been surprisingly swift. While payday lenders were nearly non-existent until the mid 1990s, they have since grown to have more storefronts in the United States than McDonald’s and Starbucks combined, with loan volumes in excess of $40 billion annually.48 The payday lender market is bifurcated by small independent stores and a small set of large payday loan firms, some of which are publicly traded corporations. Most recently, payday lending has migrated outline, with loans debited directly to borrowers’ bank account and collected electronically.49 Online payday lending has grown rapidly, with loan volumes estimated at $10.8 billion in 2010.50

The Payday Lending Debate Supporters of payday loans argue they provide consumers short-term credit for emergency expenses, filling a market gap created by the withdrawal of traditional lenders from the small dollar loan market.51 When used in moderation to smooth consumption, payday loans can provide welfare enhancing benefits for consumers. Typical 460 percent APRs are justified by high operating costs and the default losses associated with serving high-risk borrowers.52

Opponents of payday loans see a product detrimental to consumer welfare, ensnaring low-income households in debt traps. Sixty-three percent of loans are used to pay recurring bills (such as phone bills, rent, electric), rather than for one-time emergencies, creating unmanageable

Department of Corporations. “California Deferred Deposit Transaction Law.” December 2007.

In practice, a rollover and consecutive loan are almost identical, except the latter requires the borrower to briefly have the funds to repay the original loan balance.

48 Paige Skiba and Jeremy Tobacman. “Do Payday Loans Cause Bankruptcy.” Vanderbilt Law and Economics Research Paper No. 11-13. November 9, 2009.

49 Jean Ann Fox and Anna Petrini. “Internet Payday Lending: How High-priced Lenders Use the Internet to Mire Borrowers in Debt and Evade State Consumer Protections.” Consumer Federation of America, November 30, 2004.

50 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief. November 2011. P.2. accessed February 2, 2012, 51 Gregory Elliehausen and Edward C. Lawrence. “Payday Advance Credit in America: An Analysis of Customer Demand.”

Georgetown University, April 2001.

52 Flannery, Matt and Samolyk, Katherine. June 2005. Payday Lending: Do the Costs Justify the Price? Federal Deposit Insurance Corporation (FDIC). FDIC Center for Financial Research Working Paper No. 2005-09.

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debt and increased bankruptcy rates.53,54 Consumer advocates argue that ruinous outcomes can be mitigated with more practicable repayment terms and increased payday loan alternatives.

Alternatives to Payday Loans Savings are often seen as the inverse to credit. While dissaving or reducing expenses can be a viable alternative to taking out a payday loan, we have seen from a multitude of data sources that the typical payday borrower does not have much capacity to save or have large stocks of savings to draw upon.55

As shown in Table 3, additional payday loan alternatives include formal “non-loan” options and informal lending:

Table 3 “Non-loan” and informal lending alternatives to payday loans

Formal Alternatives

Informal Alternatives

Renegotiating existing credit

Community lending groups

Seeking financial planning services

Borrowing from friends and family

Employer provided paycheck advances

Loan sharks

Adjusting paycheck withholdings

Money lenders

Counseling services Emergency assistance programs

Bank products, such as credit cards and overdraft protection services, share similarities with payday lending. Credit cards and credit card cash advances are most similar to payday lending, as they give access to a revolving credit line. These alternatives are typically cheaper, with APRs below 30 percent. Additionally, credit cards allow for longer payback periods and do not feature the balloon payment feature of payday loans. Unfortunately, for most payday loan borrowers, credit cards are not a possibility. Most payday loan borrowers have been denied or can no longer draw additional credit.56 Overdraft protection can also serve as an alternative when a bank 53 Nathalie Martin. “1000 percent Interest - Good While Supplies Last: A Study of Payday Loan Practices and Solutions.”

Arizona Law Review, Vol. 52, p. 563, 2010. August 24, 2010.

54 Robert Mayer. “Payday Lending and Personal Bankruptcy.” Consumer Interests Annual Vol. 50, 2004, Pgs 76 – 82.

55 Gregory Ellihausen. “An Analysis of Consumer’s Use of Payday Loans.” The George Washington School of Business, January 2009.

56 Ibid

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

account holder writes a check with insufficient funds and allows her bank to clear the check for a fee.57 Many banks can charge as much as $35 per overdraft instance, regardless of the size of the transaction, which can quickly become a much more expensive alternative to payday loans.

Lastly, some banks and credit unions do offer small dollar loan alternatives, specifically structured to substitute traditional payday lending. Wells Fargo has a cheaper and competing product, called a Direct Deposit Advance.58 However, there are more stringent requirements for this product, including being a Wells Fargo banking customer with recurring direct deposit from an employer.59 Other small dollar loan alternative includes a well-publicized revolving loan offered by the North Carolina State Employees’ Credit Union.60 The revolving loan has a maximum balance of $500 at 12 percent APR61 and acts almost identically to a payday loan, except that it requires the borrower to save five percent of each advance in a special savings account.62

The Financial Ecosystem Past research indicates how the marketplace for financial services is vast and interrelated.

Therefore, in order for us to derive recommendations that would increase low-income consumer welfare, we must approach the issue of financial service access through a financial ecosystem lens. We view the financial ecosystem as including the following interrelated systems that affect the provision and consumption of financial products:

•

Consumer systems, which involve consumer behavior and needs that determine the provision of financial products. In low-income communities, this may include consumer needs for short-term, immediate, and convenient products.

•

Financial product systems, which involve the gamut of products in the financial market, such as transactional, savings, and credit products.63 In low-income communities, too many

California Budget Project. “Payday Loans: Taking the Pay Out of Payday.” September 2008.

Wells Fargo website. Accessed March 16, 2012: https://www.wellsfargo.com/help/faqs/dda_faqs 59 Ibid 60 Sheila Blair. “Low-Cost Payday Loans: Opportunities and Obstacles.” Baltimore: Annie E. Casey Foundation, June 2005.

61 Ibid 62 Ibid 63 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2.

Accessed February 2, 2012.

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58

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short-term credit products and too few savings building products interact to create a precarious system based on high financial fees and unrealized savings.

•

Producer systems, which are made up of the AFS providers and banks. The willingness and ability of banks to enter the low-income market influences the prevalence of mainstream and nontraditional products in these ecosystems.

•

Regulator systems, which are defined by the federal, state, and local regulations affecting the availability and provision of financial services. Legislation influences banks’ and AFS providers’ discretion in and motives for providing products to low-income communities.

In low-income communities, the interaction among limited regulation, the lack of knowledge and the needs of low-income consumers, and the profit motive on the part of banks and AFS have created financial ecosystems saturated with high-cost products and without mainstream, wealth building products. In this report, we use this conceptualization of the financial ecosystem to guide our analysis and policy selection. We specifically gear our analysis and policy selection around four broad goals we have identified as key to improving financial ecosystems in low-income communities:

1.

Reduced costs: Our core goal is the measurable increase in welfare to unbanked/underbanked households by direct cost savings.

2. Increased access to financial services: To enhance the financial ecosystem and overall welfare, there must be greater location integration of mainstream products into low-income communities.

3. Sustainability: To improve financial ecosystems in low-income communities, financial products must contribute to the long-term welfare of consumers, rather than only meeting short-term needs.

4. Feasibility: Improvements in these financial ecosystems should also be operationally and politically feasible to ensure continuity in financial service provision.

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

II. Methodology To inform the creation of our archetype consumers and selection of key policy alternatives, we aggregated information on financial access barriers, the costs of AFS products, and potential policy options through five project parts.

1. Stakeholder Interviews We conducted eight interviews with local government officials, alternative financial service providers, and private financial access organizations to gather information about current policy alternatives and to inform our survey and focus group questions.64 Interview questions varied based on stakeholder background, but generally included topics related to banking barriers and potential policy alternatives to restructure financial products. These questions were intended to help ensure that our policy alternatives were feasible given current local government environments, banking barriers, and financial access.

2. Consumer Survey This primary survey measured the loss to individual consumer welfare as a result of AFS, by asking consumers directly about their AFS expenditures and long-term goals.65

To sample consumers, we randomly selected 50 AFS locations from a complete list of locations in Los Angeles.66 We hired research assistants to intercept consumers leaving these businesses.

They were first asked to take the survey in-person, but were provided a business reply envelope if they were unable to. In exchange for their responses, we entered survey participants into a Appendix C Appendix D 66 This complete list was created using the Yellow Pages and Geographic Information Systems (GIS) and was crosschecked against major AFS provider websites and Western Union’s directory of AFS providers.

64 65

19

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

$100 raffle. Locations were sampled during different times of the day to account for variability in consumer characteristics. We determined these survey times by geographic area and degree of service use. For example, South LA locations were surveyed at different times of the day and during different times of estimated service traffic, such as high service traffic on paydays. We estimated service traffic by conducting test runs in different neighborhoods and at different times. We found that weekday evenings, specifically Friday evenings, were particularly high in service traffic while weekday mornings were low in service traffic.

3. Secondary Data To help develop archetype consumers and assess key barriers to financial service access, we analyzed two secondary data sources: The Federal Deposit Insurance Corporation’s (FDIC) National Survey of Unbanked and Underbanked Households and the New American Dimensions (NAD) dataset on banked/unbanked households in Los Angeles.67 We also analyzed these datasets to assess consumer financial needs and consumer behavior related to choosing between an AFS provider and a bank. The FDIC data includes state level information about demographics of AFS users, reasons for AFS use, and degree of AFS use. The NAD data provide similar information but is specific to communities in Los Angeles and covers more AFS products, including bill payment and remittances. The NAD data also provide specific information about AFS expenditures per month for each AFS product.

4. Focus Groups We conducted three focus groups in collaboration with community-based organizations to gather consumer and community input on core policy options and the degree to which they would meet consumer needs. Because past research had not included consumers in the development of alternative products, we determined that these groups were key to evaluating policy alternatives from a consumer welfare perspective. We asked participants about financial services in their communities, their financial needs, and their opinions about our key policy options.

Tseng and Tellalian, household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles, underwritten by the Pew Charitable Trusts.

67

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

We selected three community-based organizations (CBOs) to assist in recruitment based on their program activities and connections through the California Reinvestment Coalition (CRC). 68 We provided them instructions on recruiting participants based on check-cashing or payday loan use in the past 12 months. The focus groups lasted for two hours each and ranged from 4 to 30 participants.69 We provided participants with refreshments and childcare and entered them into a $100 raffle for their participation.

5. Political Landscape Analysis Though the preceding methods informed our policy selection and our analysis of how our key policy alternatives would affect low-income consumers, our main method for evaluating our policy alternatives was policy landscape analyses. We viewed political issues as being a main concern because our client is a grassroots advocacy organization. A political landscape assessment would allow our client and similar organizations to concentrate on policies that have high political feasibility and benefits to consumers. Moreover, the California state legislature and policy advocates are currently pursuing several policy alternatives, such as a statewide database on payday loans, a payday loan interest rate cap, and incentives for banks to create new financial products. Some of these policies have been attempted in the past, but have not been implemented because they were not politically feasible due to operational costs, consumer privacy concerns, or ideological differences.

For each of our policy alternatives, we evaluated the relevant political landscape to determine the likelihood of policy adoption given the political context of each policy. In addition to these political landscape analyses done for each alternative, we completed a general political landscape analysis of all regulations at the federal, state, and local levels related to AFS. The purpose of this review was to determine which policies have been politically feasible in order to assess the degree of feasibility of our policy alternatives. To do this general review and the analyses for each alternative, we used four methods:

1. A review of current and past AFS legislation and reasons for different successes and failures

Appendix E There was a misunderstanding with one community-based organization that provided more participants than requested.

68 69

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

2. Analysis of the political dynamics and ideological composition within the relevant legislature for each policy alternative, such as the political dynamics of the local legislature for zoning reforms 3. Identification of possible focusing events that may highlight AFS policy in particular jurisdictions, such as the appointment of the Consumer Financial Protection Bureau’s director and its effect on federal level concerns about AFS disclosure statements 4. Assessment of the power and ability of consumer and industry interest groups to affect legislation70

III. Data Analysis: Implications for Financial Ecosystem Goals We analyzed our primary and secondary data sources according to our four overarching goals for the financial ecosystem. Guiding our analysis around these goals was intended to reveal low-income consumer needs related to ease of access to financial services, match of financial services to consumer goals, and costs of financial services.

General Results from Primary Data Collection Between February and March 2012, we distributed 528 surveys, 85 of which were returned, giving us a response rate of 16 percent. Approximately 68 percent of our respondents reported having either a checking or savings account. Specific AFS product use among our respondents was as follows: 70 percent respondents reported using check-cashing services, 33 percent used bill payment services, 28 percent used remittances and 40 percent used payday loans within the last 12 months. Ethnically, 13 percent of our respondents were white, 27 percent were African American, 47 percent were Latino and 5 percent were Asian. We compared these figures to the demographics from the FDIC data.71 We concluded that African Americans had a much higher response rate than other ethnic groups and were overrepresented. We also found that respondents from the San Fernando Valley had a low response rate. Taking these factors into consideration, any analysis taken from our survey is only descriptive of our respondents.72 Appendix C We considered the FDIC data to be a representative sample of AFS users given that the data was collected in conjunction with the 2009 Current Population Survey and the sample was randomized.

72 Appendix D 70 71

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Between February and March 2012, we conducted three focus groups with a total of 40 participants. Of these participants approximately 88 percent were female, 90 percent were Latino, and 83 percent were monolingual Spanish-speakers. These data indicate our focus group sample was skewed toward women, individuals of Latino origin, and monolingual Spanish-speakers.

Given the skewed nature of our focus group sample, any analysis from these groups is only descriptive of our participants. The majority of participants (78%) indicated having access to a bank account while a minority indicated during discussion that they were able to save monthly.

AFS use among participants was as follows: 36 percent reported using check-cashing, 11 percent used payday loans, 47 percent used bill payment services, 11 percent used remittances, and 11 percent used pawn shops.73

Access Issues To test the theory that low-income individuals have less access to traditional financial services, we mapped all AFS and bank locations within L.A. According to our research, there are 631 bank branches and 424 AFS locations within the city (See Map 1).74 AFS locations are heavily concentrated in low-income and ethnic minority areas while banks are concentrated in high income and white neighborhoods.

To test these visual conclusions, we estimated the AFS and bank density per 1000 people by census tract and measured the exact level of disparity (See Table 4). It is clear that areas with lower income and higher minority percentages have a higher AFS density. The same conclusion could not be made with bank density. However, we believe this number is skewed because it does not take into account financial districts located in low-income neighborhoods, such as the downtown area. We tested this theory by focusing in on South, East, and West Los Angeles. We found a clear and dramatic disparity in financial access among these neighborhoods. There are 72 banks in West L.A for a bank density of .59, whereas South L.A. and East L.A. each have 9 banks or densities of .05 and .06 respectively.75

Please see Appendix E for a focus group summary We obtained a list of Los Angeles bank branches from the FDIC institution directory. We created a list of AFS locations within L.A. using the yellow pages and cross referenced these locations through additional internet search, as well as calling each location. Locations were mapped using demographic from the 2009 American Community Survey.

75 Please see Appendix F for detailed maps.

73 74

23

24

Map 1a

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

AFS Locations by Median Income

Los Angeles alternative financial services by median income

5 118

210

5 2 134

101 101 405

10

10

710

$2,499 - $30,500 $30,500 - $39,321 $39,321 - $53,649 $53,649 - $72,928

Median Income

by Census Tract

105

405

$72,928 - $214,375 AFS Locations

110

City of Los Angeles

10 MILES Sources: 2009 American Community Survey, Yellow Pages

Pacific Ocean

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Bank Locations by Median Income

Map 1b Los Angeles bank locations by median income

5 118

210

5 2 134

101 101 405

10

10

710

$2,499 - $30,500 $30,500 - $39,321 $39,321 - $53,649 $53,649 - $72,928

Median Income

by Census Tract

105

405

$72,928 - $214,375 Bank Locations

110

City of Los Angeles

10 MILES Sources: 2009 American Community Survey, Yellow Pages

25

Pacific Ocean

26

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Income Level

AFS Density

Bank Density

Minority Level

AFS Density

Bank Density

Under $30,500

0.186

0.185

Under 35%

0.031

0.295

$30,501 - $39,321

0.139

0.114

35.1% - 68%

0.087

0.162

$39,322 - $53,649

0.100

0.079

68.1% - 90%

0.158

0.171

$53,650 - $72,928

0.083

0.140

90% - 98%

0.136

0.125

Over $72,929

0.034

0.313

98%

0.123

0.054

Table 4 AFS and bank density level by income and ethnicity

Access to convenient, transparent, and affordable financial products is a theme that came up repeatedly in the survey-based data sets and focus group discussions. In the NAD survey, 60 percent of banked respondents stated that they chose their primary financial institution because it was “located close to where I live or work.”76 Over 82 percent of unbanked respondents also chose their AFS location based on proximity.77 Focus group participants often discussed AFS locations within walking distance while banks and credit unions were within driving distance. The NAD data show that 60 percent of AFS users frequent an AFS location within walking distance while 66 percent of banked individuals had to drive 5 or more minutes to reach their financial institution. 78 Our survey results tell a similar story (see Figure 1). Approximately 47 percent of the consumers sampled (n=35) lived under one mile from their AFS location and 66 percent (n=49) under two miles.

The lack of access to affordable financial products, especially affordable short-term credit, was another concern of AFS users. Focus group participants knew the exact fees charged by several local banks and AFS providers and could point to the most affordable location for each service: “$17 for a money order at Bank of America, it is cheaper at the check casher. At Superior Checkcashing you can get a money order for 85 cents if the amount is under $500.” Focus group participants unanimously expressed a desire to have bank accounts and expressed interest in community banks that offered more affordable services. The NAD data confirm that unbanked

76 Tseng and Tellalian, household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles, underwritten by the Pew Charitable Trusts.

77 Ibid.

78 Ibid.

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

27

25

20

Mean = 1.568 mi.

Median = 0.710 mi.

Number of AFS Consumers

Figure 1 Euclidean distance from AFS consumer’s home to AFS location

15

10

5

0 0

1

2

3

4

5

6

7 Miles

respondents would respond favorably to banks that presented them affordable access to the financial services offered at check cashers.79

Thirty percent of respondents cited eliminating overdraft fees and hidden fees as the most important thing a bank could do to help them open an account, the most popular response.80 According to these data, there is a demand for a hybrid institution that combines the services offered by check cashers with the financial accounts available at banks and credit unions.

Sustainability Issues AFS consumers have a variety of long-term goals that are difficult to achieve given the financial services available to them. Major goals reported in our survey included returning to school and owning a home (See Table 5). Focus group participants reiterated these goals, but also emphasized wanting more access to money or finding better work. Though the lack of money, 79 Tseng and Tellalian, household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles, underwritten by the Pew Charitable Trusts.

80 Ibid.

28

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

savings, and credit were stressed as obstacles to these goals, survey respondents largely had bank accounts or were able to save every month. For example, about 76 percent of respondents wanting to own a home had a bank account and 54 percent were able to save every month.

Respondents who cited wanting more money or financial stability had the lowest saving rates (22%), but were more likely to be banked (78%).

Goals (N=63)

Percent of Respondents Saving every Month

Percent of Respondents with Bank Accounts

Corresponding Obstacles

School (46%, n=9)

51% (n=15)

59% (n=17)

Money, Work, Time, Self

Home (38%, n=24)

54% (n=13)

67% (n=16)

Money, Credit, Saving, Work

Money/Financial Stability* (14%, n=9)

22% (n=2)

78% (n=7)

Money, Work, Education

Work (9%, n=6)

66% (n=4)

83% (n=5)

Economy, Unemployment, Time

Table 5 AFS consumer goals by saving rates, banked status, and obstacles

*Five out of 9 specified financial stability, one specified credit, one specified savings

We also asked focus group participants to explore obstacles to their goals and problems they had encountered with financial services in their communities. Though the majority of participants initially indicated money or jobs as an obstacle to their goals, after further discussion, several participants in two focus groups indicated difficulty in accessing credit as obstacles.

About one-third of participants in these two groups either expressed that they had a savings account but they could not receive loans at their bank or that they could not qualify for loans in their communities due to poor credit. Over half of participants in these two groups indicated they did not have the necessary bank accounts or credit cards to build adequate credit.

We observed a pattern of focus group participants saying the barriers they confronted in saving for the future were either that they had too little money for a bank account or that they had a bank account but could not afford to save money every month.81 The prevailing obstacle may be too little income, but participants did recognize the importance of savings and bank accounts to build credit even if they were low-income. They specifically stated preferring bank accounts over AFS providers in order access credit in the future. This analysis suggests that although these in81

Please see Appendix G for a detailed table on survey respondents’ reported obstacles to their goals.

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

29

dividuals have access to savings and bank accounts, they are still unable to build enough credit.

Banking low-income consumers may be an insufficient solution if being banked is not enabling them to build or access credit.

The NAD data indicate that unbanked consumers report being in poorer financial health compared to their banked counterparts. 82 AFS-only consumers are more likely to be operating at the margin of their incomes (See Table 6). Approximately 39 percent of AFS-only consumers are not able to pay their regular bills compared to 24 percent of their banked counterparts. We found the association between a person’s banking status and ability to save to be statistically significant at the .001 significance level. Financial stability particularly is an important factor in long-term goal attainment because it allows for savings and reduces the impact of economic shocks. Our archetype analysis delves deeper into AFS consumer financial stability.

Not Making Enough to Pay Regular Bills

Making Enough to Pay Bills, But Not to Save for Future

Making Enough to Pay Bills and Save for Future

Total (N-2,021)

Table 6

Banked Only

24.3% (n=153)

49.3% (n=311)

26.5% (n=167)

631

AFS Only

38.6% (n=278)

49.9% (n=359)

11.5% (n=83)

720

Underbanked

31.1% (n=115)

48.7% (n=180)

20.3% (n=75)

370

Cash Only

36.7% (n=110)

54.7% (n=164)

8.7% (n=26)

300

Pearson chi2(6)=83.9341, p=0.000

Affordability Issues Using the NAD dataset, we estimated the dollar amount spent monthly and annually on AFS by product, banked type, and community. 83 Our analysis shows a wide distribution of how much AFS users spend on AFS fees (See Figure 2).

82 Tseng and Tellalian, household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles, underwritten by the Pew Charitable Trusts.

We also found that consumers who purely operate in the AFS economy are the worst off as far as self-report of financial health. Though we find these mean ratings to be statistically significant between AFS-only consumers and their banked or underbanked counterparts, these differences are small enough to question their economic significant. Please see Appendix G for these results.

83 Tseng and Tellalian, household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles, underwritten by the Pew Charitable Trusts.

Best characterization of financial situation by banked type

30

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

80 Check Cashing Fees (N=549) Money Order Fees (N=848)

70

Payday Advance Loans (N=31) Bill Payment Fees (N=1,534)

60 50 40 30 20 10

More than $50 per month

$26 to $50 per month

$11 to $25 per month

$5 to $10 per month

Less than $5 per month

0 Nothing

Distribution of monthly AFS fees by AFS product

Percent of Respondents Using Product

Figure 2

Amount Spent on AFS Fees per Month

AFS users typically spend approximately $14.86 monthly on AFS, with some users spending as high as $124 per month on fees and others users spending closer to $0 per month.84 Fees for each product also show this range of dollars spent. For example, the check-cashing user spends on average $11.16 per month while some users may spend over $50 a month on cashing checks.85 People who use payday loans have the highest costs for AFS product fees. The payday The numbers in this section should be considered as estimates for the eight communities in the New Market Dimensions data. The sample was not representative of the entire LA AFS population, but these numbers at least provide rough estimates of the overall costs of AFS. 84 The data were originally coded in dollar categories. To approximate the exact dollar amount each survey respondent spent on AFS products, we recoded the AFS cost variables by using the midpoint method on each category included in the survey question. For example, the “Between $5 and $10� category was recoded to be $7.50. As a result, these are relatively conservative estimates.

85 Please see Appendix G for a detailed table on average dollar amount spent per AFS product.

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

31

loan user spends on average $30 a month on loan fees, with approximately 39 percent of payday loan users spending between $26 and $50 per month on fees.

Comparing average AFS fees by banked status, we see that underbanked and AFS-only individuals spend similar amounts on AFS (See Table 7).86 Underbanked users who use some AFS spend on average $17.15 a month on fees, only a dollar less per month than their AFS-only counterparts. For this sample, simply having a bank account did not significantly reduce the amount spent per month on AFS.87 There is an overlap between AFS use and being banked. As seen in these data, in these high AFS use communities; individuals who are fully banked are still using AFS. This finding has implications for policy alternatives, as simply moving people toward bank accounts may be an insufficient solution to cost savings if they are still using AFS products. Â

Monthly Average Spent

Yearly Average Spent

Yearly Total Average Percent of Annual Income

Banked Only (N=261)

$13.05

$156.61

$52,326.00

0.79%

Underbanked (N=280)

$17.15

$205.82

$61,668.00

1.04%

AFS Only (N=720)

$18.10

$217.21

$156,390.00

1.36%

Cash Only (N=300)

$6.53

$78.36

$23,508.00

0.57%

$14.86

$178.35

$293,892.00

1.07%

Total

In total, AFS users in the eight sample communities spent $293,892 a year on AFS (See Table 7). AFS-only users spend the highest proportion of their income on AFS fees, at an average of 1.4 percent of their annual income. We believe this is a low estimate given the low check-

86 AFS-only individuals are defined as people who do not have a bank account and rely purely on AFS. Cash-only users are people who do not have a bank account and who do not use AFS. Underbanked individuals are people who indicated having a bank account, but who also indicated using a check-cashing establishment. Banked individuals are people who indicated having a bank account and who did not indicate using a check-cashing establishment for their financial needs.

Please note that there were some discrepancies in these categories of banked status depending on the variables used to create them. For example, a banked individual may have indicated never using a check-cashing establishment for their financial needs, but later in the survey reported using check-cashing products. We decided to create these categories based on financial establishment used rather than reported products used. This corresponded to the original categories used by New American Dimensions and Emerging Markets in their report to PEW. 87 Though some respondents indicated only using banks and credit union establishments for their financial needs, these banked only individuals later indicated using check-cashing, money orders, and other establishments other than banks.

Table 7 Dollars spent on AFS fees by banked type controlling for AFS use

32

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

cashing fees reported. AFS-only users should be spending approximately 3 percent of their paychecks on fees to cash their checks. Our archetype analysis further examines this true cost.

Among the communities sampled, per community, between $22,000 and $76,000 are being spent annually on AFS fees (See Table 8). The South Figueroa corridor experienced the highest percentage of its community annual income reported in the survey being spent on AFS, approximately 2 percent of its total income. 88 Vernon Central spent the largest amount on AFS fees, totaling $76,161. Even with only $76,161 being spent across 436 individuals, the $174 average per person surveyed illustrates the potential high costs to individual families in these communities.

LocationÂ

Monthly Total Spent

Yearly Total Spent

Percent of Total Community Income

Extrapolated Yearly General Community Costs

Vernon Central (N=436)

$6,346.75

$76,161.00

1.35%

$15,015,436.80

Westlake Pico Union (N=328)

$3,534.00

$42,408.00

0.87%

$11,729,928.60

Pacoima (N=363)

$4,013.75

$48,165.00

0.51%

$10,615,725.00

Boyle Heights (N=298)

$3,353.75

$40,245.00

0.72%

$10,245,759.48

South Figueroa Corridor (N=177)

$2,295.25

$27,543.00

1.60%

$8,830,457.16

Lincoln Heights (N=114)

$888.50

$10,662.00

0.57%

$7,110,724.68

Watts (N=162)

$2,166.00

$25,992.00

0.87%

$6,577,473.12

Baldwin Village (N=143)

$1,893.00

$22,716.00

0.55%

$2,682,315.12

$24,491.00

$293,892.00

0.91%

$72,807,819.96

Table 8 Monthly and Annual Dollars Spent on AFS by Community

Total

Since annual income was also a categorical variable, we used the midpoint method to approximate each individual’s household income and then calculated the total annual income by community.

88

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

We extrapolated these sample costs to the greater population for each community. Applying information obtained from the NAD dataset to population statistics from the 2010 census, we estimate that families within these eight communities spend approximately $2.5 to $15 million per year on AFS fees.89 We cannot extrapolate these numbers to calculate total costs for the City of Los Angeles. However, if these communities are representative of other low-income communities in L.A., we can conclude that low-income communities are potentially spending upwards of $2M per year on AFS fees. This analysis suggests high costs to community welfare for communities with high AFS rates, low median incomes, and high poverty rates. However, this analysis does not account for the potential benefit individual families receive from using AFS products. The liquidity of and ease of access to AFS products are benefits of these products for low-income families in these communities. Quantifying these benefits is extremely difficult and could not be done within the scope of this project.90

Tseng and Tellalian, household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles, underwritten by the Pew Charitable Trusts We first calculated the average AFS cost per individual for each neighborhood, by multiplying the total monthly AFS expenditure by the number of respondents each community. Using census tracts, we calculated the total adult population for each community. Finally, we multiplied the average individual AFS cost by the adult population for each neighborhood.

90 We did not intend for this affordability analysis to be a full cost-benefit analysis of these products, but for it to be a proxy of the costs of AFS products for families in these communities. We can say that there is a very low likelihood of these fees being reinvested into the community. Major corporations own and operate most AFS locations, meaning that these businesses are not community-owned and ruling out that potential benefit for families. However, we cannot say that community members are not being employed by these businesses. Therefore, there is a potential employment benefit being offered by these businesses.

89

33

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

IV. Archetype Analysis The following analysis constructs archetype consumers that are representative of typical unbanked, banked, and payday loan individuals in the City of Los Angeles. The purpose of this analysis is to compare the costs of using banks versus AFS by using archetypical monthly spending profiles to highlight the effect of financial services used on consumer welfare.

Unbanked Archetype We used the FDIC’s Survey of Unbanked Households to estimate the necessary demographic information to construct an archetypical unbanked individual. We applied this demographic information to the NAD dataset, which contained information regarding respondents’ consumption expenditures and how they conducted their financial transactions. We supplemented this information with some additional consumption expenditures not included in the NAD data, such as transportation costs. There were still unassigned expenditures, such as healthcare expenditures, clothing costs, etc. that we did not feel comfortable assigning a specific dollar amount. As such, any remaining dollar amount should not be considered potential savings but rather unassigned income.

The average unbanked individual in L.A. is a male earning between $15,000 and $25,000 a year, is Latino, has completed some high school, is foreign born, and is not a U.S. Citizen.91 He is 34 years old and comes from a household of five. He has never possessed a bank account and earns enough money to pay his bills, but not enough to save.92 He is paid with a check and uses a check-cashing service to convert his income into cash. He does not possess a car or mortgage and probably has not borrowed from friends and family in the last 12 months (See Table 9).93

91 Federal Deposit Insurance Corporation. “National Survey of Unbanked and Underbanked Households.” December 2009. http://www.fdic.gov/householdsurvey/ 92 Thomas Tseng and Daniel Tellalian. “Household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles underwritten by the Pew Charitable Trusts.”

93 Ibid

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Demographic Information

Archetype

Ethnicity:

Hispanic/Latino

Income (annual):

$15,000 to $25,000

Education:

Some high school

Citizen status:

Not a U.S. Citizen

Foreign/native born:

Foreign

Language spoken at home:

English

Age:

34

Household size:

5

Previous banking relationship:

Never banked

View of financial health:

Enough to pay bills but not to save

Debt/loan outstanding:

Has not borrowed from family & friends

Savings behavior:

Not able to save every month

Car:

No car

Mortgage:

No

Refer to Appendix H for full table with methodology.

Unbanked Archetype Analysis Summary The direct cost of being unbanked for our archetypical unbanked individual is approximately 4.1 percent of total annual pre-tax income. Because becoming banked is not free, we compare the actual cost of AFS use to what we estimate would be the cost of being banked. The cost of being banked is 1.9 percent of total annual pre-tax income, or a difference of $457, or 2.3 percent of total annual pre-tax income compared to being unbanked (See Table 10). The future value of the direct savings to banking is $26,472, or 132 percent of current total annual pre-tax income, over the course of the archetypical unbanked individual’s working career.94

Discussion of Assumptions Our analysis of these direct costs relies on several key cost and behavior assumptions. The direct cost to check-cashing services is primarily driven by the cost of cashing a check, which is one to four percent of the value of the check, excluding personal checks.95 In our model, we used an average fee of 2.70 percent.96 Additionally, the archetypical unbanked individual uses 3 Refer to Appendix H for methodology Federal Deposit Insurance Corporation. “Alternative Financial Services: A Primer.” FDIC Quarterly 2009, Volume 3, No. 1. http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_1/FDIC140_QuarterlyVol3No1_AFS_FINAL.pdf 96 Weighted Average of check-cashing fees paid by those in our consumer survey 94 95

35

Table 9 Unbanked archetype demographics

36

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

money orders per month, amounting to $13 in monthly costs.97 Lastly, unbanked individuals who use check-cashing services to convert their income to cash are more susceptible to theft, loss, and damage of their cash holdings. According to data from the NAD survey, 18 percent experienced average cash losses of $729 over the course of a year.98 We find the expected value of a cash loss to be $131 annually.99

In calculating the cost of banking, we assumed the individual would open a low-cost checking account at a large banking institution.100 We assume the archetypical individual would not be able to consistently meet the minimum balance required by the account, costing him approximately $8.95 a month. Additionally, we assume fees for out-of-network ATM withdraws on average 2 times per month at a cost $2.18.101 The average low-income individual overdrafts 3.3 times per year at an average cost of $27 per instance. This cost was included in our analysis.102 The archetypical individual would have to overdraft an additional 1.4 times per month, or 17 times per year, to raise the direct cost of banking above AFS use. While we concede this is not implausible behavior, it would certainly be highly atypical.

97 Thomas Tseng and Daniel Tellalian. “Household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles underwritten by the Pew Charitable Trusts.”

98 Ibid 99 Using the Teng & Tellalain dataset, we calculate the expected annual cash loss = probability of loss [% respondents reporting loss] * average cash loss to surveyed population 100 Thomas Tseng and Daniel Tellalian. “Household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles underwritten by the Pew Charitable Trusts.”

101 Ibid 102 Federal Deposit Insurance Corporation. “FDIC Study of Bank Overdraft Programs.” November 2008. http://www.fdic. gov/bank/analytical/overdraft/FDIC138_ExecutiveSummary_v508.pdf

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Monthly

Income

Annual

Percent of Pre-Tax Income

$1,667

$20,000

Rent, Mortgage or housing

$780

$9,360

46.8%

Food

$370

$4,440

22.2%

Utilities

$139

$1,668

8.3%

Phone

$58

$696

3.5%

TV/Cable

$16

$192

1.0%

Remittance

$68

$816

4.1%

Transportation (Bus Pass)

$65

$780

3.9%

$1,496

$17,952

89.8%

$171

$8,592

Check-cashing

$45

$541

2.7%

Money Orders

$3

$36

0.2%

Wire Service

$10

$120

0.6%

Cash Loss

$11

$132

0.7%

$69

$829

4.1%

Current AFS Costs

$69

$829

4.1%

Estimated Bank Costs

$31

$371

1.9%

Potential Savings

$38

$458

2.3%

Expenses

Total Implied Remaining AFS Cost

Total Financial Services Fees

Refer to Appendix H for full table with methodology.

Indirect Costs This analysis does not take into account indirect or “unpriced” costs such as liquidity, convenience, and opportunity cost, which individuals may highly value. For example, when depositing checks into a bank account, banks often put holds on deposited funds while check-cashing services allow access to funds immediately. However, there are a number of services, such as direct deposit, which may counterbalance some convenience concerns. We omit these indirect costs from our analysis because of the difficulty in accurately “pricing” them and the inherently behavioral and highly subjective component.

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Table 10 Unbanked archetype

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Long Term Costs There is a rather broad consensus among researchers that there are high long-term costs of remaining unbanked, including the lack of access to safe and interest-bearing savings accounts and the inability to establish a credit score. Although placing a discrete value on these benefits is extremely difficult, establishing a credit score is essential to acquire long-term assets like a home or being able to finance purchases such as an automobile or education. The mere access to building a credit profile, however, will not necessarily lead to a desirable credit profile or the ability to build to long-term assets.

Banked Archetype When constructing our banked archetype we were constricted by the NAD dataset, which only allowed construction of an archetype representative of Latinos in L.A. rather than the broader population. This archetype is likely to be found in similar neighborhoods as our unbanked archetype and therefore face similar costs. We applied the same methods as our banked archetype to calculate expenditures and method of transactions. We used the 2010 Consumer Expenditure Survey to calculate the average costs of owning and maintaining a vehicle for a low -income individual. As with our unbanked archetype, any remaining income should not be considered potential savings but rather unassigned income for categories not included in the archetype.

The archetypical Latino banked individual is a female earning between $30,000 and $35,000.

She is a high school graduate, is a native U.S. citizen,103 is 41 years old, and lives in a household of four. She earns enough money to pay her bills and is able to save on occasion, but not every month.104 She is paid with a check and deposits that check into her checking account. The individual owns a car but does not own property or have a mortgage (See Table 11).105

103 Federal Deposit Insurance Corporation. “National Survey of Unbanked and Underbanked Households.” December 2009. http://www.fdic.gov/householdsurvey/ 104 Thomas Tseng and Daniel Tellalian. “Household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles underwritten by the Pew Charitable Trusts.”

105 Ibid

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Demographic Information

Archetype

Ethnicity:

Hispanic/Latino

Income (annual):

$30,000 to $35,000

Education:

High school graduate

Citizen status:

U.S. Citizen

Foreign/native born:

Foreign (51%) & native born (49%)

Language spoken at home:

English

Age:

41

Household size:

4.5

Previous banking relationship:

Banked

View of financial health:

Making enough to pay bills, but not to save

Debt/loan outstanding:

Has not borrowed from family & friends

Savings behavior:

Save money when I can, but not every month

Car:

Yes

Mortgage:

No

Refer to Appendix H for full table with methodology.

Banked Archetype Analysis Summary The costs of the being banked for our archetypical banked person are approximately 1.1% of total annual pre-tax income. Alternatively, if the individual used check-cashing services for income conversion, she would spend 2.7 percent of her total annual pre-tax income (See Table 12). In order for banking to be the more expensive alternative, she would have to overdraft an additional 1.6 times above what is currently modeled, over 19 times annually, or withdraw cash from out-of-network ATMs 20 times per month, 240 times annually.

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Table 11 Banked archetype demographics

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Table 12

Banked archetype

Income

Monthly

Annual

Percent of Income

$2,708

$32,500

Rent, Mortgage or housing

$975

$11,700

36.0%

Food

$413

$4,956

15.2%

Utilities

$191

$2,292

7.1%

Phone

$99

$1,188

3.7%

TV/Cable

$31

$372

1.1%

Remittance

$68

$816

2.5%

Car Insurance

$33

$400

1.2%

Gasoline

$84

$1,009

3.1%

Maintenance and repairs

$66

$787

2.4%

$1,960

$21,324

65.6%

$748

$10,024

30.8%

Direct Deposit

$0

$0

0.0%

Monthly Maintenance Fee

$9

$107

0.3%

Withdrawal (out of Network)

$4

$53

0.2%

$10

$120

0.4%

$6

$75

0.2%

$30

$356

1.1%

Expenses

Total Implied Remaining Bank Cost

Wire Service Overdraft/NSF Total Refer to Appendix H for full table with methodology.

Discussion of Assumptions In calculating the cost of banking, we assumed the archetypical individual has a low-cost checking account at a large bank.106 We also assume the archetypical individual would not meet the minimum balance charged by the account, incurring a monthly cost of approximately $8.95.

Additionally, we estimate the individual would withdrawal cash at an out-of-network ATM two times a month at a cost $2.18 and overdraft 2.8 times per year at an average cost of $27 per instance.107

106 Thomas Tseng and Daniel Tellalian. “Household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles underwritten by the Pew Charitable Trusts.”

107 Federal Deposit Insurance Corporation. “FDIC Study of Bank Overdraft Programs.” November 2008. http://www.fdic. gov/bank/analytical/overdraft/FDIC138_ExecutiveSummary_v508.pdf

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Policy Implications of Unbanked/Banked Archetype Analysis The results of our unbanked archetype analysis yield some important policy implications. The cost of being unbanked is significant, with the archetypical unbanked individual spending 4.1 percent of their pre-tax income on AFS products. A considerably large portion of that cost comes from converting income into cash using a check-cashing service. The archetypical unbanked individual could yield considerable savings if he was willing and able to open a bank account.

However, as mentioned previously in our report, there are number of reasons why this individual may not be willing or able to open a banking account. In particular, if an individual does not have an employer that utilizes direct deposit services, opening and using a bank account may have significant opportunity costs that can considerably decrease the cost savings associated with banking. Additionally, many unbanked individuals feel uncomfortable navigating the banking system.

The archetype analysis indicates that policies that influence employers to pay employees through direct deposit, allowing employees to bypass check-cashing services, can provide substantial cost savings to low-income households. Furthermore, policies that help address households’ concerns about navigating the banking system through financial education or the marketing of low-cost bank accounts suitable to an archetypical low-income household’s financial behavior can also provide cost savings.

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Payday Loan Archetype To construct our payday borrower archetype, we used demographic and usage data from three studies: FDIC’s survey (at the California state level),108 the California Department of Corporation’s 2007 report,109 and an academic study by Gregory Ellihausen (at the national level). 110 Because of the lack of data at the local level, we constructed our payday loan archetype to be representative of the typical California payday loan borrower.

The average payday borrower in California earns between $35,000 and $40,000 a year, is either Latino or White, and has a high school diploma.111,112 The borrower is 35 to 44 years old and is a woman.113 She has a bank account, is employed, and does not regularly save money.114 She has other forms of household credit, with debt-to-income ratios between 10% and 19%.115 She is credit constrained, having been denied or having limited access to further credit.116 The borrower takes out 3.5 (median) to 7 (average) loans in a 12-month period and is likely to take out consecutive loans.117 She takes out $255, the maximum loan amount allowed under California state law, and pays a $45 fee equivalent to 460 percent APR for a 14-day term.118 The borrower is likely taking out a loan to “pay for basic living expenses” and finds payday loans “easier to obtain than a bank loan or other credit” (See Table 13).119

108 Federal Deposit Insurance Corporation. “National Survey of Unbanked and Underbanked Households.” December 2009. http://www.fdic.gov/householdsurvey/ 109 California Department of Corporations. “California Deferred Deposit Transaction Law.” Report to the Governor and the Legislature. December 2007 110 Gregory Ellihausen. “An Analysis of Consumer’s Use of Payday Loans.” The George Washington School of Business, January 2009. http://www.cfsaa.com/portals/0/RelatedContent/Attachments/GWUAnalysis_01-2009.pdf 111 Federal Deposit Insurance Corporation. “National Survey of Unbanked and Underbanked Households.” December 2009. http://www.fdic.gov/householdsurvey/ 112 California Department of Corporations. “California Deferred Deposit Transaction Law.” Report to the Governor and the Legislature. December 2007 113 Ibid 114 Gregory Ellihausen. “An Analysis of Consumer’s Use of Payday Loans.” The George Washington School of Business, January 2009. http://www.cfsaa.com/portals/0/RelatedContent/Attachments/GWUAnalysis_01-2009.pdf 115 Ibid 116 Ibid 117 California Department of Corporations. “California Deferred Deposit Transaction Law.” Report to the Governor and the Legislature. December 2007 118 Ibid 119 Federal Deposit Insurance Corporation. “National Survey of Unbanked and Underbanked Households.” December 2009. http://www.fdic.gov/householdsurvey/

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Demographic Information

Archetype

Ethnicity:

White/Hispanic

Gender

Woman

Age

35 to 44

Income (median)

$35,000 to $40,000

Education

High school graduate

Monthly debt payments to income

10% -19%

Credit available?

Denied or limited

Savings behavior

Do not save

# Of transactions average

7

# Of transactions median

3.5

Loan amount

$255

Fee amount

$45

Term

14 Days

APR (14-day term)

460.08%

Consecutive or intermittent

Consecutive

Need for credit

Basic living expense

Reason for payday vs. Alternative

Easier than bank loan or other credit

Refer to Appendix H for full table with methodology.

Payday Loan Archetype Analysis In our analysis of the archetypical payday borrower we focus on cost and consumer behavior. We modeled what both the median and average payday borrower would spend to take out consecutive loans. The median borrower, taking out the maximum loan amount for 3 consecutive terms, is essentially taking out a revolving credit line for 42 days at 460 percent APR. The real cost to the borrower is $135 in fees and an interest rate of 52.9 percent. The fees represent 3.1 percent of the archetypical borrower’s pre-tax income over the 42 days (See Table 14). The average payday borrower is taking out 7 consecutive loans, taking out a revolving credit line for 98 days. The real cost to the borrower is $315 in fees and an interest rate of 123.6 percent (See Table 15). We cannot say definitively if an archetypical borrower is demonstrating economically rational behavior. For emergency payments or to avoid even higher fees, taking a high priced loan could clearly be economically rational behavior.

However, the average user would have saved more than the original loan amount if they have saved the $45 fee instead of using it to continue the use of the revolving credit line.

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Table 13 Payday archetype demographics

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Model of Median Use: 3 Consecutive Loans Amount Borrowed

Loan

Net Payment (Fees)

0

$255.00

$(300)

1

$(45.00)

$255

$(300)

2

$(45.00)

February 12, 2012

$255

$(300)

3

$(45.00)

$255

$(300)

3

$(135.00)

Table 14

Date

Median payday archetype

January 1, 2012

$255

January 15, 2012

$255

January 29, 2012

Amount Paid

Income over 42 Days

$4,315

True Interest Rate

52.94%

Fees (% of Income)

3.13%

Loan as % of Monthly Income

8.16%

Refer to Appendix H for full table with methodology.

Model of Average Use: 7 Consecutive Loans Amount Borrowed

Amount Paid

Loan

Net Payment (Fees)

0

$255.00

Table 15

Date

Average payday archetype

January 1, 2012

$255

January 15, 2012

$255

$(300)

1

$(45.00)

January 29, 2012

$255

$(300)

2

$(45.00)

February 12, 2012

$255

$(300)

3

$(45.00)

February 26, 2012

$255

$(300)

4

$(45.00)

March 11, 2012

$255

$(300)

5

$(45.00)

March 25, 2012

$255

$(300)

6

$(45.00)

$(300)

7

$(300.00)

April 8, 2012

$255

$(300)

7

$(315.00)

Income over 98 Days

$10,068

True Interest Rate

123.53%

Fees (% of Income)

3.13%

Loan as % of Monthly Income

8.16%

Refer to Appendix H for full table with methodology.

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Scenario 1 - Loan to Avoid Late Rent Charge

As an example, imagine a payday borrower taking a loan to avoid a five percent late fee of $56.25 on a rent payment.

120

The borrower could

(1 Loan) Monthly Income

choose to take a loan of $255, paying a $45 fee.

Rent (% of monthly income)

This loan is only worthwhile if there is a positive

Rent payment

net present value (NPV). In scenario 1, we see

late payment

that using a even a high cost product such as a payday loan can lead to a positive NPV and thus a beneficial investment. However, the typical behavior of a payday borrower is to take consecutive loans, creating a multi-period revolver.

Under scenario 2 and scenario 3, we model the same investment decision and find negative NPVs in both scenarios. This implies that the typical borrower would not be making a economically rational investment decision (See Table 16).

Fee

Table 16 $3,125 36% $1,125 5% $56.25

-C

-255

S

$311.25

D

17.65%

t (period) NPV

1 $9.56

Scenario 2 - Loan to Avoid Late Rent Charge (3 Loan Cycle) t (period) NPV

3 $(63.85)

Scenario 3 - Loan to Avoid Late Rent Charge (7 Loan Cycle)

This scenario does not include “unpriced” costs,

t (period)

such as a personal relationship with a landlord,

NPV

7 $(155.22)

or the increased possibility of eviction. Of course, those are important factors that would guide a borrower’s decision. However, the example serves to show that NPVs of payday loan usage are highly sensitive to the term length to the loan. This also seems to cast doubt to the commonly held industry hypothesis that payday loans are mostly used for borrowers needing emergency liquidity. The structure of the payday loan, a balloon payment after only 14 days, is very likely a difficult impediment for borrowers with thin cashflow profiles to overcome, thus easily leading to consecutive borrowings. For borrowers who do not expect to take consecutive loans, but ultimately do, the likelihood that the actual interest rates exceed their original investment hurdle rate, increases.

120

45

In this scenario we assume the borrower spends 36% of their monthly pre-tax income on rent.

Payday loan NPV

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Policy Implications of Payday Archetype Analysis Our analysis of the archetypical payday customer in California reveals that the typical user is taking out multiple loans a year and is taking out consecutive payday loans. This type of behavior closely resembles the characteristics of a bank revolver or credit line. However, using a payday loan as a bank revolver or credit line is expensive, with actual interest rates exceeding 50 percent at the minimum.

The archetypical payday customer is credit constrained and has limited options for substitute products. It is very likely that the typical payday loan customer has exceeded her credit limit and may not be able to access a loan from a bank.

The archetype analysis indicates that policies that address the high cost of the payday loan product along, the credit constrained nature of the payday loan customer, and the typical behavior of payday loan customers churning loans, can produce substantial cost-savings.

V. Policy Criteria and Options Criteria for Evaluating Policy Effectiveness Based on our literature review and analysis of our four main goals, we identified six criteria that guide our policy alternative analysis and that reflect of our goal of improving the financial ecosystem. Criteria 1 and 2 focus on the feasibility of implementation and Criteria 3 through 6 focus on improving consumer welfare.

Criterion 1: Operational feasibility We evaluate policies against this criterion based on their ability to function within the market and be implemented by the AFS industry or other suppliers. In our interviews, stakeholders repeatedly cited the costs to banks for entering into the low-income market.121 Banks tend to be highly risk averse and reliant on deposits for profits. These deposits are lower in low-income 121

Stakeholder Interview. February 13, 2012. CEO of Financial Industry Consulting Firm

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

neighborhoods and recent regulation restricts the profit that can be made from account fees.122 Given budget constraints and the high capital costs in designing new financial products, any policy proposed must be able to survive these conditions. We evaluate policy options across operational considerations including 1) operational costs and 2) industry buy-in.

Criterion 2: Political feasibility We define this criterion as the likelihood for policy adoption and implementation by legislators in target jurisdictions. Because of the inherent multitude of stakeholders that span the unbanked/underbanked market, we must consider what can feasibly be passed in the public sector given the changes in political climate and financial regulation after the economic crisis of 2008.

In assessing political feasibility, we consider 1) public official/policy maker buy-in, 2) consumer buy-in, and 3) likelihood for legislative passage in the short-term.

Criterion 3: Consumer-related Affordability We use this criterion to assess policy options based on how much they reduce the costs of meeting the basic financial transaction needs of low-income consumers. Using both our primary and secondary data sources, we evaluate policy options against this criterion by qualitatively assessing the potential wealth effect each policy option may have on AFS consumers. For our key policies related to payday loans, we focus on the differential effects among high end, middle end, and marginal users. For our general financial access policies, we evaluate their effects on unbanked and banked low-income demographics.

Criterion 4: Location Access The degree to which policies promote readily accessible products and locations of mainstream financial services is reflected by the location access criterion. We assess the degree to which each policy would increase financial product access through more mainstream financial storefronts in low-income communities. We measure increased location access using factors found in our GIS mapping analysis and secondary data sources, including 1) increased density of mainstream financial services, 2) balanced bank-to-AFS ratio, and 3) ease of access to financial services based on geographic proximity.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public.Law. 111-203, H.R. 4173 Stakeholder Interview. February 13, 2012. CEO of Financial Industry Consulting Firm 122

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Criterion 5: Product Access Product access is the extent to which policy options would lead to transparent and innovative products that meet low-income consumer needs and attract their business. With our primary and secondary data sources, we evaluate the financial needs of our archetypes and their barriers to accessing mainstream financial products. We have identified the following key factors to measure how each policy targets consumer needs and barriers: 1) fee structure, 2) transparency and disclosure structure, 3) product-consumer match, and 4) product variety.

Criterion 6: Sustainability We define this criterion as maintaining a financial ecosystem that contributes to the long-term goals of low-income consumers and provides continuity in availability of financial products.

Designing products geared toward sustainability is essential to addressing the lack of capacity of low-income to save for the future123 and their low rates of asset accumulation.124 Continuity is an essential element of the financial ecosystem as it provides households with the ability to plan ahead and minimizes transaction costs that arise from searching for new methods of conducting their finances. To evaluate how policies contribute to sustainability, we compare them against the following key sustainability factors identified in our data analysis: 1) product match to consumer long-term goals, 2) product match to alleviate barriers to long-term goals, and 3) continuity in financial ecosystem to avoid disruptions in financial services.

Weighting and Scoring Criteria Following a qualitative assessment of each policy, we score options against each criterion using these rankings of potential impact: Very Poor

Poor

Uncertain

Good

Very Good

Certain negative effects that override any positive impact.

Potential negative effects with some uncertainty or positive effects.

Potential positive and negative effects with a high likelihood of zero-sum effect.

Potential positive effects with some uncertainty or negative effects.

Certain positive effects that override any negative impact.

Thomas Tseng, Daniel Tellalian and Eleni Constantine, “Unbanked By Choice: A Look At How Low-income Los Angeles Households Manage The Money They Earn,” PEW Health Group (July 20, 2010) 124 Michael S. Barr, “Banking the Poor: Policies to Bring Low-Income Americans Into the Financial Mainstream,” University of Michigan Law School (2004) 123

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Though this rating scale is imprecise, it provides a means by which we can compare our diverse policy options. This comparison allows us to summarize and recommend policies that have the highest likelihood of benefiting policy advocacy activities.

In order to evaluate policies that would have the highest positive impact on the financial ecosystem, we place the greatest emphasis on the operational and political feasibility criteria. Any other positive attributes become irrelevant if a policy is unable to function in the market, or is unable to garner political support. As a result, any policy option must receive a minimum rating of uncertain to be recommended for adoption. A score receiving a poor rating may be pursued in the long-term, while a score receiving a very poor rating will require a dramatic shift to become law.

Policy Options for Financial Access We identified six policy options based on what policy advocacy groups are currently pursuing, our data analysis, and on our goals for the financial ecosystem. We decided to focus our policies on the state and local level, with the exception of one national policy, given the scope of our client’s advocacy activities.

Policy 1 - Payday Loan Rate Cap Current law in California places a cap on fees to be charged for payday loans at $15 per $100 borrowed, which comes to nearly 460 percent APR. One proposal to reduce cost of payday loans would be to cap the interest rate at 36 percent and charge fees at a commensurate schedule.

Various reform proposals have advanced legislation to cap payday loans at a 36 percent interest rate, bringing it closer to alignment with other forms of consumer credit. Many consumer advocates see the rate cap as an option that maintains consumer access to the emergency credit provided by payday loans, while bringing down costs and preventing excessive profits earned by lenders. The payday lending industry points to the fact that higher rates are necessary due to the high default the loans incur and the sizeable start-up costs associated with setting up the businesses. California Financial Services Providers indicate that a lender would only earn $1.38 per $100 for a two-week payday loan. This would be less of a return than cashing a government

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

check. Lowering the rate cap would impinge on the ability of suppliers to provide loans. Without sufficient revenue from interest and fees, many lenders would be forced to exit the market.

The most recent attempt to legislate a rate cap in California came through the introduction of Assembly Bill 2511 in March of 2010, which would have capped interest rates at 36 percent for individuals receiving unemployment benefits. The bill’s first hearing in the Budget & Finance Committee was cancelled at the request of the bill’s author, Assemblymember Nancy Skinner (DBerkeley). We were unable to identify the reason for the hearing’s cancellation and our calls to the Assemblymember’s office were not returned. The current status of the bill is listed as “died”.

Analysis from Other States Similar rate caps have been passed in several other states. The State of Oregon placed a limit of ten dollars per every $100 borrowed with a 31-day repayment timeframe, giving an APR of 150 percent125. There were 346 payday outlets in existence six months before the rate cap went into effect and that number had reduced to 105 outlets within seven months of the cap’s existence.126 A study performed by Dartmouth economist, Jonathan Zinman, estimated that the cap dramatically reduced access to emergency credit and consumers became worse off due to their shifting to inferior substitutes, such as bounced checks or overdrafts.127 We can infer that a rate cap of 36 percent would have led to even greater disruptions to the market. The Federal Reserve Bank of New York noted that relative to other states, households in the State of Georgia bounced more checks, complained more about debt collectors, and were more likely to file for Chapter Seven bankruptcy after Georgia initiated a ban on payday loans in 2004.128 While many of these alternatives may have fewer direct costs, the implicit costs of substitutes to payday loans could prove to be more costly in the long-term. For example, bounced checks may include the eventual closing of the consumer’s bank account leading to further exclusion from the financial mainstream. Empirical evidence has not yet shown precisely how these substitutes may be

“Payday Lending Statutes,” National Conference of State Legislatures, last modified December 7, 2011, http://www. ncsl.org/issues-research/banking/payday-lending-state-statutes.aspx 126 Jonathan Zinman, “Restricting Consumer Credit Access: Household Survey Evidence of Effects Around The Oregon Rate Cap,” Journal of Banking & Finance (October 2008) 127 Ibid 128 Donald P. Morgan and Michael R. Strain, “Payday Holiday: How Households Fare after Payday Credit Bans,” Staff Report no. 309, Federal Reserve Bank of New York (February 2008) 125

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

superior or inferior to payday loans. This is an area that requires more study to draw definitive conclusions.

Application of Criteria Operational feasibility – We expect this proposal to limit lender profitability to the extent that all suppliers would exit the market. This model is unfeasible from an operational standpoint. (Score – Very Poor)

Political feasibility – With AB2511 having been placed as inactive, a revival of the rate cap in California appears unlikely. An even broader law that touched all Californians (rather than solely those drawing unemployment benefits) would face even higher levels of political opposition. Even though this policy is operationally and politically infeasible, we decided to continue to evaluate its effectiveness because it has been popular among consumer advocate groups.

(Score – Very Poor)

Consumer-related Affordability – Based on evidence we collected, market collapse due to limited profitability is the likely outcome. High-frequent users consumers would be unable to obtain loans and would be forced seek out other, potentially costlier, alternatives. Low-frequency consumers who use these loans in emergencies would face disruptions causing detrimental effects to their welfare. Low-frequency users who may be tempted into use based on geographic proximity would not be able to access loans and improve their welfare. Because the effects of the tradeoffs among expensive loans and their substitutes is unclear, we are unable to conclude that a cap on payday loans would lead to decreased overall costs to consumers. (Score - Poor)

Location Access – Initiating a rate cap would not increase access to these products because suppliers are expected to exit the market. We therefore conclude that a rate cap would reduce access to financial products. (Score – Very Poor)

Product Access – This policy does not improve access to any welfare increasing options. Consumers would no longer be able to access to these products and be forced to use other alternatives, which may have greater welfare reducing attributes. (Score – Very Poor)

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Sustainability – Consumers may face additional financial uncertainty due to the elimination of an available, albeit expensive, option. In the focus groups we conducted, participants indicated that they were unhappy with the high fees charged by payday lenders, yet they were happy that the option existed. However, focus group participants also reported that acquaintances had overused these loans and that it would be better for these high-ender users to have limited access to payday loans. Lack of access to these loans would prevent them from entering a negative debt spiral. (Score - Poor)

Policy 2 - Amend California’s Deferred Deposit Transaction Law California currently regulates the payday loan industry through the Deferred Deposit Transaction Law. This policy recommends amending California’s law authorizing payday lending to incorporate reforms instituted by the State of Washington.129

The amendments would include: •

Create an installment plan option where borrowers are entitled to convert their payday loan into an installment plan at any time.

•

Cap the number of payday loans an individual can take out per 12-month period to eight.

•

Establish a statewide database to track loans and borrowers.

•

Increase the maximum payday loan size to $700 or 30 percent of borrower’s gross monthly income, whichever is lower.

•

Adjust the maximum fee a lender may charge a borrower to 15 percent on the first $500 and ten percent above $500

Individuals who are unable to pay off their loan at its due date would be able to request the loan be converted to an installment plan at no additional fee. Depending on the size of the loan, individuals would have between 90 and 180 days to repay the loan. Individuals who exercise the installment loan option would not be able to take out another loan until the original loan is paid off. The purpose of the installment plan is to provide borrowers with a “cooling off” period.

129

RCW 31.45 Washington Check Cashers & Sellers Act

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

The payday loan cap would help prevent borrowers from entering a cycle of debt that is detrimental to their overall welfare. The cap would also ensure these loans are used as short-term credit vehicles as they were originally intended for.

The establishment of a centralized loan database would prevent borrowers from taking more than eight loans per year or visiting multiple lenders to skirt the law. This database would provide lenders with better information on repayment and would allow the state to properly monitor the payday industry and ensure that the rights of borrowers are being protected.

Increasing the loan size from the current $300 maximum would allow individuals additional levels of credit. This was a common theme among our focus group respondents who were unhappy that they were forced to use multiple lenders instead of receiving what they required from a single lender. The decreasing fee schedule is intended to lower the costs of financing as loan principle rises. This would allow consumers to obtain funds to solve their immediate problem while saving money spent on interest.

Analysis of the Reforms in the State of Washington The Washington reforms went into effect on January 1st, 2010, and had immediate consequences. The number of payday lenders reduced by 30 percent, unique borrowers decreased by 32 percent, and the total amount of loans went down by 66 percent.130 While it is easy to see the direct effect of the reforms on the payday industry, it is much harder to examine whether these reforms increased or decreased overall consumer welfare. We believe further study is needed to properly analyze the effects of these reforms on low-income individuals.

Lacking the empirical evidence to evaluate completely the reforms, we relied on two indicators provided by the statewide database to help us examine the reforms’ overall effects on consumer welfare: the percentage of borrowers who reached the maximum amount of loans and the percentage of individuals who choose to convert their payday loan into an installment plan.

In 2010, 15.7 percent of all borrowers reached the maximum loan cap. While it is impossible to estimate the percentage of borrowers who would have continued to take out additional loans, 130

Ibid

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considering that 33 percent of all borrowers took out over eight loans in the year prior to the law’s implementation, it is very likely that the loan cap restricted at least some individuals from accessing loans.131 This decrease in access would affect users in different ways depending on their frequency of use of the loans. Some low-frequency users may benefit because they would be unable to take out unnecessary loans. Other low-frequency emergency users and highfrequency, habitual users would face higher transaction costs for the loans they need due to increased average distance traveled to access loans.

Prior to 2010, borrowers were able to convert their loans into installment plans only after they had taken out four consecutive loans from the same provider. In 2009, 23.2 percent of all borrowers converted their loans into installment plans. In 2010, with the enactment of the new law, 33.6 percent of all borrowers converted their loans into installment plans.132 While it is impossible for us to estimate the level of increased welfare, we can assume that certain individuals benefited from converting their loans into installment plans due to the increased repayment flexibility offered by the plans.

Application of Criteria Operational feasibility – Based on the Washington results, the implementation of these reforms in California would dramatically affect the profit margins of payday lenders and result in a shrinking of the market. Specifically, the loan cap and installment plan option will result in payday lenders no longer being able to earn the same profit margins off of habitual, high-end users, which would cause some of the least profitable lenders to exit the market. The extent of this shrinkage is uncertain and will require further study to fully determine its effects. However, based on the Washington model we expect that the shrinking of the market will not be large enough to eliminate the payday industry. The construction and maintenance of the statewide database would incur costs on the state. We are not able to estimate this cost, but we suspect it would not be high enough to make the project unfeasible. (Score – Uncertain)

Political Feasibility – Since these reforms are geared towards a compromise, they will likely not appease interest groups on either side of the issue. Industry groups will argue that these 131 132

Washington State Department of Financial Institutions, “2009 Payday Lending Report,” (2009) Washington State Department of Financial Institutions, “2010 Payday Lending Report,” (2010)

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

reforms go too far, while consumer advocates will argue they do not go far enough. Therefore, in the short term these reforms are most likely to be enacted if a policy champion takes up their cause.133 California SB365, which was designed to implement a statewide database in 2011, failed to pass the legislature. Industry groups opposed the bill due to its potential to limit the market. Consumer groups joined in opposition because the proposed legislation did not include a cap on the amount of loans that could be taken out annually.134 Because this proposal does include a loan limit of eight, advocacy groups could potentially be brought on board for this proposal. As Washington’s reforms are too recent to have received sufficient study, political support could shift once new information is brought to light through additional study of the Washington model. For example, if it is proven that increasing the loan limit enhanced consumer welfare, legislators and consumer advocates who may have previously opposed the legislation could be persuaded to advocate or vote for its passage. (Score – Uncertain)

Consumer-related Affordability – We conclude that the enactment of the new law would result in decreased costs for borrowers because they would now be able to convert their loans into installment plans. For example, an individual who converts a $300 14-day loan into a 90-day installment plan decreases his or her APR from 460 percent to 71.6 percent. Furthermore, a more restricted market may be advantageous to certain groups of users, such as high-frequency, habitual users, by limiting their access to a harmful product, thus preventing them from entering a debt spiral. (Score – Very Good)

Location Access – While we cannot predict the exact effect, we expect these reforms to initiate a sizable decrease in payday locations and to have different effects for various consumers based on their usage. The number of payday lenders in Washington did reduce by 30 percent following its reforms.135 We can expect a similar effect in California. This policy would not increase geographic access to financial services nor would it increase access to banks. Payday loan users may have to travel further to payday loan locations to obtain short-term credit. However, the extent of this effect is unknown and its negative implications would depend on the consumer’s frequency of payday loan use. Economic theory states that decreased competition will result in

John Kingdon, Agendas, Alternatives, and Public Policies (HarperCollins Publishers 1997) California Senate Bill 365 California Deferred Deposit Transaction 135 RCW 31.45 Washington Check Cashers & Sellers Act 133

134

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increased prices. Our analysis concluded that this theory was not applicable to the payday loan industry because the majority of lenders charged the maximum legal amount regardless of their location and the amount of nearby competitors. This analysis is supported by the fact that in 2010 the average APR for a payday loan in California was 460 percent.136 It is difficult to evaluate the effectiveness of this plan’s ability to meet the location access criterion due to the differing effects based on usage patterns. (Score – Uncertain)

Product Access – The installment plan option would result in a fee structure that improves consumer flexibility and helps bridge the product-consumer gap, such as allowing consumers to take out larger loans at a lower interest rate instead of borrowing from multiple lenders at a higher interest rate. The loan cap could potentially negatively affect high-end users but as our payday archetype analysis illustrated, as the number of loans taken out increases, it becomes harder to justify payday loan use as beneficial for the borrower. (Score – Very Good)

Sustainability – The installment plan would help individuals avoid falling into a negative debtcycle and rebuild their financial stability. The decreased size of the lending market could result in a disruption of financial services because certain individuals may no longer qualify for or be able to obtain loans. The evidence from Washington is mixed on this conclusion, as the overall amount of borrowers decreased by 32 percent, but the amount of borrowers who took out between one to three loans increased by 13.4 percent.137 While we know that the total amount of borrowers decreased in Washington, we are unable to determine whether this decrease was due to changes in the business model, fewer repeat borrowers because of the installment plan, higher loan limits, or some other factor. (Score – Good)

Policy 3 - Improving Payday Loan Disclosure Requirements Payday loan fee disclosures are more transparent when contrasted with comparable bank products. California law requires payday loan businesses to post, within public view, a “complete, detailed, and unambiguous schedule of fees” that is “clear, legible, and in letters not less than one-half inch in height.”138 136 State of California Department of Corporations, “2010 Annual Report of Operation of Deferred Deposit Originators,”(April 25, 2011) 137 Washington State Department of Financial Institutions, “2010 Payday Lending Report,” (2010) 138 California Financial Code. Division 10. § 23019.

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Prior to a payday loan transaction, the lender must also provide customers a notice that includes information about payday loan fees expressed in dollars and APR, and the potential for up to a $15 fee for bounced checks. Payday loan terms must also be written on each customer’s payday loan agreement, which must be signed by the customer prior to receiving the payday loan. Finally, to further ensure that customers are making informed decisions, both the notice and loan agreement must be written “in the same language principally used in any oral discussions or negotiations leading to execution of the deferred deposit agreement, in at least 10-point type.”139

APR comparison information treatment

Accumulated fees information treatment

Figure 3 University of Chicago study payday loan disclosure treatments

Typical repayment information treatment

No treatment

While payday loan disclosures may be prevalent and integrated into every step of the payday loan process, the format in which loan information is disclosed can be made more transparent to further inform consumer decisions. Recent evidence from a randomized field trial, conducted

by Bertrand and Morse of the University of Chicago Booth School of Business, suggests that the manner in which payday loan information is disclosed alters borrowers’ decision to take loans.140Payday loan proponents, including the CFSA, argue that payday loan borrowers are making fully informed decisions. Bertrand and Morse test whether borrowers are fully informed by changing how the costs of payday loans are disclosed and evaluating borrowers response to the disclosure changes; if borrowers are currently fully informed, then disclosure changes should not impact their decision to borrow. Bertrand and Morse were given access to all cusCalifornia Financial Code. Division 10. § 23019.

Marianne Bertrand and Adair Morse, “Information Disclosure, Cognitive Biases and Payday Borrowing,” University of Chicago Booth School of Business. (July 2010) 139

140

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tomers entering seventy-seven payday loan stores located in eleven states. The 1,441 customers that elected to participate in the study were given one of three disclosure treatments, or proceeded with the loan as usual, serving as a control group. The disclosure treatments consisted of the envelopes used to distribute cash at the end of a payday loan transaction.

Bertrand and Morse find that the accumulated fees information had the greatest impact; these borrowers reduced their take-up of payday loans by 11 percent in the four months following the information disclosure. Information disclosures also had an impact on the amount of borrowing in each cycle following the disclosures. While some borrowers that received the new information disclosure chose to take out fewer loans, others reduced the amount they borrowed (See table 17).

Disclosure treatment

Average Reduction of Amount Borrowed

Percent Reduction of Amount Borrowed

Accumulated fees

$55

23%

APR comparison

$38

16%

Repayment profile

$28

12%

Table 17 Average reduction in payday loan amount following information disclosure

Relative to control group in each pay cycle.

These findings suggest that under the current disclosure environment, payday loan borrowers are not making fully informed decisions and would benefit from improved disclosure requirements. In particular, California’s Deferred Deposit Transaction Law (CA Financial Code Division 10) can be amended so that the posted notice on the wall, the written notice prior to the loan, and the actual loan contract contain a version of the three disclosures used in the study. This information could be added to the law so that every customer also receives the accumulated fees informational envelope that proved most successful in the study. Also, while there is no current requirement for disclosure on loan envelopes, this can be added to the law so that every customer also receives the accumulated fees informational envelope that proved most successful in the study. Formalizing these information disclosures into permanent policy could increase their effectiveness due to repeated exposure, reinforcing borrowers’ ability to truly consider the short and long-term costs of payday loan products.141

141 Payday loan stores in the University of Chicago study only distributed these information disclosures for a two-week period. Most states, including California do not allow borrowers to have more than one loan at a time and set the minimum loan period at 14 days. In theory most customers in the study should have only been exposed to the new information once. It is possible that repeated exposure would have a greater effect.

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Application of Criteria Operational feasibility – The marginal costs of this policy are low for lenders, which already pay to provide borrowers disclosure documents and cash envelopes. We expect the market to shrink to a certain degree due to decreased lending volume based on fewer consumers taking up loans. The extent of this shrinkage is uncertain and will require further study to fully determine its effects. (Score – Good)

Political Feasibility – Empowering consumers to make informed decisions increases their liberty, and is generally well received by both consumers and the payday loan industry. The CFSAA prefers disclosure requirements to more restrictive policies that would cap rates or change loan terms. These changes can be instituted nationwide in the short-term, because the newly formed Consumer Financial Protection Bureau has the authority to change information disclosure requirements at the federal level without passing new legislation. CFPB is currently looking into how it can protect consumers against the payday loan industry. (Score – Very Good)

Consumer-related Affordability – In 2010, 2,144 payday lenders made a combined 12,092,091 payday loan transactions valued at $3,125,299,157.142 These loans were sold to 1,646,700 borrowers, with the average customer borrowing $258 at an average APR of 414 percent.143 If California borrowers respond to information disclosures like the borrowers in University of Chicago study, the take-up of payday loans would decrease by 11 percent or 1,330,130 loans, potentially keeping up to $51,476,031 of forgone debt fees in consumers’ pockets a year.144 California borrowers that do not decrease the number of loans they take out may respond to the information disclosure by decreasing the amount they choose to borrow. Borrowers in the University of Chicago study decreased their loan size by 12 to 23 percent, depending on the information they were given. In California, a 12 to 23 percent reduction in loan size would save the average borrower $32 to $65 per year, a combined savings for California borrowers of $49,978,546 to $95,781,452 a year.145 142 California Department of Corporations. 2010 Annual Report: Operation of Deferred Deposit Originators under the California Deferred Deposit Transaction Law. April 25, 2011. pp. 1-2 143 Ibid. pp. 2-3 144 Assuming an average loans size of $258 and 15% fees for the two week loan term, each forgone loan will save the borrower $38.70. 1,330,130 forgone loans will save borrowers $51,476,031 in loan fees.

145 Assuming 11% of loans are no longer taken that leaves 10,761,961 loans (12,092,091*.89), each of which is no reduced by 23%. Assuming the average loan is $258, as in the Department of Corporations report, a 23% reduction is equivalent to not paying loan fees on $59.34. The fee on $59.34 at 15% for a two-week loan term is $8.90. 10,761,961*$8.90 = $95,781,452 in reduced loan fees per year. The average borrower takes out 7.34 loans and would save $65 per year. At 12% 49,978,546 in loan fees stays with consumers each year or $32.51 per borrower. Note that these estimates are

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Together, the reduced loan amounts and reduced number of loans disclosure responses could keep up to $101 million to $147 million in California consumers’ pockets. (Score – Very Good)

Location Access – Enhanced information disclosure may impact locational access due to the smaller lending market. As noted previously, decreased payday loan locations may benefit or harm some consumers based on their frequency of loan use. (Score – Good)

Product Access – Enhancing disclosure should not prompt formation of any new products that may impact consumer welfare. (Score N/A)

Sustainability – Consumers are reminded that these loans are unsustainable when used repeatedly over the long-term, especially in comparison to mainstream credit options. Finally, the accumulated fees disclosure may help borrowers consider alternative uses for those fees including saving for future goals. (Score – Very Good)

Policy 4 - Establish an Office of Financial Empowerment in Los Angeles Numerous policy options have been developed to create substitutes for AFS products, but the efforts behind them are fragmented and insufficient to mitigate the problem. An entity is needed that possesses the vision, capacity and leadership to bring these diverging policies together. By developing these policies in a larger scale, this entity could have a dramatic impact on improving consumer financial welfare.

One such entity, which was developed in San Francisco in 2006, is the “Bank On” initiative. Typically led by a local government official, Bank On programs negotiate with local banks and credit unions to reduce barriers to banking and bring households into the financial mainstream. Many times the banks that volunteer to partner with the Bank On entity have agreed to offer some form of low-cost or free starter accounts, which are marketed as Bank On accounts. During the program’s first year of implementation in San Francisco, 11,110 previously unbanked individuals had entered the financial mainstream.146

forgone debt fees and not consumer surplus, which would be lower because consumers receive some surplus from borrowing.

146 Leigh Phillips and Anne Stuhldreher, “Building Better Bank Ons,” New America Foundation (February 2011)

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San Francisco has taken its Bank On program a step farther with the creation of the City’s Office of Financial Empowerment (OFE). The OFE is housed under the Office of City Treasurer and offers numerous programs to build assets for low-income San Franciscans. These programs include promoting workplace adoption of electronic payroll and direct deposit, developing partnerships with local credit unions to pilot a lower cost payday loan option, and providing training for financial education coaches.

Bank On in Los Angeles Bank On LA was initially brought to the City of Los Angeles and was housed within the Office of Mayor Antonio Villaraigosa. Eventually the Villaraigosa administration chose to move the program from the Mayor’s Office to its current home at Community Development Department (CDD) due to its programmatic kinship with the city’s workforce development efforts. CDD contracts with twenty-one local Family Source Centers, to provide Bank On LA work and an array of services including financial education, after school activities for youth, food distribution and others. While Bank On at the Family Source Centers is successful in bringing households into banking, additional programs could be added to broaden financial empowerment in Los Angeles.

We believe that moving Bank On LA outside of the Mayor’s Office weakened its effectiveness by creating distance from the center of power at City Hall. By centering Bank On at CDD, financial empowerment is added to the broad palette of programs that currently exist, but does not have a strong policy presence of its own. In order to maximize its effectiveness, Los Angeles could establish its own Office of Financial Empowerment and center its work in a location that can build its scope as a stand-alone initiative. San Francisco has shown how this can be done through committed leadership with City Treasurer Jose Cisneros acting as a policy champion who ushered the program into his office147. The City of Los Angeles could give consumer financial welfare the priority necessary to make a significant impact by developing a robust set of services through a key institution.

147

Bank On Government Official Stakeholder Interview, January 31, 2012

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Application of Criteria Operational feasibility – We were unable to identify any underlying assumptions in the implementation models of other cities that would prevent similar success in Los Angeles. The City budget, however, is expected to face yet another deficit this coming fiscal year and funding for new programs will be scarce. The new program could be supplemented by new private philanthropy, as is the case in the San Francisco model.148 (Score – Very Good)

Political Feasibility – The political feasibility of moving the Bank On program to an Office of Financial Empowerment in Los Angeles may prove to be difficult at this time. Because it was decided that the Mayor’s Office was an unsuitable home for the program, it is unlikely that the political will exists to move it back into the Mayor’s Office until a new mayor is elected when Villaraigosa is termed out in 2013. It is impossible to predict at this point how financial access initiatives will rank on the incoming Mayor’s list of priorities. (Score – Uncertain)

Consumer-related Affordability – With more AFS users fully participating in the banking mainstream, we expect these households to save costs on check-cashing fees and decreased use of expensive payday loans. However, because these savings are reliant on banks’ and credit unions’ participation in the program, the scope of these efforts will remain limited. Many banks still doubt the profitability of expanding banking access to low-income consumers, therefore we do not expect widespread cost reductions for low-income households. (Score – Good)

Location Access – Bank On and the Office of Financial Empowerment do not work to increase location access of banks in underserved communities. (Score – N/A)

Product Access – One of OFE’s most important functions has been development of low-cost bank accounts. Unfortunately, anecdotal evidence indicates that many banks do not actively promote the Bank On accounts, potentially due to uncertainty of the products’ profitability, untrained staff, or a lack of standardized procedures. These factors may diminish the breadth of the accounts’ positive effects.149 San Francisco has worked with local credit unions to pilot a payday loan alternative through its Payday Plus program. Yet, these products have not been widely 148 149

Ibid Ibid

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

adopted by banks and further study is needed to determine if the loans will be cost-effective products that financial institutions can use for the long-term. (Score – Good)

Sustainability - Bank On products are designed as an entryway to a healthy, long-term financial relationship and directly match the goals of low-income consumers. We do not anticipate an increase of Bank On activity as having any negative spillovers or market disruptions. (Score – Very Good)

Policy 5 – Amendment of Community Reinvestment Act Banks could be incentivized to develop new products to meet the needs of low-income consumers through amendment of the Community Reinvestment Act (CRA). CRA was passed in 1977 to ensure that banks and financial institutions are providing access to credit in the communities in which they do business. In exchange for increased lending activities in these communities, while preserving the safe and sound operation of the banks, CRA regulators currently are able to provide approval for the bank’s request for a merger or acquisition. Though CRA is a federal law with national scope, state and local advocacy groups can use their states, communities, and examples of how a redeveloped CRA to impact local constituencies. Additionally, state groups who are affiliated with national consumer groups may be able to add CRA amendments to a national agenda.

CRA was initially designed to promote home mortgage lending, but the law added additional criteria for the review process during its reauthorizations over the years. Most recently the law has been extended to include provision of low-cost student loans to low-income students as a measurement of banks’ effectiveness in reaching residents of the communities in which they do business.150

Because there is a precedent for amending CRA to include new products aimed at increasing welfare among low-income communities, this approach could be done again to include products aimed at decreasing use of AFS products. CRA credits could be given for development of small-dollar loans, low-cost checking accounts, or other products. The inclusion of these products could significantly decrease AFS use and lower the fees associated with more expensive services.

150

Higher Education Opportunity Act, Pub. Law 110-315

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While CRA has helped banks realize the profit potential that exists in low-income neighborhoods for mortgage lending, it is difficult to assume that they would come to the same conclusions for AFS. This may be because of the uncertainty regarding profitability surrounding AFS substitutes. With a healthy small-dollar loan product, consumers would be able to avoid costly payday loans and be less likely to enter a negative debt spiral because the small-dollar loans do not utilize a large balloon repayment structure. The increased affordability of these products would allow consumers to take out a loan that meets their immediate needs and pay down the debt in a manner that does not demand the quick turnaround of the payday loan.

Application of Criteria Operational feasibility – It is difficult to assess the operational feasibility of this option due to the uncertainty surrounding the profitability of the products. Banks may be provided with an incentive to initiate these products, but if the profit margins on these products are insufficient to support their business model, then banks would still not take them up. (Score – Uncertain)

Political feasibility – A CRA amendment is politically infeasible at this time. CRA has become a partisan issue after the financial meltdown of 2008. The most recent attempt at financial reform (Dodd-Frank 2010) was fiercely ideological, splitting Democrats and Republicans along party lines. The final vote attracted zero Republican votes in the House and four votes in the Senate151 . With Republicans currently holding control over the House of Representatives, it is unlikely that any new legislation regarding CRA will be introduced in the foreseeable future.

(Score – Very Poor)

Consumer-related Affordability – Banks would be incentivized to created new products that meet the needs of low-income consumers. These products would provide direct competition at lower prices than AFS products. (Score – Very Good)

Location Access – Expanding CRA credits are not designed to increase location access to banks.

It is not expected to expand, nor contract, geographic concentration of banks or financial services. (Score – N/A) 151

House.gov, Final Vote Results For Roll Call 968

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Product Access – This policy would enhance the development of superior products to AFS and improve a bank’s ability to meet the needs of low-income consumers. (Score – Very Good)

Sustainability – Low-cost payday alternatives provide consumers with short-term financing that meets their needs without costly repayment schedules. With a lengthier repayment timeframe, consumers would be able to rebuild financial stability. These products would improve consumer financial welfare for the long-term by providing greater flexibility. (Score – Very Good)

Policy 6 - Banking Development Districts New York State enacted Banking Development Districts (BDD) to encourage banks to locate in underserved areas. The BDD incentivizes banks to locate in underserved areas by depositing public funds into financial institutions that locate within the BDD. These below-market rate deposits are intended to minimize risks to banks that depend on a certain deposit threshold to locate in an area.152 Other incentives include below market rate deposits from the state, fasttracked land use permitting, or streamlined zoning requirements153 Between 2005 and February 2010, 61,750 accounts have been opened, with 6,673 loans totaling $538.8 million being initiated in New York State’s BDD branches.154

Banking Development Districts in Los Angeles The creation of BDDs in Los Angeles was set into motion through a change to the Los Angeles Administrative Code, which established the Banking Development District Task Force in 2011.155 The purpose of the Task Force is to develop and recommend guidelines, criteria, rules and regulations for the formation of banking development districts within the City of Los Angeles.156 Criteria for the BDD contains such items as the location of sites within the district, identification of consumer needs, credit needs of the community inside the district and others.157 The City Council voted to approve the BDD Task Force by a vote of 13-0 with two abstentions.158 The next

152 “The Banking Development District (BDD) Program,” New York State Department of Financial Services, http://www. dfs.ny.gov/banking/bdd.htm#whatis 153 Ibid 154 New York State Banking Department, Community Affairs Unit, Consumer Services Division, “10 Years In: A Review Of The Banking Development District Program,” (May 2010) 155 Los Angeles Administrative Code, Chapter 5.1, Article 3, Section 20.99.03 156 Ibid 157 Ibid 158 Los Angeles City Council File No. 09-1219

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key step to improve low-income consumer welfare would be to advocate for product developments that enhance the financial ecosystem as a criteria for the formation of a BDD. Banks entering low-income neighborhoods is a clear victory for advocates, yet this policy could be enhanced by improved broader product access.

Application of Criteria Operational feasibility – Operational barriers may occur as municipalities provide deposits at below-market rates to set up the BDDs. There is an implicit cost to governments through this policy due interest revenue not being received from the below-market rate deposits. Additionally, there would be transaction costs from governments moving funds from one bank to another bank in the BDD. It is difficult to quantify costs at this stage without seeing a tangible proposal.

Though we can only speculate, we do not envision the costs of opening new accounts and transferring funds being prohibitive to action. We were unable to find any operational constraints that made the program successful in New York, but could not be replicated elsewhere. If banks’ entrance to the program is conditional on their creation of low-cost bank accounts or AFS substitute products, then this may dissuade some banks from participating because these products may not be profitable. (Score – Good)

Political Feasibility - The BDD program already has secured the legislative support necessary to move forward in Los Angeles based on the fact that the Council has already been passed it.

Testimony from the New York Bankers Association expressed strong support for the program.159 Because New York has such an influential banking sector, it could be inferred that their support is representative of feelings that banks may have towards BDDs in other areas, including Los Angeles. (Score – Very Good)

Consumer-related Affordability - We anticipate that there would be diminished use of checkcashing and, as a result, lower spending on associated fees by increasing the proportion of banked households. Additionally, we estimate that households would have reduced need to use payday loans through an increased likelihood of savings. The magnitude of these effects

Michael P. Smith, “Testimony from Michael P. Smith, President and CEO of the New York Bankers Association before the Assembly Standing Committee on Banks,” (May 26, 2005) 159

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

remains unclear, as there is no evidence to determine the amount of unused AFS services due to increased banking. (Score – Very Good)

Location Access – Increasing access is the primary goal of the Banking Development District.

Consumers would have much greater location access to bank products and would be able to compete with AFS on convenience through this program. (Score – Very Good)

Product Access – Evidence from New York’s BDD program did not indicate if any product enhancements were developed to match the needs of low-income consumers. Unless the new banks provide products, such as low-cost checking accounts, this policy would do an incomplete job of meeting the financial needs of low-income households. It is possible that new banks could offer AFS substitutes, but this has not been the program’s focus. Due to this uncertainty, we do not conclude that this would positively affect product enhancement. (Score – Uncertain)

Sustainability – Additional banks allow consumers to get on the path to long-term financial health and stability. We believe this policy would do very well in promoting financial sustainability for low-income consumers. (Score – Very Good)

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VI. Policy Recommendations and Conclusions To arrive at our final recommendations, we summarized the results of our extensive analyses of each policy option and compared our policies across the criteria (See Table 18). We found that some policies fared better than others, particularly when considering the criteria we considered most important—operational and political feasibility. The policies “Improve Payday Loan Disclosure Requirements” and “Banking Development Districts” scored the best on operational and political feasibility. The “Payday Loan Rate Cap” scored the worst on the criteria, neither benefiting consumers nor being operationally and politically feasible. Though we found some policies do well in the areas of consumer affordability, location access, and product access, these policies were not operationally or politically feasible, such as “Community Reinvestment Act Credits.”

After thoroughly weighing our policies, we chose to order them based on how they performed on our criteria. Ideally a combination of these policies would most improve the financial ecosystem and low-income consumer welfare, but we understand that our client and other consumer advocate groups do not have the capacity to advocate for every policy we presented.

This ordering is meant to help our client and consumer advocate groups prioritize policies the most operational and political feasibility, while recognizing low-income consumer welfare. In the following section, we present our ordering of the policies and make final recommendations regarding each policy alternative.

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Operational Political Feasibility Feasibility

Consumer Affordability

Location Access

Product Access

Sustainability

Payday loan rate cap

Very Poor

Very Poor

Poor

Very Poor

Very Poor

Poor

Amend California’s DeferredDeposit Transaction Law

Uncertain

Uncertain

Very Good

Uncertain

Very Good

Good

Good

Very Good

Very Good

Good

N/A

Very Good

Establish an Office of Financial Empowerment in Los Angeles

Very Good

Uncertain

Good

N/A

Good

Very Good

Community Reinvestment Act credits

Uncertain

Very Poor

Very Good

N/A

Good

Very Good

Very Good

Very Good

Improve payday loan disclosures requirements

Banking Development Districts

Very Good Very Good

Uncertain

Very Good

69

Table 18 Scoring the options

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Recommendations Improving Payday Loan Disclosure Requirements: We strongly recommend advocating for improved consumer information requirements because this policy receives positive scores across all applicable criteria. Currently consumers fixate on the deceivingly low $45 per $300 fee disclosure without considering the short-term and potential rollover costs. Accumulated fee disclosures allow consumers to consider the long-term costs of payday loans and have been proven to empower borrowers to reduce loan consumption. We estimate that these accumulated fee disclosures have the potential to keep $101 million to $147 million in borrowers pockets each year with little to no effect on the availability of short-term credit.

Because industry groups have voiced support for transparent fees and terms, they may be amenable to policy changes that enhance disclosure as a means of staving off more onerous and restrictive regulations. By aligning consumer advocates and interest groups behind a single reform effort, the likelihood of passage would increase dramatically. As a result, we believe that improving payday loan disclosure requirements should become an immediate target for advocacy action.

Establish An Office of Financial Empowerment in Los Angeles: We recommend advocating for the Bank On LA program to be relocated from the Community Development Department to the Office of the City Treasurer, keeping the issue closer to the Mayor. All applicable criteria receive scores above “uncertain”, thus having definitively positive effects for consumers. Advocacy efforts should be timed to coincide with the incoming Mayor’s re-organization of City Hall. Efforts to make financial access issues part of the current mayoral campaign discussion may initiate the momentum needed to ensure that financial access issues are integrated into the daily governance of the City. Long-term advocacy goals should include working with the City of Los Angeles to establish an Office of Financial Empowerment.

Banking Development Districts: We encourage consumer advocates to begin their push to develop criteria with the Los Angeles BDD Task Force that support low-cost bank accounts and AFS substitute products. Only one criterion (product access) received a score that was “uncertain”.

This should take place immediately because the BDD model has proven successful in New York

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

and political support has been garnered for establishment in Los Angeles. BDDs are at a nascent stage in their development in Los Angeles. Now is a critical time for action to ensure that newly established bank branches are sufficient to meet the needs of underserved neighborhoods.

Amend California’s Deferred Deposit Transaction Law (CDDTL): Amendments to CDDTL based on the successful payday loan policies implemented in Washington State may have positive effects for consumers though there is tremendous uncertainty surrounding several of our criteria. Effects on operational feasibility and location access are difficult to access at this time.

Due to uncertain political feasibility we recommend that advocacy on this policy should take a long-term approach. Because other legislation regarding AFS is inactive or has recently been defeated, we do not believe that advocacy efforts would be fruitful at this time. Advocates should pursue a long-term strategy, building a coalition and base of support with a leader who has the authority to serve as a champion to this cause. As new studies are conducted on the impact of Washington’s reforms, this information could be used to change the political dynamics surrounding AFS. Armed with new analysis, a support coalition could be formed and an effective legislator could be able to take up the issue. The political timing would be ripe for advocates to push for adoption of these reforms.

Although these policies were enacted as a package and it is difficult to separate the effects of each regulation, advocates could try to prioritize certain components. We believe that the installment plan option is the most important component to advocate for and should not be compromised because it would empower payday loan consumers to escape debt traps, eliminating the most harmful effect of payday loans without restricting access to short-term credit.

Amendment of Community Reinvestment Act: While many of the product enhancements are positive, the current political environment is not conducive to this policy. With political feasibility receiving a score of “very poor” we believe that opposition is too strong to warrant spending political capital at this time. Additionally, much of the scholarly work remains to be completed regarding pilot programs for AFS substitute products.

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In advocating for a new CRA amendment, we recommend behind-the-scenes actions and longterm coalition building to secure the policy’s eventual passage. A full-scale advocacy campaign should be postponed until a policy window reveals a more favorable political climate. This may happen when Democrats are firmly in control of both the Congress and the White House.

Based on the Republican reaction to Dodd-Frank, it is unlikely that they will support additional financial reform legislation.

Payday Loan Rate Cap: We advise against advocating for the 36 percent APR rate cap that many consumer advocates support. This policy receives negative scores in all criteria. Evidence from states that implemented similar caps suggests that the small-loan market would be effectively eliminated, leaving many low-income consumers without access to credit. Until alternative sources of small loan credit become available, a rate cap would negatively impact consumer welfare. There may be a feasible rate cap somewhere between 36 percent and the current maximum 460 percent, but it has yet to be identified.

Conclusion The policies we recommend would provide a substantial improvement to the financial ecosystem if enacted. Two of these options would dramatically reduce the most damaging effects of payday loans and provide consumers with increased knowledge and flexibility to meet their credit needs. Two other options would lower the cost of conducting financial transactions for low-income households and increase the options of products available, ensuring that they have the tools necessary to meet their needs. None of these options are mutually exclusive and could all be implemented if there were sufficient advocacy efforts and political will to enact them.

Our conclusions, if implemented, can have a significant impact towards lowering costs to lowincome households’ financial transactions. Yet, the policy recommendations we have developed should not be viewed as the silver bullet solution to redefining the relationship between low-income communities and the financial mainstream. There remain many insightful and relevant options to solve this problem. The complexity of the issue is far too broad to be studied in one thesis. Other policy alternatives not discussed in this paper, but merit further discussion may include:

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

•

Harnessing changes in mobile technology to increase participation in banking

•

Analyzing the growing presence of online payday lending and how these operations may avoid state and local laws

•

Scaling up neighborhood institutions to act as community loan funds

•

Additional funding for Community Development Financial Institutions

•

Expansion of pilot programs for payday loan alternatives

•

Study of hybrid bank/AFS provider models

In a time of increasing uncertainty, ensuring that low-income households are able to cope with economic disruptions while promoting long-term financial sustainability is a critical policy question for the public and private sectors. Giving communities the platform to preserve the funds they have worked to earn would allow them to mitigate some of the worst effects of the financial downturn. Our research has shown that there are quantifiable income effects resulting from remaining unbanked that can be solved through a deft application of public policy.

This report has aimed to address this issue by disentangling consumer preferences and how they relate to the broader financial ecosystem. Understanding how these dynamics function holistically can unleash economic potential in low-income communities and build a template for continued growth and development.

Our report should be viewed as an entryway to a larger conversation among the many stakeholders who are invested in the financial ecosystem. We approached the policy problem using a broad conceptual lens, allowing us to understand the AFS marketplace from different vantage points. As a result, the policy alternatives we addressed are reflective of the contrasting interests from advocacy groups, industry representatives, and the communities that are impacted. Only by incorporating the vast array of interests associated with this issue would we be able to promote options that are sustainable. We look forward to the continued debate, the expansion of scholarly literature, and the development of innovative solutions that expand our conceptions of low-income economic growth.

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Appendix A: Overview of AFS Products Transaction Products and Services Check-cashing - Check-cashing services convert checks such as payroll checks, personal checks, government benefit checks, etc. into cash. Check-cashing services provide immediate cash conversion without fund holds and without a bank account.160 Check-cashing service fees range from one to four percent of the face value of the check for payroll or government checks and as high as 15 percent for personal checks.161 Approximately 85 percent of checks cashed at checkcashing outlets are low risk payroll or federal benefit checks.162 The volume of check-cashing services is approximately $58 billion, generating $1.8 billion revenue for firms in 2010.163

Remittance- Remittance services wire money from one location to another, typically from immigrants in the United States to their families abroad.164 In 2009, remittance volume from the United States was estimated at $48 billion, generating $2.4 billion in fee revenue.165

Prepaid Cards - “Prepaid card” refers to a variety of “debit” cards that store money electronically and can be used to make transactions with retailers that accept card payment networks (Visa, etc).166 Prepaid cards are generally similar in function to bank debit cards and can be used to make purchases, store money and withdrawal cash at ATMs.167 In 2010, prepaid transaction volumes were estimated at $35 billion, which generated $1 billion in fee revenue for issuers.168

ACE Cash Express, www.acecashexpress.com, access on February 29, 2012 Fannie Mae Foundation and Urban Institute. “Alternative Financial Service Providers.” 2004.

162 Federal Deposit Insurance Corporation. “Alternative Financial Services: A Primer.” FDIC Quarterly 2009, Volume 3, No. 1.

163 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2.

Accessed February 2, 2012.

164 Manuel Orozco. “The Remittance Marketplace: Prices, Policy and Financial Institutions.” Washington, DC: Pew Hispanic Center, 2004.

165 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief. November 2011.

P.2. accessed February 2, 2012, 166 Center for Financial Services Innovation. “The Nonprofit’s Guide to Prepaid Cards.” September 2010.

167 Ibid 168 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2. Accessed February 2, 2012.

160 161

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Money Orders - Money orders are alternatives to personal checks, do not require a bank account, and are used to pay bills, such as rent or utility bills.169 In 2010, money order transaction volumes were estimated at $45 billion, generating $300 million in fee revenue.170

Walk-in Bill Pay - Walk-in bill pay allows customers to pay their utility, credit card, phone, internet bills at AFS provider locations.171 The volume of transaction is unknown, but AFS providers earned an estimated $1.9 billion in fee revenue from walk-in bill pay in 2010.172

Credit Products and Services - AFS-provided credit products enable consumers to borrow funds on a short-term basis.173 AFS credit products are, generally, not offered by banks or other financial institutions and provide liquidity to otherwise credit constrained consumers.174

Payday Lending - Payday loans are small cash advances typically extended to consumers who have a checking account and verifiable employment.175 Payday loans usually involve small dollar balances, typically under $500, with two-week terms. Payday loans charge a fee between 15 percent and 17 percent of the amount borrowed, which, if rolled over would create an annual percentage rate (APR) of 400 percent or more. Payday loan volumes were estimated at $40 billion in 2010, generating $7.4 billion in fee revenue for payday lenders.176

Pawn Lending - Pawn loans are short-term loans issued with pledged collateral. This is a secured lending transaction in which the lender typically takes possession of an item securing the loan177.

The agreement allows the lender to take possession of and sell the collateral if the borrower does not meet the terms of the agreement. Loans typically represent roughly 50 percent of the collateral’s resale value and interest rates range from about 1.5 percent to 25 percent monthly 169 Roger Swagler, John Burton and Joan Koonce Lewis. “The Operations, Appeals and Costs of the Alternative Financial Sector: Implications for Financial Counselors.” Financial Counseling and Planning Vol. 6, 1995. Association for Financial Counseling and Planning Education, 1995.

170 Ibid 171 Unbanked Trends: Trends on Alternative Financial Services, accessed February 29, 2012: 172 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2.

Accessed February 2, 2012.

173 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2.

Accessed February 2, 2012.

174 Federal Deposit Insurance Corporation. “Alternative Financial Services: A Primer.” FDIC Quarterly 2009, Volume 3, No. 1.

175 Ibid 176 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2.

Accessed February 2, 2012.

177 Fannie Mae Foundation and Urban Institute. “Alternative Financial Service Providers.” 2004.

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(30 to 300 percent APR).178 Pawn loan volumes were estimated at $3.9 billion in 2010, generating $2.4 billion in fee revenue.179

Auto Title Lending - Auto title loans are short-term loans issued with pledged collateral in the form of the auto title. Borrowers keep physical possession of the automobile under the terms of the agreement, but pledge to turn over the title to the lender if the terms of the agreement are not met.180 Typical loans are for 25percent of the collateral value and interest rates range between 1.5percent to 25percent monthly (30 percent- 300 percent APR).181 Auto title loan volumes were estimated at $3.7 billion in 2009, generating $1.5 billion in fee revenue.182

Refund Anticipation Loans - Refund anticipation loans (RALs) are short-term loans, typically 2 weeks in term, offered by tax preparers and secured by the borrowers’ expected tax refund.183 The fee is generally deducted from the refund, which range between two percent to five percent (75 percent to 275 percent APR).184 Refund anticipation loan volumes were estimated at $24 billion in 2009, generating $600 million in fee revenue.185

Rent-to-Own - The rent-to-own product sells consumers goods including furniture, computers, appliances and electronics, through installment payments. Under the rental-purchase agreement, consumers own the goods at the end of the agreement.186 The effective price, including financing charges, ranges between two to three times the retail price of the item.187 Rent-to-own volumes were estimated at $7 billion in 2009, generating $5.1 billion in fee revenue.188

Ibid Ibid 180 Federal Deposit Insurance Corporation. “Alternative Financial Services: A Primer.” FDIC Quarterly 2009, Volume 3, No. 1.

181 Fannie Mae Foundation and Urban Institute. “Alternative Financial Service Providers.” 2004.

182 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2.

Accessed February 2, 2012.

183 Federal Deposit Insurance Corporation. “Alternative Financial Services: A Primer.” FDIC Quarterly 2009, Volume 3, No. 1.

184 Ibid 185 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2.

Accessed February 2, 2012.

186 Ibid 187 Fannie Mae Foundation and Urban Institute. “Alternative Financial Service Providers.” 2004.

188 Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief. November 2011.

P.2. accessed February 2, 2012, 178

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Appendix B: Political Landscape Analysis State Level AFS Regulations The main regulatory framework that authorizes AFS is conducted at the state level. The scopes of those regulations vary widely and cover numerous products.

Check-cashing There is not a significant variation in regulatory environment among states. A 2006 study by the Consumer Federation of America found that the national average to cash a check was 2.44 percent of the face value for social security checks and 4.11 percent of the face value to cash a paper payroll check.189 Nearly all states require check cashers to post fee schedules and their license or permit.190

California Regulations Check-cashing in California is regulated by California Civil Code Section 1789.30 – 1789.38. The law stipulates that a permit to run a check-cashing business must be obtained from the California Department of Justice. A check casher shall not charge a fee for cashing a payroll check or government check in excess of 3 percent or three dollars, whichever is greater. The fee for cashing a personal check may not exceed 12 percent.191

Payday Loans The regulatory environment for payday loans differs significantly from state to state with variations on the loan limit, fees collected and length of the repayment period. Thirty-eight states have laws specifically allowing payday lending, five states and the District of Columbia have banned payday loans entirely while another eight states have let laws allowing payday lending to sunset.192 The average maximum loan limit is $510 with five states having no limit.193 Length of the loan

Jean Ann Fox and Patrick Woodall, “Cashed Out: Consumers Pay Steep Premium to “Bank” at Check-cashing Outlets,” Consumer Federation of America (2006) 190 Ibid 191 California Civil Code, Section 1789.30-1789.38 192 “Payday Lending Statutes,” National Conference of State Legislatures, last modified December 7, 2011. http://www. ncsl.org/issues-research/banking/payday-lending-state-statutes.aspx 193 Ibid 189

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terms range from no less than seven days to a maximum of 120 days with six states not regulating loan terms.194 Fees vary greatly from state to state but typically range from $15 to $20 for every $100 borrowed.195 Some states provide for a sliding scale up to a certain amount and then a lower fee schedule for any amount borrowed above that mark.196 The diversity in regulations is an indicator of the different approaches taken by states in order to control or promote AFS usage. Due to the tremendous variety in regulations in each state we have chosen to highlight regulatory regimes, which represent the main policy options that states have pursued.

Limited Market The limited market model is a policy alternative that seeks to regulate payday loans by placing limitations on the loan value, fees charged or term of the loan. It is the most common approach taken by states in order to manage the payday loans in their state.197

California uses the limited market model and is regulated by the California Financial Code Section 23035. Fees charged shall not exceed 15 percent of the value of the check.198 The maximum loan value is $300 and has a maximum loan term of up to 31 days.199 Rolling over a payday loan is not allowed in California.200 This regulatory regime has created a market that initiated 12,092,091 payday loans equaling $3,125,299,157 in total dollars lent during 2010.201

Establishing the legal limits on any of the loan variables may affect the overall market for payday loans. For example, the state of Oregon placed a limit of $10 per every $100 borrowed with a 31-day repayment timeframe, giving an APR of 150 percent.202 After the limit was placed there was significant exit of payday lenders from the market. Jonathan Zinman estimates that the cap dramatically reduced access to emergency credit and consumers become worse off financially

Ibid Ibid 196 Ibid 197 “Payday Lending Statutes,” National Conference of State Legislatures, last modified December 7, 2011. http://www. ncsl.org/issues-research/banking/payday-lending-state-statutes.aspx 198 California Finance Code, Section 23035 – 23038 199 Ibid 200 Ibid 201 State of California Department of Corporations, “2010 Annual Report of Operation of Deferred Deposit Originators” (April 25, 2011) 202 “Payday Lending Statutes,” National Conference of State Legislatures, last modified December 7, 2011. http://www. ncsl.org/issues-research/banking/payday-lending-state-statutes.aspx 194 195

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

as a result due to their shifting to plausibly inferior results such as bounced checks or overdraft accounts.203

The state of Washington established the ability to pay down payday loans through an installment plan rather than a one-time bullet payment. The installment plan allows consumers greater flexibility in repaying their loan, yet caused dramatic changes in the amount of lenders in the Washington market. In 2009, the state of Washington initiated over 3 million payday loans for the sixth consecutive year.204 In 2010, the year the installment plans took place, that loan number reduced significantly to 1,093,776 loans issued.205 Additionally, the total number of payday lending branches reduced from 494 in 2009 to 339 in 2010, a 31 percent drop.206 The effects on overall consumer welfare due to this change have not yet been determined.

Prohibition Several states have banned payday loans outright while others have allowed pre-existing payday loan authorizations to sunset. Similar outcomes to those documented in Oregon have been found in states that have banned payday loans. The Federal Reserve Bank of New York noted that relative to other states, households in Georgia bounced more checks, complained more about lenders and debt collectors, and were more likely to file for Chapter 7 bankruptcy after the ban was placed.207

Federal AFS Regulations While less comprehensive than the regulatory environment at the state level, there are notable forms of regulation that have been passed by the Federal government.

Jonathan Zinman, “Restricting Consumer Credit Access: Household Survey Evidence of Effects Around The Oregon Rate Cap,” Journal of Banking & Finance (October 2008) 204 Washington State Department of Financial Institutions, “2010 Payday Lending Report” (2010) 205 Ibid 206 Ibid 207 Donald P. Morgan and Michael R. Strain, “Payday Holiday: How Households Fare after Payday Credit Bans,” Staff Report no. 309, Federal Reserve Bank of New York (February 2008) 203

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Consumer Financial Protection Bureau Most recently the Consumer Finance Protection Bureau (CFPB) came into existence with the passage of the Dodd-Frank financial reform legislation in 2010. The statutory language in Dodd-Frank has given CFPB a wide scope of authority to regulate payday lending. Sec. 1024 (a) (1) of the law specifically names payday loans as one of the entities CFPB has the authority to regulate. The law gives CFPB the ability to assess compliance with all forms of federal consumer financial law, compel payday lenders to submit reports and to detect and assess risks to consumers and markets brought about by financial products.

While it does not have the power to set rates or loan limits for AFS products, CFPB may step in if a financial product is found to be unfair, deceptive of abusive.208 A product can be considered unfair if 1) the act is likely to cause substantial injury to consumers which is not reasonably avoidable and 2) if such injury is not outweighed by countervailing benefits to consumers or competition. A product can be considered abusive if 1) it materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or 2) takes unreasonable advantage of a) a lack of understanding on the part of the consumer of the material risks, costs or conditions of the product or service; b) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or c) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.209 The law does not stipulate a definition for deceptive. The wording in this section is vague and as a result, CFPB regulators will have wide latitude in determining the scope of regulations.

Truth In lending act The Truth In Lending Act (TILA) requires lenders to disclose the loan terms and Annual Percentage Rate for loan products. This goal is allow consumers to compare credit terms between the various products available and to protect the consumer against inaccurate and unfair credit billing.210 The rationale stated in the legislation was that Congress found that economic stabilization would be enhanced if knowledge about financial products were increased and competi-

Dodd- Frank, section 1036 Dodd-Frank, Section 1029A – Subtitle C 210 Section 101 of TILA 208 209

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

tion between lenders would benefit if more consumers were better informed about the use and terms of credit.

The Federal Reserve Board considered payday loans in the context of Regulation Z of the Truth In Lending Act and found that they are a product that is applicable to regulation as other loan products are.211

Military Rate Cap The John Warner National Defense Authorization Act was passed in 2007 and included a stipulation on payday lending to members of the military. The law places an interest rate cap of 36 percent on payday loans given to members of the armed forces and their dependents including all fees and charges in connection with the loan.

Community Reinvestment Act The Community Reinvestment Act (CRA) was initially passed in 1977 as a means to ensure that banks and financial institutions are providing access to credit in the communities in which they do business. This was designed as a response to the decades long practice of redlining in which banks would specifically exclude certain communities from their lending practices due to perceived concerns about the lending environment there. This policy often became racialized as communities of color were the ones frequently targeted for redlining, leaving those neighborhoods without sufficient financing. In exchange for increased lending activities in these communities, CRA regulators are able to provide approval for the bank’s request for a merger or acquisition.

While CRA was initially designed to promote home mortgage lending, the law added additional criteria for the review process during its reauthorizations over the years. Most recently the law has been extended to include provision of low-cost student loans to low-income students as a measurement of the bank’s effectiveness in reaching residents of the communities in which they do business

211

12 CFR Part 226, Supplement I, Subpart A, Section 226.2(a)(14), note 2

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CRA is a law that is not without controversy and as such has become a highly partisan policy between clashing ideologies. While advocacy communities tout the law as an essential means of allowing low-income households access to basic financial institutions many industry groups are opposed to the law due to its burdensome reporting requirements and that it creates market distortions due to the development of products to obtain positive CRA ratings. One recent criticism is that CRA forced banks to lend to subprime borrowers who were not credit worthy and thus caused the collapse of the US housing market.

Local AFS Regulations In the City of Los Angeles, check-cashing businesses are listed as a “miscellaneous service� under the City Charter and are subject the gross receipts tax rate E.212 This rate places a $3.70 tax for each $1,000 of gross receipts or fractional part.213 Tax rate E is the second highest tax rate category in Los Angeles as Tax Rate F is set at $5.28 for each $1,000 of gross receipts.

Many local governments have sought to exercise land use controls and zoning ordinances to halt AFS businesses from locating in specific communities. The City of Los Angeles zoning code currently permits check-cashing business to locate in commercial, commercial manufacturing and industrial zones.214 In 2005, Los Angeles City Council passed a motion to instruct the City Planning Department to issue an Interim Control Ordinance to halt the issuance of building permits for check-cashing businesses citywide. The City of Oakland, California passed an amendment changing its zoning code to allow for check cashers to be approved by conditional use permit in certain locations which would not be detrimental to the residents. In 2007, the City of Sacramento, California adopted a 45-day moratorium on check cashers and payday lenders commencing business in the city. During that time, local officials would determine any negative consequences from the presence of the businesses. The moratorium was ultimately extended several times by City Council with ultimate extensions of nearly two years from the initial motion.

City of Los Angeles Municipal Code, Sec. 21.48 City of Los Angeles Municipal Code, Sec. 21.33 214 City of Los Angeles Municipal Code, Chapter 1 212 213

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Local governments have played a role in promoting mainstream banking alternatives that seek to draw consumers away from using higher priced AFS products. The “BankOn” movement sprang out of local government’s desire to increase financial opportunities for citizens by partnering with banks to open up more products aimed at low-income consumers who are the primary users of AFS.

Bank On San Francisco is currently developing a pilot program with six local credit unions to offer a lower cost payday loan alternative for its clients. A report has been commissioned to determine the success of the program and results will be forthcoming.

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Appendix C: Stakeholder Interviews We conducted interviews with four local government officials in Los Angeles and San Francisco.

All four were currently, or had previously been involved in their local Bank On program. The interviewees provided us information on the history, structure and current status of the Bank On program within their municipality.

We interviewed one Alternative Service Provider. The individual was specifically involved in the distribution of payday loans, as well as the collection of payday loan that had gone into default.

The individual provided us with valuable information of the payday market from the perspective of the industry.

We interviewed one independent research contractor who had previously collected data on the issues of AFS and financial access within Los Angeles. The individual provided us information based on his surveying.

Finally, we interviewed two individuals working in private financial access organizations. One individual was based locally and he primarily guided us on the issue of financial access within Los Angeles. The second individual was with a national organization and guided us on the issue of financial access nationally.

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Appendix D: AFS Consumer Survey General Results Our survey was distributed to AFS consumers going in and out of AFS businesses between the dates of February 4th and March 2nd, 2012. English and Spanish surveys were given out at each location for a minimum of one hour and a maximum of three hours, to ensure that no one geographical area was over-sampled. In total, researchers spent 94 hours distributing surveys at the 50 sampled locations.

We were able to distribute 528 surveys and we received a total of 85 responses for a response rate of 16 percent. While this is a low response rate, it was not unexpected due to the small incentive we were able to offer, as well as the difficulties involved in asking respondents to return surveys via mail.

Due to the randomized design of our survey we were confident that no one demographic was oversampled. However, because of our low response rate, we wanted to check and make sure that no demographic had a higher response rate which would bias our results. To test our results we used the FDIC’s National Survey of Unbanked and Underbanked Households as a benchmark to estimate the AFS population within Los Angeles. Comparing this information to the demographics from our dataset we concluded that African Americans had a much higher response rate than other demographics and were overrepresented in our results. Another issue was with the response rates from the different geographical areas of Los Angeles. We found that surveys distributed within the San Fernando Valley had a much lower response rate and were therefore underrepresented in our results. Taking these factors into consideration, we concluded that the results of our survey were not representative of the entire AFS population. Therefore, any analysis taken from our survey was only descriptive of the individuals we surveyed and not of the entire AFS population.

In total 68 percent of our respondents reported having either a checking or savings account. In terms of AFS usage, 70 percent respondents reported using check-cashing services, 33 percent used bill pay services, 28 percent used remittances and 40 percent obtained payday loans within the last 12 months. We were especially surprised by the high rate of payday loan users considering the low amount of borrowers in the NAD and FDIC data sets. Ethnically, 12.79% of our respondents were white, 26.74% were African American, 46.51% were Latino and 4.65% were Asian.

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Survey Locations ID#

Hours

Name of Business

Full Adress

1

1.5 Money Mart

8608 1/2 S Vermont Ave Los Angeles 90044

2

2.5 Nix Check-cashing

1800 W 6th St Ste 9 Los Angeles 90057 CA

3

2.75 ACE Cash Express

4

1 ACE Cash Express

1333 Pacific Coast Hwy Harbor City 90710 CA

1245 S Union Ave Los Angeles 90015 CA

5

1 Gaffey Check-cashing

324 S Gaffey St San Pedro 90731 CA

6

2 ACE Cash Express

2534 Daly St Los Angeles 90031 CA

7

2.5 Nix Check-cashing

2940 E. 1st Street Los Angeles, CA 90033

8

1.5 Sherman Way Check-cashing

15333 Sherman Way Van Nuys, CA 91406

9

2 Continental Currency Services

3401 W Slauson Ave Los Angeles 90043 CA

10

1.5 Money Mart

18445 Roscoe Blvd Northridge 91325 CA

11

2.5 Digital Currency Services

2430 N Broadway Los Angeles 90031 CA

12

2 Payday Advance

11057 Balboa Blvd Granada Hills 91344 CA

13

2 City Check Cashers

20851 Sherman Way Winnetka 91306 CA

14

2 Advance Payday

9235 Venice Blvd. Los Angeles 90034 CA

15

2 Speedy Cash

454 W Florence Ave Los Angeles 90003 CA

16

1.5 City Check Cashers

11002 Magnolia Blvd North Hollywood 91601 CA

17

1.5 PLS Check Cashers

9714 Woodman Ave Arleta 91331 CA

18

3 Continental Currency Services

4020 W Washington Blvd Los Angeles 90018 CA

19

2 Check Into Cash

5150 Huntington Dr Los Angeles 90032 CA

2 Continental Currency Services

862 S Broadway Los Angeles 90014 CA

20 21

1.5 Advance America Cash

11256 Glenoaks Blvd Pacoima 91331 CA

22

1.5 Nix Check-cashing

10005 S Central Ave Los Angeles 90002 CA

23

2 ACE Cash Express

1561 W Sunset Blvd Los Angeles 90026 CA

24

2.5 Omega Check-cashing

715 S Alvarado St Los Angeles 90057 CA

25

1.5 Nix Check-cashing

2715 S Western Ave Los Angeles 90018 CA

26

1.5 Continental Currency Services

12773 Van Nuys Blvd Pacoima 91331

27

1.5 Ace Check-cashing

8905 Venice Blvd. Los Angeles 90034 CA

28

2.5 Rampart Check-cashing

264 S Rampart Blvd Los Angeles 90057 CA

29

2.75 Digital Currency Services

1006 N Vermont Ave Los Angeles 90029 CA

30

2.5 Money Mart

31

2 EZ Check Advance

32

1.5 ACE Cash Express

33

1 ACE Cash Express

3998 S Figueroa St Los Angeles 90037 CA 4004 Lincoln Blvd Marina Del Rey 90292 CA 12801 Sherman Way North Hollywood 91605 CA 1330 S Pacific Ave San Pedro 90731 CA

34

1.5 Continental Currency Services

8026 Vineland Ave Sun Valley 91352 CA

35

1.5 Money Mart

4481 Hollywood Blvd Los Angeles 90027 CA

36

1.5 LA Check Cashers

8925 Sepulveda Blvd. North Hills 91343 CA

37

1.5 Check-cashing

13108 Sherman Way North Hollywood 91605 CA

38

2 Cash ‘N More

21919 Sherman Way Canoga Park 91303 CA

39

2.5 Su Casa De Cambio

2132 E Cesar E Chavez Ave Los Angeles 90033 CA

40

1.5 Money Mart

12101 Santa Monica Blvd Los Angeles 90025 CA

41

1.75 Continental Currency Services

1675 W Martin Luther King Los Angeles 90062 CA

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

42

3 Check Into Cash

21015 Sherman Way Canoga Park 91303 CA

43

2 PLS Check Cashers

2601 S La Brea Ave Los Angeles 90016 CA

44

1.5 PLS Check Cashers

45

2 ACE Cash Express

2489 Lincoln Blvd Venice 90291 CA

46

1.5 Su Casa De Cambio

3657 E 1st St Los Angeles 90063 CA

47

1.5 Money Mart

6547 W Sunset Blvd # A Los Angeles 90028 CA

87

1570 S Western Ave Los Angeles 90006 CA

48

1 Nix Check-cashing

727 W Anaheim St Wilmington 90744

49

2 Speedy Check-cashing

239 E 7th St Los Angeles 90014 CA

50

1.5 ACE Cash Express

15226 Vanowen St Van Nuys 91405 CA

51

2.5 Westwood Check-cashing

2180 Westwood Blvd Los Angeles, CA 90025

Map 4 Survey Locations

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

UCLA Financial Services Study

You have been selected to participate in a UCLA study of financial services. The purpose of this study is to evaluate the direct costs of financial services (such as check cashing and pay lending) and evaluate policies that will increase the welfare of consumers. Your responses to this survey will help us understand the individual and community level costs of these services.

In exchange for your valuable responses and time spent completing this 10 to 15 minute survey, you will be entered in a drawing for $100. To enter the $100 drawing, please answer the following questions to the best of your ability and mail them back to UCLA, in the included envelope, by February 18th. We will mail the $100 prize to the return address indicated on the randomly selected envelop, so don’t forget to write your address on the envelope. We expect to receive only 300 responses so you have a good chance of winning $100. Your answers will remain completely confidential and including your name on your return address is optional. If you are uncomfortable answering a question leave it blank, but we appreciate as much of your feedback a possible. Please note that you must be 18 years of age or older to participate in this survey. Thank you in advance for your time and contribution to this research. Please mail the finished survey to: UCLA School of Public Affairs Attn: Study of Financial Services 3250 Public Affairs Building Box 951656 Los Angeles, CA 90095‐1656 Sincerely, UCLA Financial Services Study Team If you have questions regarding this study, please contact: Elycia Mulholland 3250 Public Affairs Building Box 951656 Los Angeles, CA 90095‐1656 ecmulhol@ucla.edu

Dr. Robert Jensen 3250 Public Affairs Building Box 951656 Los Angeles, CA 90095‐1656 robertjensen@ucla.edu

If you have questions about your rights while taking part in this study, or you have concerns or suggestions and you want to talk to someone other than the researchers about the study, please call the OHRPP at (310) 825‐7122 or write to: UCLA Office of the Human Research Protection Program, 11000 Kinross Avenue, Suite 211, Box 951694, Los Angeles, CA 90095‐1694

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

89

Part 1 -­‐ Demographic Information Q1. Gender:

Male

Female

Q2. Ethnicity: White/Caucasian Black/African American Hispanic/Latino Asian Hawaiian or Pacific Islander Native American Other _______________________________________

Q11. Are you currently employed?

Yes No Q12. Do you or anyone in your household currently have a savings or checking account?

Yes No

Q3. Age (in years): ______________________________

Q13. If yes, which of the following do you have: Savings Checking Debit card

Q4. Marital Status: Single Married

Q14. Have you ever had a savings or checking account?

Yes No

Divorced

Other

Q5. Adults Living in Household: How many adults live within your place of residence? _______________________________________________

Q15. How is your salary or wage paid?

Cash Direct Deposit into Bank Account Check Prepaid Debit Card Other ______________

Q6. Children Living in Household: How many children are living within in your place of residence? _______________________________________________

Q16. If you are paid by check, please state how you cash your checks: Deposit into bank account Cash using bank account Cash using Check Casher

Q7. What is the language that is primarily spoken in your home _______________________________________________

Q17. How often do you get paid?

Daily Weekly Every Two Weeks

Monthly

Q18. What is your MONTHLY household income? *If there is more than one wage earner in household, please indicate total combined income _____________________________________________

Q8. Education: Please select the highest level of education you have received: Eighth Grade or Below Some High School High School Graduate Some College Associate Degree Bachelor’s Degree Some Graduate

Graduate Degree

Q19. What is your YEARLY household income? *If there is more than one wage earner in household, please indicate total combined income Less than $15,000 per year Between $15,000 and $25,000 per year Between $25,000 and $35,000 per year Between $35,000 and $50,000 per year Between $50,000 and $75,000 per year Over $70,000 per year

Q9. Do you have access to the Internet in your home?

Yes No Q10. Do you currently receive: Unemployment Insurance benefits Social Security, Disability, Food Stamps or any other direct government benefit payments

Part 2 – Financial Activity Information Section 1. Have you used the following services in the past 12 months?

Check Cashing Payday Loan Bill Payment Remittances/Wire Transfer

Yes Yes Yes Yes

No No No No

Refund Anticipation Loans Auto Title Loan Pawn Shop Prepaid Debit Card

Yes Yes Yes Yes

No No No No

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

90

Section 2. Check Cashing

(If you have not used Check Cashing in the last 12 months, please skip this section) Q20. In the past 3 months, how many times has anyone in your household used Check Cashing?

1 – 2 3 – 4 5 – 6 7 -­‐10 10+ Q21. Please list the check amount for your most recent transactions and the fee you were charged:

Check Amount

Fee (if known)

Month

1 2 3 4

Name of Company who cashed check

Q22. Please indicate how important each one of the following factors is for you in cashing a check at a place other than a bank, with 1 being not all important and 5 being very important:

Not at all important

Neutral

1 1 1 1 1 1

2 2 2 2 2 2

3 3 3 3 3 3

4 4 4 4 4 4

1. Don’t have a bank account 2. To get money faster 3. The place is more convenient 4. A bank charges more to cash checks 5. The place to cash checks asks for fewer id’s 6. Feel more comfortable than at a bank

Extremely Important 5 5 5 5 5 5

Section 3. Payday Loans

(If you have not used Payday Loans in the last 12 months, please skip this section) Q23. How many times in the last 12 months did anyone in your household use payday loan or payday advance services? (In answering this question, please count a rollover of a payday loan as a new loan and also count using a new payday loan to pay off an old one, as a separate new loan.)

1 – 2 3 – 4 5 – 6 7 -­‐10 10+

Q25. How many outstanding Payday Loans do you currently have? _____________ Zero

Q24. Thinking about the past 12 months, what was the MAIN reason you or anyone in your household needed a payday loan: For medical expenses To make up for lost income For car repairs For school or childcare expenses For bill payment (utilities, car, cell phone, etc.)

For basic living expenses (food, clothing, etc.)

Emergency expenses (please specify) _______________________________________________ Other (Specify) _______________________________

Q27. Were you aware of the fee associated with the payday loan you were taking before you accepted the loan?

Yes No

Q26. Have you ever compared different payday lenders before deciding to take out a loan?

Yes No

Q28. Have you taken out a loan from more than 1 lender in the last 12 months?

Yes No Q29. Have you ever taken out a new loan in order to repay the interest or principal on an old loan?

Yes No Q30. Have you ever defaulted on payday loan or had to pay a non-­‐sufficient funds (NSF) fee to a payday lender because a check bounced?

Yes No

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

91

Q31. Please list the total loan amounts on your most recent loans, the fees you were charged, the month the loan was taken and the name of the lender:

1 2 3 4 5

Loan Amount

Fee (if known)

Month

Lender’s Name

Q32. Please indicate how important was each of the following factors for you in choosing a specific lender, with 1 being not all important and 5 being very important:

1. Location 2. Hours 3. Customer Services 4. Less expensive fees 5. Additional service beyond payday lending (bill pay, check cashing, etc.)

6. Saw a advertisement for the company

Not at all important 1 1 1 1 1

Neutral

2 2 2 2 2

3 3 3 3 3

4 4 4 4 4

Extremely Important 5 5 5 5 5

1

2

3

4

5

Part 3 -­‐ Consumption & Expenditure Information

Q33. Please estimate to the best of your ability how much you have spent on the following items in the past month:

Expense Monthly Estimate How did you pay for the following expense?

(Cash, Check, Credit Card, Bill Payment Service, Prepaid Debit Card, Online, etc.)

Rent, Mortgage or housing costs

Food

Car Payment

Utilities (Water and Electricity)

Utilities (Gas)

Mobile phone

Internet/cable bill/landline phone

Healthcare

Transportation (bus fare, gasoline)

Car Insurance

Other (entertainment, gifts, clothing, etc.)

Emergency or Unforeseen Expenses *

* Please specify what was the emergency or unforeseen expense: _______________________________________ Q34. Does this past month represent your typical monthly expenditures?

Yes

No

Q35. If No, please state what makes the past month extraordinary: _________________________________________

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

92

Credit Card Usage and Savings Behavior Q36. How many credit cards do you own?

0

1

2

3

4

Q38. If yes, if you know the reason for being denied please indicate it here: ________________________________________________

5+

Q39. During the typical month, are you able to save a portion of your income?

Yes No

Q37. Have you ever applied for a credit card and been denied?

Yes No

Q40. If yes, how much on average do you save each month? ________________________________________________

Future Plans Q41. Please describe some of your future goals: (i.e. owning a home, going back to school, etc.)

___________________________________________________________________________________ ___________________________________________________________________________________ Q42. What is the greatest obstacle to achieving your goals? _________________________________________

___________________________________________________________________________________ ___________________________________________________________________________________

Additional Comments ___________________________________________________________________________________ ___________________________________________________________________________________ ___________________________________________________________________________________

Please write down your mailing address to be entered into the $100 drawing! ________________________________________ ________________________________________ ________________________________________

Thank you for taking our survey!

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Appendix E: Focus Group Community-Based Organizations & Results Community-based Organizations New Economics for Women – is an organization that seeks to reduce poverty through wealth building opportunities for women.

Community Coalition – is an organization that focuses on leadership development, community organizing and policy advocacy to reduce poverty and crime in South LA.

Esperanza Community Housing – is an organization that works toward community development in the Figueroa Corridor through affordable housing, education, and community health.

Focus Group Results The following are general results from our focus group discussions. We split focus groups into three main discussion parts: participants’ long-term goals and obstacles to those goals, the benefits and areas for growth related to financial services in participants’ communities, and feedback regarding three key policies of interest. Forty participants total participated in these discussions. These focus groups took place between February and March 2012.

Goals and Obstacles to Goals Across all three focus groups, participants emphasized wanting to own a home or returning to school as their long-term goals. Participants also stressed wanting to send their children to college to have better lives and jobs than their own. For their own education goals, participants majorly cited wanted to finish adult school with about four citing wanted to finish their undergraduate or graduate degrees. Participants emphasized the need for better work and pay as obstacles to these goals. Later on in the discussion, participants in each focus group discussed the need for better access to credit to accomplish goals like homeownership or returning to

93

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

school. Participants who had bank accounts reported not being able to qualify for loans at their banks either due to documentation status or poor credit.

Financial Services in Participant Communities Though participants appreciated some of the availability of financial services in their communities, they emphasized wanting to change the costs of financial services and certain policies of both AFS and banks. In our focus group conducted at an asset-building organization, participants reported appreciating faster and easier deposits without the need for deposit envelopes anymore. At another focus group, nearly all of the eight participants spoke about how certain services were cheaper at check-cashers rather than banks, such as money orders. One participant spoke about receiving special rates after being a routine customer at using one check-casher. At another group, participants had difficulty expressing anything positive about the financial services in the community, but ended up stating that at least payday lenders and check-cashers were available for people to take out short-term loans or cash their checks.

Participants in all focus groups had encountered problems with fees at banks or AFS, believing the fees charged were too costly. Relating to banks, participants discussed high overdraft fees and suggested that they should vary based on the check’s value. In the same group, participants stated wanting to eliminate overdraft protection, preferring transactions to be denied. In two focus groups, participants emphasized minimum balance fees as barriers to being banked.

Some participants cited having accounts before, but could not maintain them due to not having enough money to save. In one focus group, participants emphasized how AFS took advantage of people with their high costs. One participant described AFS as being “vampiros� (vampires) that sucked money out of people. Another participant described how one AFS would not cancel a money order she had lost and that the location would charge her double for a $700 money order by splitting it up into two separate orders of $300 and $400 each.

Specifically in regards to changing financial services in their communities, participants wanted to see more institutions that served their communities directly and changes in financial regulations. In two focus groups, participants suggested community banks or micro-loans instead of traditional banks or payday lenders. Participants wanted more access to credit through banks in

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

order to gain homeownership. They also wanted to change the fee structure or disclosure policies of payday loans and check-cashing, citing that they knew of people in their communities who had been overcharged because they did not know the rules.

Policy Feedback Participants were asked to rate and discuss three separate policies: 1) financial education for high school students on banks, credit, and school loans; 2) payday lending restructuring with options for an installment plan, a higher loan amount, and a user database to restrict number of loans taken out; and 3) increasing banking access through no minimum balance accounts.

Financial Education Overall, participants viewed this policy favorably though only one focus group preferred it to the other policies. The focus group that preferred this option wanted their children to be educated about loans and grants. However, they also thought this policy would provide college loans for their children, which was not the intent of the policy. The other two focus groups appreciated this policy, as it would educate children early on about the importance of building credit or about how to access loans. One focus group did discuss how even with financial education, their children would still likely overspend once they could qualify for a credit card. These participants concluded that financial education would at least make their youth more financially aware, specifically in terms of credit. In two focus groups, participants also stated wanting to have financial education for adults. One focus group participant suggested that banks be required to offer financial education to the community.

Payday Loan Restructuring Though participants in two groups expressed the short-term loan need payday lenders are meeting, only one group preferred this policy. The group that preferred this policy appreciated how it would increase the loan size and provide the option of an installment plan. One participant described how she had became over $10,000 in debt partially due to having to take out loans from multiple payday lenders to support a friend on the verge of homelessness. She reported that being able to take one loan from one lender would have made meeting her financial need easier. Participants in the same focus group also appreciated the database of payday loan

95

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

users to protect people from taking out too many loans. Overall, they believed this policy would satisfy consumer needs though their ideal option would be for micro-loans. Participants in another focus group did not like this policy because a few of them had friends who had accumulated debt from payday loans. They preferred reducing payday lenders and preventing people from taking them out. One participant in this group did discuss that she wanted access to short-term loans in case of an emergency.

Increasing Bank Access One focus group preferred this policy to the others, but participants expressed wanting to promote community banks over traditional banks. Participants in all focus groups discussed the importance of having access to a bank account to save for the future and build credit, but they also questioned the purpose of having a bank account when they did not have any money to save. About half of the participants liked the no minimum balance provision of the policy so that they could save at least some money every month, but the other half of participants questioned having a savings account if they could only save $20 a month. In discussing this policy, participants in two focus groups also expressed a degree of distrust towards banks, though they trusted banks over AFS. They talked about not being able to access loans at their banks or about how they did not believe the traditional banks were serving community needs. In one focus group, participants discussed how they did not have confidence in saving their money in a bank because of their documentation status, fearing that the bank would take their money if they were deported.

General Conclusions Participants in all groups recognized the needs AFS are meeting in their communities, but the majority of participants would like to see more community banks. The majority of participants preferred banks to AFS. Participants recommended having banks offer small-dollar loans, financial education, and better access to credit for long-term goals, like homeownership. Participants wanted to build their credit and their savings, but the costs of financial services at banks and AFS and poor access to credit seemed to be the major barriers in accomplishing these longterm financial goals.

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

We also found that the majority of participants, especially in two of the focus groups, did a substantial amount of comparison-shopping in choosing their financial institution. They could cite the exact fees charged at different banks or AFS providers. They talked about going to different AFS providers according to the product they needed and the price charged by the AFS provider. One participant compared fees at Chase to those at Bank of America, stating that she had switched banks due to the higher fees at Bank of America. These low-income consumers seemed to be maximizing their dollars by comparing the array of financial products in their communities.

97

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Appendix F: GIS Location Access Analysis Map 3

AFS Locations by Median Income

Los Angeles AFS Locations

by Median Income

5 118

210

5 2 134

101 101 405

10

10

710

$2,499 - $30,500 $30,500 - $39,321 $39,321 - $53,649 $53,649 - $72,928

Median Income

by Census Tract

105

405

$72,928 - $214,375 AFS Locations

110

City of Los Angeles

10 MILES Sources: 2009 American Community Survey, Yellow Pages

Pacific Ocean

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Bank Locations by Median Income

Map 4 Los Angeles Bank Locations

by Median Income

5 118

210

5 2 134

101 101 405

10

10

710

$2,499 - $30,500 $30,500 - $39,321 $39,321 - $53,649 $53,649 - $72,928

Median Income

by Census Tract

105

405

$72,928 - $214,375 Bank Locations

110

City of Los Angeles

10 MILES Sources: 2009 American Community Survey, Yellow Pages

99

Pacific Ocean

100

Map 5

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

AFS Locations by Ethnicity

Los Angeles AFS Locations

by Ethnicity

5 118

210

5 2 134

101 101 405

10

10

710

0% - 35% 36% - 68% 69% - 90% 91% - 97%

Percent Minority

by Census Tract

105

405

98% - 100% AFS Locations

110

City of Los Angeles

10 10 MILES MILES Sources: Sources: 2009 2009 American American Community Community Survey, Survey, Yellow Yellow Pages Pages

Pacific Ocean

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Bank Locations by Ethnicity

Map 6 Los Angeles Bank Locations by Ethnicity

5 118

210

5 2 134

101 101 405

10

10

710

0% - 35% 36% - 68% 69% - 90% 91% - 97%

Percent Minority

by Census Tract

105

405

98% - 100% Bank Locations

110

City of Los Angeles

10 10 MILES MILES Sources: Sources: 2009 2009 American American Community Community Survey, Survey, Yellow Yellow Pages Pages

101

Pacific Ocean

Los Angeles

$2,499 - $20,000 $20,000 - $30,000 $30,000 - $40,000 $40,000 - $50,000 $50,000 - $143,224 West LA Banks West LA AFS

Median Income by Census Tract

West Los Angeles

3 Miles

Source: 2009 American Community Survey FDIC Institution Directory & Yellow Pages

Total Population: 121,485 Square Miles: 11.61 Population Density Per 1000 People: 10,464 Banks: 72 Bank Density: 0.59 AFS Location: 8 AFS Density Per 1000 People: 0.06

102 ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Los Angeles

East LA AFS Locations

East LA Banks

$18,695 - $20,000 $20,000 - $30,000 $30,000 - $40,000 $40,000 - $50,000 $50,000 - $100,682

Total Population: 135,030 Square Miles: 11.14 Population Density: 12,121 Bank Locations: 9 Bank Density: 0.07 AFS Locations: 31 AFS Density: 0.23

East Los Angeles

Median Income by Census Tract

3 Miles

Source: 2009 American Community Survey FDIC Institute Directory & the Yellow Pages

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER 103

Pacific Ocean

Los Angeles

Median Income by Census Tract

Source: 2009 American Community Survey FDIC Institute Directory & Yellow Pages

South LA AFS Locations

South LA Banks

$10,833 - $20,000 $20,000 - $30,000 $30,000 - $40,000 $40,000 - $50,000 $50,000 - $54,813

Total Population: 175,181 Square Miles: 10.07 Population Density Per 1000 People: 17,396 Banks: 9 Bank Density: 0.05 AFS Location: 19 AFS Density Per 1000 People: 0.11

South Los Angeles

3 Miles

104 ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

105

Appendix G: Data Analysis Obstacle

N

Percent

Saving

Percent

Banked

Percent

Table G1 Money*

18

31.0%

8

44.4%

13

72.2%

Education

6

10.3%

2

33.3%

2

33.3%

Health

5

8.6%

3

60%

5

100%

Work**

11

19%

6

54.5%

8

72.7%

Self***

5

8.6%

3

60%

3

60%

Time

6

10.3%

5

83.3%

5

83.3%

Obstacles for the Future from Consumer Survey

N= 58 *4 specified lacking enough money, 3 specified savings, 2 specified credit and 1 specified financial independence

**Unemployment or needs better work ***making it work, actually doing it, me

Self-Rating of Financial Health (1: Very Good -- 7: Very Poor) Banked Type

Mean

Std. Dev.

N

Banked Only

3.60

1.68

630

Underbanked

3.81

1.72

370

AFS Only

4.21

1.70

720

Cash Only

3.96

1.73

300

Total

3.91

1.72

2020

Table G2 Self-Rating of Financial Health from Consumer Survey

Bonferroni Multiple Comparisons: Banked Only/AFS Only***; Underbanked/AFS Only***; Banked Only/Cash Only* *statistically significant at the 0.05 level *** statistically significant at the 0.01 level

Average Dollars Spent Per Month on AFS Fees by Product Used Check Cashing

Money Orders

Bill Payment

Payday Loans

Remittances

AFS Fee Total (N=1,561)

Mean

$11.16

$4.61

$5.13

$30.10

$9.28

$14.86

Std. Dev.

$11.01

$5.59

$13.64

$19.14

$3.75

$18.02

Median

$7.50

$3.75

$0.00

$38

$10.00

$10.00

Table G3 Average Dollars Spent Per Month on AFS Fees by Product Used

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Appendix H: Archetype Analysis Unbanked Archetype

Methodology In order to estimate the necessary demographic information to construct our unbanked archetype, we first relied on the FDIC’s National Survey of Unbanked and Underbanked Households. We compared key demographics of the Los Angeles portion of the FDIC dataset to the 2010 U.S. Census and found that the FDIC data set to be representative of the City of Los Angeles population. With this assumption we were able to construct the archetypical unbanked individual, based off of the averages of key demographical variables.

The second portion of our archetype construction involved using the data set constructed by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles, on behalf of the Pew Charitable Trusts. The PEW dataset was not constructed to be representative of the entire Los Angeles population but instead to be demonstrative of the low-income population. This data set contained information regarding respondent’s consumption expenditures, as well as how respondents conducted their financial transactions. Connecting the key demographic information from the FDIC data set (banking status, income level, ethnicity and income level) to the PEW data set we were able estimate certain expenditure categories, how financial transactions were conducted and AFS usage.

The consumption expenditure variables were categorical data within the data set. Our method for converting the variable to specific dollar amount was to use the midpoint method and then take the weighted mean to estimate the level of expenditures. We then selected the most common method of transaction and based on our own data set and academic studies, we calculated an average cost of those transactions. The archetypical unbanked individual relies on check-cashing for income conversion. We estimated the fee for such transactions and assign the cost of income conversion. Finally, because not all consumption categories were included in the PEW datasets, we supplemented the information with some additional consumption expenditures. For example, since our archetype

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

has a job but does possess a car we included the cost of a monthly bus pass to cover their transportation costs. Even with this additional category, there are still unassigned expenditures that we did not feel comfortable assigning a specific dollar amount. As such, any remaining dollar amount should not be considered potential savings but rather is unassigned income that could cover such categories as healthcare, clothing, emergencies or other miscellaneous categories.

Unbanked Archetype Table Dem ographic Inform ation Ethnicity: Income (Annual): Education: Citizen Status Foreign/Native Born: Language Spoken at home: Age: Household Type: Previous Banking Relationship

Archetype Hispanic/Latino $15,000 to $25,000 Some High School Not a U.S. Citizen Foreign English 34 5 Never Banked

Confidence Level High High High High High High High High High

Source FDIC FDIC FDIC FDIC FDIC FDIC FDIC PEW PEW

Metholodolgy median of unbanked median of unbanked median of unbanked median of unbanked median of unbanked median of unbanked median of unbanked median of unbanked median of unbanked

High

PEW

median of unbanked

High

PEW

median of unbanked

High High High

PEW PEW PEW

median of unbanked median of unbanked median of unbanked

Enough to pay bills but not to save Has not borrow ed from family & friends Not able to save every month No Car No

View of Financial Health: Debt/Loan outstanding Savings Behavior: Car: Mortage:

Household Incom e Statem ent Confidence Level Source High PEW

Incom e Wages/Salary

Monthly $ 1,667

Annual $ 20,000

Expenses Housing (Rent/Mortgage)

Monthly

Annual

$

780

$

9,360

46.8%

High

Pew

Food

$

370

$

4,440

22.2%

High

Pew

Utilities

$

139

$

1,668

8.3%

High

Pew

Phone

$

58

$

696

3.5%

High

Pew

TV/Cable

$

16

$

192

1.0%

High

Pew

Remittance

$

68

$

816

4.1%

High

Pew

Transportation (Bus) Monthly

$

65

$

780

3.9%

Medium

LA Metro

Total implied remaining

$ $

1,496 171

$

17,952

% of Incom e

89.8%

Confidence Level

Source

Metholodolgy midpoint method

Metholodolgy w eighted avg. at income w eighted avg. at income w eighted avg. at income w eighted avg. at income w eighted avg. at income w eighted avg. at income Monthly Fare including "Rider Relief" subsidy

107

108

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Cost Comparison AFS Cost Bank Cost

$ $

Monthly 69 31

$ $

Annual 828 371

AFS Premium (Discount)

$

38

$

457

Future Value of Premium Future Value Years Salary

$

26,471.78 132%

Breakevens Overdraft (# additional times beyond modeled) Out of Network ATM (# additional times beyond modeled)

Monthly

Annual

1.4

16.9

17.5

209.8

% of Income 4.1% 1.9% 2.3%

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Cost of AFS Use Income Conversion Check cashing

Monthly

$

Annual

45

Transactional Money Orders

3

Wire Service

10

$

Fee Am ount

541

Confidence Level Source

2.7% High

36 $1 per order

High

120 $10 per transfer High

UCLA Financial Services Survey

PEW

Metholodolgy

Weighted Average

Internet Search

Weighted Average Average fee of MoneyGram, WesternUnion

PEW

Pew data source, probability of cashcentric unbanked experiencing cash loss

Cash Loss

Loss due to theft/loss/damage

$

AFS Cost implied remaining after AFS

$ $

11

$

Annual

Monthly

Cost of Banking Income Conversion Direct Deposit

Monthly Maintenance Fee

69 102

$ $

$

w ithdraw al (out of Netw ork) $

-

$

9

4

828 1,220

Annual

Monthly

$

131

High % of Incom e 4.1% 6.1%

Fee Am ount

-

$

107 8.95 per month

$

$2.18 per at 53 2.04x Month

Confidence Level Source

Metholodolgy

High

CFSI & Survey of Bank w ebsites

High

Average Fee using CFSI range, confirmed by CFSI & Survey of analysis of major Bank w ebsites banking institutions

High

PEW

Median responders # of times per month and cost

Internet Search

Average fee of MoneyGram, WesternUnion

FDIC

Median Fee &Weighted Avg. of Low Income Group # of Overdrafts per year in automated O/D accounts

Transactional

Wire Service

$

Overdraft

$

Bank Cost

$

10

8

$

$

Monthly 31

120 $10 per transfer High

$27 avg. fee at 90 3.35x year Annual

$

371

% of Incom e 1.9%

Medium

109

110

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Future Value Age

34

Retirement proxy (SS benefit eligibility) 67 Work years remaining 33 Periods 396

Future Value of Direct Costs Variable Annuity AFS premium $ Interest Rate Annuity Factor Future Value Years Salary

Confidence Level Source

High S = R *(((1+i)^n-1)/i) S= FV R = periodic payment i = interest rate per period n = # of periods

Metholodolgy

Full retirement age to collect SS socialsecurity.gov benefits

38

0.26% 694.839628 $ 26,472 132%

High

totalreturnannuity. 3.15% yearly com interest rate quote

Banked Archetype

Methodology When constructing our Banked Archetype we were constricted by the data available to us.

Since the PEW data was not representative of the entire City of Los Angeles population, we were not able to use this dataset to construct the archetypical banked individual. According to the FDIC dataset the archetypical banked individual in Los Angeles was most likely to be Latino since Latinos made up 45.5% percent of the banked population, compared with 35.5% for whites.215 We when examined the yearly income for banked individuals we noticed that the average yearly income was skewed by the ethnicity of the respondents. We found that the average income for a banked household was around $50,000. However, the average income level of a white banked household was between $60,000 and $75,000 and the average income level of a Latino banked household was between $30,000 and $35,000.216 When we compared the yearly income of banked Latinos from the FDIC data set to the PEW data set, we found that they were close enough so that we could use the consumption expenditure data from the PEW data set to construct our banked archetype. This archetype is not representative of the entire banked population, but is representative of the Latino banked population. We decided that constructing a Latino banked archetype was more beneficial for the purposes of our project, because this

215 Federal Deposit Insurance Corporation. “National Survey of Unbanked and Underbanked Households.� December 2009. http://www.fdic.gov/householdsurvey/ 216 Ibid

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

archetype is much more likely to be found in similar neighborhoods as our unbanked archetype and therefore face similar costs.

After constructing our archetype we once again relied on the PEW data to estimate certain expenditure categories, as well as how financial transactions are conducted. Finally, since our archetype possess a car and has car insurance we estimated the average costs relating to the possession and maintenance of vehicle for a low income individual based on 2010 Consumer Expenditure survey. As with our unbanked archetype any remaining income should not be considered potential savings but rather as unassigned income for categories not included in the archetype.

Banked Archetype Table Dem ographic Inform ation Ethnicity: Income (Annual): Education: Citizen Status Foreign/Native Born: Language Spoken at home: Household Size: Age: View of Financial Health: Debt/Loan outstanding Savings Behavior: Car: Car Insurance: Mortage:

Archetype Hispanic/Latino $30,000 to $35,0000 High School Graduate U.S Citizen Foreign (51%) & Native Born (49%) English 4.5 41 Making Enough To Pay Bills, But Not To Save No loans from friends/family Save Money When I Can, But Not Every Month Yes Yes No

Confidence Level High High High High High High High High High

Source FDIC FDIC FDIC FDIC FDIC FDIC FDIC FDIC PEW

Metholodolgy median of banked median of banked median of banked median of banked median of banked median of banked median of banked median of banked median of banked

High

PEW

median of banked

High High High High

PEW 2 PEW PEW PEW

median of median of median of median of

banked banked banked banked

111

112

ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Household Incom e Statem ent Incom e Wages/Salary

Expenses

Monthly $ 2,708

Annual $ 32,500

Monthly

Annual

Confidence Level Source High PEW

% of Incom e

Confidence Level

Rent, Mortgage or housing

$

975

$

11,700

36.0%

High

Food

$

413

$

4,956

15.2%

High

Utilities

$

191

$

2,292

7.1%

High

Phone

$

99

$

1,188

3.7%

High

TV/Cable

$

31

$

372

1.1%

High

Remittance

$

68

$

816

2.5%

High

Car Insurance

$

33

$

400

1.2%

Medium

Gasoline

$

84

$

1,009

3.1%

Low

Maintenance and repairs

$

66

$

787

2.4%

Low

Total

$

1,960

$

21,324

65.6%

implied remaining

$

748

$

10,024

30.8%

Monthly

Annual

Monthly $ 73 $ 30

$ $

Annual 879 356

AFS Prem ium (Discount)

$

$

523

Overdraft (# additional times beyond modeled) Out of Netw ork ATM (# additional times beyond modeled)

Metholodolgy w eighted avg. at Pew income w eighted avg. at Pew income w eighted avg. at Pew income w eighted avg. at Pew income w eighted avg. at Pew income w eighted avg. at Pew income CA Department of low cost insurance Insurance plan Taken from Low est Income quintile total Gasoline consumption, very likely a low BLS CES survey, estimate as CA is 2010 high cost state Taken from Low est Income quintile total Gasoline consumption, very likely a low BLS CES survey, estimate as CA is 2010 high cost state

% of Incom e

Cost Com parison AFS Cost Bank Cost

Breakevens

Source

44

M onthly

Annual

2.7

32.6

33.6

403.5

Metholodolgy midpoint method

% of Incom e 2.7% 1.1% 1.6%

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

Cost of Banking Income Conversion Direct Deposit

Monthly Maintenance Fee

Monthly

$

$

w ithdraw al (out of Netw ork) $

-

Annual

$

9

4

$

$

Fee Am ount

-

Confidence Level Source

High

107 8.95 per month

$2.18 per at 53 2.04x Month

High

High

Metholodolgy

CFSI & Survey of Bank w ebsites

CFSI & Survey of Bank w ebsites

Average Fee using CFSI range, confirmed by analysis of major banking institutions

PEW

Median responders # of times per month and cost

Internet Search

Average fee of MoneyGram, WesternUnion

FDIC

Median Fee/ Weighted Avg. of Moderate Income Group # of Overdrafts per year in automated O/D accounts

Transactional

Wire Service

$

Overdraft

$

Bank Cost

$

10

6

$

$

Monthly 30

120 $10 per transfer High

$27 avg. fee at 75 2.788x year Annual

$

356

Medium

% of Incom e 1.1%

Payday Loan Archetype

Methodology To construct our payday borrower archetype, we took a slightly different approach than the unbanked and banked archetype. The depth and quality of payday borrower demographic data is extremely limited and sparsely concentrated. We primarily used demographic and usage data from three studies: FDIC’s National Survey of Unbanked and Underbanked Households217(at the California state level), the California Department of Corporation’s 2007 report to the Governor218, and a 2009 academic study done by Gregory Ellihausen219 (at a national level). Using the three data sources we were able to construct the archetypical payday borrower, based off of the averages of key demographical variables. While we have a lower confidence in our estimates at the City of Los Angeles level, we have a considerable amount of data at the state level.

FDIC 2009 National Survey of Unbanked and Underbanked Households California Department of Corporations. December 2007. California Deferred Deposit Transaction Law. Report to the Governor and the Legislature.

219 Elliehausen, Gregory. January 2009. An Analysis of Consumers’ Use of Payday Loans. George Washington School of Business. Financial Services Research Program. Monograph No.41 217

218

113

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Payday Loan Archetype Table

Dem ographic Inform ation Ethnicity: Gender Age Income (Median) Education Monthly Debt Payments to Income

Archetype White / Hispanic Woman 35 to 44 $35,000 to $40,000 High School Graduate

Confidence Level Metholodolgy Source Medium FDIC Majority High CA Dept. of Corp Majority High CA Dept. of Corp Median Medium FDIC Median Medium FDIC Median

10% -19%

Low

Elliehausen 2009

Median

Credit available?

Savings behavior # of Transactions Average # of Transactions Median Loan Amount Fee Amount Term APR (14-day term)

Denied or Limited Do not save 7 3.5 $255 $45 14 days 460.08%

Medium Medium High High High High High High

Elliehausen 2009 Elliehausen 2009 CA Dept. of Corp CA Dept. of Corp CA Dept. of Corp CA Dept. of Corp CA Dept. of Corp CA Dept. of Corp

Median Majority Average Median Average Average Average calculation

Consecutive or Intermittent Need for Credit Reason for Payday vs.

Alternative

Consecutive (3x more likely) Basic Living expense Easier than bank loan or other credit

High Medium

CA Dept. of Corp FDIC

Probablity Majority

Medium

FDIC

Majority

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

CA Payday Lending True Interest Rates (%APR and Total Fees per # of Loans) 2006 data 500%

$1,400

450%

$1,200

400%

$1,000

350% 300%

$800

average use (7 loans, 124% true interest)

250% 200%

Total Fees $600

150%

APR

$400

100%

$200

50% 0%

$1

2

3

4

5

6

120%

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 $1,400

CA Payday Lending Usage (% Customers per # of Loans) 2006 data

100%

$1,200

$1,000 80% $800 60%

Cumulative Fee % of Usage

$600

Cumulative Usage %

40% $400 20%

$200

0%

$1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Source: California Department of Corporations, 2006

California Payday Loans Year # of Transactions # of Customers (repeat count once) Avg. use

$

2006 2007 10,048,422 $ 11,152,466 $ 1,432,844 1,609,680 7.01 6.93

source: California Department of Corporations, 2010

2008 11,841,014 $ 1,665,019 7.11

2009 11,784,798 $ 1,567,188 7.52

2010 12,092,091 1,646,700 7.34

115

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

Model of Average Use - 7 consecutive loans Date January 1, 2012 January 15, 2012 January 29, 2012 February 12, 2012 February 26, 2012 March 11, 2012 March 25, 2012 April 8, 2012

Income over 98 Days True Interest Rate Fees (% of Income) Loan as % of Monthly Income

Amount borrowed Amount Paid $ 255 $ 255 $ (300) $ 255 $ (300) $ 255 $ (300) $ 255 $ (300) $ 255 $ (300) $ 255 $ (300) $ (300)

$

255

$

10,068 123.53% 3.13% 8.16%

$

(300)

Model of Median Use - 3 consecutive loans Date January 1, 2012 January 15, 2012 January 29, 2012 February 12, 2012

Amount borrowed Amount Paid $ 255 $ 255 $ (300) $ 255 $ (300) $ (300) $

Income over 42 Days True Interest Rate Fees (% of Income) Loan as % of Monthly Income

$

255

52.94% 3.13% 8.16%

$

Loan 0 1 2 3 4 5 6 7 7

Loan 0 1 2 3

(300)

3

Net payment (Fees) $ 255.00 $ (45.00) $ (45.00) $ (45.00) $ (45.00) $ (45.00) $ (45.00) $ (300.00) $

(315.00)

Net payment (Fees) $ 255.00 $ (45.00) $ (45.00) $ (300.00) $

(135.00)

Days 14 28 42 56 70 84 98 98

Days 14 28 42 42

4,315

Payday Loan Archetype Analysis Methodology As an example, we used a hypothetical, but common, scenario in which a payday borrower takes a lone to avoid a late fee on a rent payment. In this scenario we assume the borrower spends 36% of their monthly pre-tax income on rent and will incur a 5% late if they cannot make a timely payment to their landlord. The cost of the late fee would be $56.25. The borrower takes out the maximum loan amount of $255 and pays the maximum fee of $45 on a 14day term. Borrowing from investment theory, a project is only worthwhile if there is a positive net present value.

Where C is the cost of the expenditure, St is the savings for n periods from making expenditure and d is the periodic discount rate.220 In scenario 1, we see that using a even a high cost product such as a payday loan can lead to a positive NPV and thus a beneficial investment. However, the typical behavior of a payday borrower is to take consecutive loans, creating a multi-period Gregory Ellihausen. “An Analysis of Consumer’s Use of Payday Loans.” The George Washington School of Business, January 2009. http://www.cfsaa.com/portals/0/RelatedContent/Attachments/GWUAnalysis_01-2009.pdf 220

GUTIERREZ, KHALSA, LOW, MULHOLLAND, & SCHUMACHER

revolver. Under scenario 2 and scenario 3, we model the same investment decision and find negative NPVs in both scenarios. This implies that the typical borrower would not be making a economically rational investment decision. We concede that this scenario does not include “unpriced” costs, such as a personal relationship with a landlord, or the increasing the possibility of eviction. Of course, those are important factors that would guide a borrower’s decision.

However, the example serves to show that NPVs of payday loan usage are highly sensitive to the term length to the loan. This also seems to cast doubt to the commonly held industry hypothesis that payday loans are mostly used for borrowers needing emergency liquidity. The structure of the payday loan, a balloon payment after only 14 days, is very likely a difficult impediment for borrowers with thin cashflow profiles to overcome, thus easily leading to consecutive borrowings. For borrowers who do not expect to take consecutive loans, but ultimately do, the likelihood that the actual interest rates exceed their original investment hurdle rate, increases.

117

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ALTERNATIVE FINANCIAL SERVICES IN LOS ANGELES

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Federal Reserve Bank of St. Louis, 2010. http://www.stlouisfed.org/publications/cb/ articles/?id=2039 Bertrand, Marianne and Adair Morse. “Information Disclosure, Cognitive Biases and Payday Borrowing.” Chicago Booth Research Paper No. 10-01. University of Chicago Booth School of Business, October 1, 2010. http://ssrn.com/abstract=1532213 Bertrand, Marianne, Sendhil Mullainathan and Eldar Shafir. “A Behavioral Economics View of Poverty.” American Economic Review, 2004. http://cbdr.cmu.edu/seminar/shafir.pdf Blair, Sheila. “Low-Cost Payday Loans: Opportunities and Obstacles.” Baltimore: Annie E. Casey Foundation, June 2005. https://folio.iupui.edu/bitstream/handle/10244/101/ FEs3622H334.pdf?sequence=1 Blank, Rebecca M. “Public Policies to Alter the Use of Alternative Financial Services Among Low-Income Households.” Brookings Institution, March 2008. http://www.brookings. edu/~/media/Files/rc/papers/2008/0416_low_income_blank/0416_low_income_ blank.pdf Board of Governors of the Federal Reserve System. “Balance Sheet of Households and Nonprofit Organizations.” December 2011.

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Center For Responsible Lending, July 2011. http://www.responsiblelending.org/paydaylending/research-analysis/big-bank-payday-loans.pdf California Budget Project. “Payday Loans: Taking the Pay Out of Payday.” September 2008. http://www.cbp.org/pdfs/2008/080926_paydaychartbook.pdf California Financial Code. Division 10. § 23019.

California Senate Bill 365 (Lowenthal); Deferred Deposit Transactions Caskey, John P. “Bringing Unbanked Households Into the Banking System.” Brookings Institution, January 2002. http://www.brookings.edu/~/media/Files/rc/articles/2002/01_banks_ poor_caskey/caskey.pdf Caskey, John. “Check-cashing Outlets In a Changing Financial System.” Working Paper No. 02-4.

Federal Reserve Bank of Philadelphia, February 2002. http://www.philadelphiafed.org/ research-and-data/publications/working-papers/2002/wp02-4.pdf Carr, James H. and Jenny Schuetz. “Financial Services in Distressed Communities: Issues and Answers.” Fannie Mae Foundation, August 2001. http://www.knowledgeplex.org/kp/ report/report/relfiles/FinancialServices.pdf Center for Financial Services Innovation. “The Nonprofit’s Guide to Prepaid Cards.” September 2010. http://cfsinnovation.com/intelligence/nonprofitguide Center for Financial Services Innovation. “2010 Underbanked Market Size.” CSFI Knowledge Brief (November 2011): 2. Accessed February 2, 2012. http://cfsinnovation.com/system/files/09-11,%20Marketscan_final.pdf Center For Responsible Lending. “Snapshot: Payday Lending in CA.” January 1, 2009. http:// www.responsiblelending.org/california/ca-payday/policy-legislation/payday-fact-andpolicy-sheet.pdf Center For Responsible Lending. “San Jose Payday Loan Store Restrictions Survey.” December 2010. http://www.responsiblelending.org/california/ca-payday/research-analysis/SanJose-Payday-Lending-Voter-Poll-Memo.pdf Chan, Pamela. “Comments on Financial Access Activities.” New America Foundation, November 17, 2011.

Chan, Pamela. “Beyond Barriers: Designing Attractive Savings Accounts for Lower-Income Consumers.” New America Foundation, November 2011. http://www.ncdsv.org/images/ NewAmerFndn_BeyondBarriersDesigningAttractiveSavingsAcctsLower-IncomeConsumers_11-11.pdf Cheney, Julia. “Payments, Credit, and Savings: The Experience for LMI Households.” Federal Reserve Bank of Philadelphia, 2007. http://www.philadelphiafed.org/consumer-credit-and-payments/payment-cards-center/events/conferences/2007/C2007MayExperienceforLMI.pdf

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Consumer Financial Protection Bureau. “CFPB Launched Inquiry into Overdraft Practices.” Last Modified February 22, 2012. http://www.consumerfinance.gov/pressreleases/consumer-financial-protection-bureau-launches-inquiry-into-overdraft-practices/ Consumer Financial Protection Bureau. “Short-Term, Small Dollar Lending.” 2011. http://files. consumerfinance.gov/f/2012/01/Short-Term-Small-Dollar-Lending-ExaminationManual.pdf Contreras, Patrick and Eric Robbins. “Strategies for Banking the Unbanked: How Banks are Overcoming Entrance Barriers.” Federal Reserve Bank of Kansas City, January 2006. http:// www.kansascityfed.org/PUBLICAT/FIP/prs06-1.pdf Cook, Leslie Diane, Kyra Kazantzis, Melissa Morris and James Zahradka. “The End of the 460 Percent APR: Tackling Payday Lending in California.” Community Investments Spring 2010 Volume 22, Issue 1. Federal Reserve Bank of San Francisco. http://www.frbsf.org/ publications/community/investments/1005/L_Cook.pdf Davis, Delvin, Keith Ernst, Wei Li and Leslie Parrish. “Predatory Profiling: The Role of Race and Ethnicity in the Location of Payday Lenders in CA.” Center For Responsible Lending, March 26, 2009. http://www.responsiblelending.org/california/ca-payday/researchanalysis/predatory-profiling.pdf Desmond, Tyler and Charles Sprenger. “Estimating the Cost of Being Unbanked.” Federal Reserve Bank of Boston, Spring 2007.

Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203) Dole, Kate M., Rob Levy and Bart Narter. “Reaching Underbanked Consumers Through Mobile Services.” Center for Financial Services Innovation, 2011. http://cfsinnovation.com/content/reaching-underbanked-consumers-through-mobile-services Edmiston, Kelley. “Could Restrictions on Payday Lending Hurt Consumers.” Federal Reserve Bank of Kansas City, 2011. http://www.kc.frb.org/publicat/econrev/pdf/11q1Edmiston. pdf Eichler, Alexander. “Working Poor: Almost Half of US Households Live One Crisis From Bread Line.” Huffington Post, January 31, 2012. http://www.huffingtonpost.com/2012/01/31/ working-poor-liquid-asset-poverty_n_1243152.html Elliehausen, Gregory and Edward C. Lawrence. “Payday Advance Credit in America: An Analysis of Customer Demand.” Georgetown University, April 2001. http://faculty.msb.edu/ prog/CRC/pdf/mono35.pdf Ellihausen, Gregory. “An Analysis of Consumer’s Use of Payday Loans.” The George Washington School of Business, January 2009. http://www.cfsaa.com/portals/0/RelatedContent/ Attachments/GWUAnalysis_01-2009.pdf Ernst, Keith, John Farris and Uriah King. “Quantifying the Economic Cost of Predatory Payday Lending.” Center For Responsible Lending, December 2003. http://cfsinnovation.com/ node/440174

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Faturechi, Robert. “Bill Would Cap Payday Loan Interest For Jobless.” Los Angeles Times, March 27, 2010. http://articles.latimes.com/2010/mar/27/local/la-me-payday27-2010mar27 Federal Deposit Insurance Corporation Advisory Committee. “Economics Inclusion: Meeting the Financial Needs of Consumers Through Financial Service Centers.” Presentation to FDIC Advisory Committee on Economic Inclusion, October 24, 2007. http://www.fisca. org/Content/NavigationMenu/GovernmentAffairs/TestimonySpeeches/EconomicInclusion-Presentation.pdf Federal Deposit Insurance Corporation. “Building Assets, Building Relationships: Bank Strategies for Encouraging Lower-Income Households to Save.” FDIC Quarterly 2008, Volume 2, No. 1. http://www.fdic.gov/bank/analytical/quarterly/2008_vol2_1/BuildingAssets/2008_Quarterly_Vol2No1.html Federal Deposit Insurance Corporation. “FDIC Study of Bank Overdraft Programs.” November 2008. http://www.fdic.gov/bank/analytical/overdraft/FDIC138_ExecutiveSummary_ v508.pdf Federal Deposit Insurance Corporation. “National Survey of Unbanked and Underbanked Households.” December 2009. http://www.fdic.gov/householdsurvey/ Federal Deposit Insurance Corporation. “Alternative Financial Services: A Primer.” FDIC Quarterly 2009, Volume 3, No. 1. http://www.fdic.gov/bank/analytical/quarterly/2009_vol3_1/ FDIC140_QuarterlyVol3No1_AFS_FINAL.pdf Federal Deposit Insurance Corporation. “A Template for Success: The FDIC’s Small-Dollar Loan Pilot Program.” FDIC Quarterly 2010, Volume 4, No. 2. http://www.fdic.gov/bank/analytical/quarterly/2010_vol4_2/FDIC_Quarterly_Vol4No2_SmallDollar.pdf Federal Reserve Bank of Kansas City. “Study of Unbanked & Underbanked Consumer in the Tenth Federal Reserve District.” May 2010. http://www.fdic.gov/about/comein/KCfed. pdf Fellowes, Matt. “The Metropolitan Market for Alternative Short-Term Loans.” Presented at The Consumer in the Financial Services Revolution, Annual Conference of the Consumer Federation of America, December 2, 2005. http://www.brookings.edu/speeches/2005 /1202childrenfamilies_fellowes.aspx Fellowes, Matt. “Grounds for Competition: The Basic Financial Service Infrastructure in LowIncome Neighborhoods.” Presented at Louis L. Redding Public Policy Forum, University of Delaware, March 2006. http://www.brookings.edu/speeches/2006/0317childrenfa milies_fellowes.aspx Fellowes, Matt. “Making Markets and Asset for the Poor.” Brookings Institution, July 23, 2007. http://www.brookings.edu/papers/2007/0723childrenfamilies_fellowes.aspx Fellowes, Matt and Mia Mabanta. “Banking on Wealth: America’s New Retail Banking Infrastructure and Its Wealth-Building Potential.” Brookings Institution, January 2008. http://www.brookings.edu/~/media/Files/rc/reports/2008/01_banking_fellowes/01_ banking_fellowes.pdf

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Fellowes, Matt. “The High Prices Facing Lower Income Consumers.” In From Poverty, Opportunity: Putting the Market to Work for Lower Income Families. Brookings Institution, July 2008.

Fellowes, Matt and Mia Mabanta. “Converting Basic Financial Services Fees into Prosperity: An Untapped Opportunity for Consumers & Banks.” PEW Charitable Trusts, December 12, 2008. http://www.pewtrusts.org/our_work_report_detail.aspx?id=46946 Final Vote Results For Roll Call HR968, House.gov “Financial Services for the Poor: The Big Save: How Can American Serve Better The Millions of Citizens Outside the Financial Mainstream.” The Economist, September 2011.

Flannery, Matt and Samolyk, Katherine. “Payday Lending: Do the Costs Justify the Price?” Working Paper No. 2005-09. FDIC Center for Financial Research, June 2005. http://www. fdic.gov/bank/analytical/cfr/2005/wp2005/CFRWP_2005-09_Flannery_Samolyk.pdf Fonseca, Maíra, Jason George, Maryann Girgis, Miriam Langer, Alexander Mont, Shaun Robinson and Maitreya Sriram. “Improving the Use of Asset-Building Financial Services

by Latino Immigrants in Langley Park, Maryland.” University Of Maryland, May 2009. http://drum.lib.umd.edu/bitstream/1903/9082/1/Answer%20Poverty.pdf Fox, Jean Ann and Anna Petrini. “Internet Payday Lending: How High-priced Lenders Use the Internet to Mire Borrowers in Debt and Evade State Consumer Protections.” Consumer Federation of America, November 30, 2004. http://www.consumerfed.org/pdfs/Internet_Payday_Lending113004.PDF Fox, Jean Ann and Patrick Woodall. “Cashed Out: Consumers Pay Steep Premium to “Bank” at Check-cashing Outlets.” Consumer Federation of America, 2006. http://www.consumerfed.org/pdfs/CFA_2006_Check_Cashing_Study111506.pdf Fusaro, Marc Anthony and Patricia J. Cirillo. “Do Payday Loans Trap Consumers in a Cycle of Debt.” November 16, 2011. http://ssrn.com/abstract=1960776 Gutierrez, Ricardo, Sarab Sarung Khalsa, Joshua Low Elycia Mullholland and Thomas Schumacher. “UCLA Financial Services Study.” Los Angeles, March 2012.

Hababou, Moez, Jennifer Kramer and Ellen Seidman. “A Financial Services Survey of Low-andModerate Income Households.” Center for Financial Services Innovation, July 2005. http://cfsinnovation.com/topics/article/440293 Hayashi, Fumiko and Joanna Stavins. “Effects of Credit Scores on Consumer Payment Choice.”

Federal Reserve Bank of Kansas City, February 2012. http://www.kc.frb.org/publicat/ reswkpap/pdf/rwp12-03.pdf Hernandez, Mindy. “Applying Behavioral Research to Asset-Building Initiatives.” Corporation For Enterprise Development, April 2011. http://cfed.org/assets/pdfs/Applying_Behavioral_Research_to_Asset_Building_Initiatives.pdf Herrmann, Michael J. “The CSFI Underbanked Consumer Study Underbanked Consumer Overview & Market Segments Fact Sheet.” Center for Financial Services Innovation, June 2008. http://cfsinnovation.com/publications/article/330525

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Herrmann, Michael J. “Prepaid Card vs. Checking Account Preferences.” Center for Financial Services Innovation, September 2008. http://cfsinnovation.com/publications/article/330524 Higher Education Opportunity Act, Pub. Law 110-315 Huckstep, Aaron. “Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits.” 2007. http://law2.fordham.edu/publications/articles/600flspub8977.pdf Hynes, Richard; “Does Payday Lending Catch Vulnerable Communities In A Debt Trap?”

Virginia Law and Economics Research Paper No. 2010-08. April 8, 2010. http://papers. ssrn.com/sol3/papers.cfm?abstract_id=1585805 Izzo, Phil. “Nearly Half of Americans Are Financially Fragile.” Wall Street Journal, May 23, 2011. http://blogs.wsj.com/economics/2011/05/23/nearly-half-of-americans-are-financially-fragile/ Kennedy, Ryan. “An Evaluation of Policy Options to Address High-Cost Payday Lending.” Harvard Kennedy School, October 2011. http://www.hks.harvard.edu/var/ezp_site/storage/ fckeditor/file/pdfs/centers-programs/centers/wiener/awards/2011/payday_lending. pdf Kingdon, John. Agendas, Alternatives, and Public Policies. HarperCollins Publishers, 1997 King, Uriah and Leslie Parrish. “Springing the Debt Trap: Rate Caps Are The Only Proven Payday Lending Reform.” Center For Responsible Lending, December 13, 2007. http://www. responsiblelending.org/payday-lending/policy-legislation/states/springing-the-debttrap-exec-summary.pdf King, Uriah and Leslie Parrish. “Phantom Demand: Short-term Due Date Generates Need For Repeat Payday Loans.” Center For Responsible Lending, July 9, 2009. http://www. responsiblelending.org/payday-lending/research-analysis/phantom-demand-final.pdf Logan, Amanda and Christian E. Weller. “Who Borrows From Payday Lenders? An Analysis of Newly Available Data.” Center for American Progress, March 2009. http://www.americanprogress.org/issues/2009/03/pdf/payday_lending.pdf Los Angeles Administrative Code, Chapter 5.1, Article 3, Section 20.99.03 Los Angeles Council File No. 09-1219 Lusardia, Annamaria, Daniel Schneider and Peter Tufano. “Financially Fragile Households: Evidence and Implications.” May 7, 2011. http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2011_spring_bpea_papers/2011_spring_bpea_conference_lusardi.pdf Mann, Ronald and Jim Hawkins. “Just Until Payday.” UCLA Law Review, Vol. 52 2007. August 4, 2006. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=921844 Martin, Andrew and Stephanie Clifford. “High Bank Fees Five Wal-Mart a Money Aisle.” New York Times, November 7, 2011. http://www.nytimes.com/2011/11/08/business/walmart-benefits-from-anger-over-banking-fees.html?pagewanted=all

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Martin, Nathalie and Koo Im Tong. “Double Down-And-Out: The Connection between Payday Loans & Bankruptcy.” 2010. http://html.documation.com/cds/NCBJ2010/PDFs/014_5. pdf Martin, Nathalie. “1000% Interest - Good While Supplies Last: A Study of Payday Loan Practices and Solutions.” Arizona Law Review, Vol. 52, p. 563, 2010. August 24, 2010. http:// ssrn.com/abstract=1664616 Martin, Nathalie; “Regulating Payday Loans: Why This Should Make the CFPB’s Short List.”

UNM School of Law Research Paper No. 2011-09. October 10, 2011. http://ssrn.com/ abstract=1941851 Mayer, Robert. “Payday Lending and Personal Bankruptcy.” Consumer Interests Annual Vol. 50, 2004, Pgs 76 – 82. http://www.luc.edu/faculty/rmayer/mayer19.pdf McKernan, Signe-Mary, Caroline Ratcliffe and Daniel Kuehn. “Prohibitions, Price Caps and Disclosures: A Look at State Policies and Alternative Financial Product Use.” Briefing to US Department of Treasury. October 2010.

Meier, Stephan and Charles Sprenger. “Present-Biased Preferences and Credit Card Borrowing.”

IZA Discussion Paper No. 4198. June 2009. http://ssrn.com/abstract=1412276 Melzer, Brian. “The Real Costs of Credit Access: Evidence From the Payday Lending Market.”

July 2, 2009. http://www.kellogg.northwestern.edu/faculty/melzer/Papers/realcosts_ melzer_07.02.09.pdf Molina, Liana. “Banks Should Stop Financing Payday Loan Sharks.” American Banker, January 11, 2012. http://www.americanbanker.com/bankthink/banks-should-stop-financingpayday-loan-sharks-1045613-1.html Morgan, Donald P and Michael R. Strain. “Payday Holiday: How Households Fare after Payday Credit Bans.” Staff Report no. 309. Federal Reserve Bank of New York, February 2008. http://www.newyorkfed.org/research/staff_reports/sr309.html Morgan, Donald; “Defining and Detecting Predatory Lending.” Staff Report no. 273. Federal Reserve Bank of New York, January 2007. http://ssrn.com/abstract=962711 Morse, Adair. “Payday Lenders: Heroes or Villains.” January 2009. http://ssrn.com/abstract=1344397 Mullainathan, Sendhil & Eldar Shafir. “Savings Policy and Decisionmaking in Low-Income Households.” April 1, 2009. http://ideas42.iq.harvard.edu/publications/savings_policy_ decisionmaking_low_income_households National Conference of State Legislatures. “Payday Lending Statutes.” Last modified December 7, 2011. http://www.ncsl.org/issues-research/banking/payday-lending-state-statutes. aspx National People’s Action. “Profiting From Poverty: How Payday Lenders Strip Wealth from the Working Poor for Record Profits.” January 2012. http://www.npa-us.org/files/images/ profiting_from_poverty_npa_payday_loan_report_jan_2012_0.pdf

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Policy Brief #13, November 2008. http://www.npc.umich.edu/publications/policy_ briefs/brief13/PolicyBrief13.pdf New York State Banking Department, Community Affairs Unit, Consumer Services Division. “10 Years In: A Review Of The Banking Development District Program.” May 2010. http:// www.dfs.ny.gov/banking/bddreview.pdf New York State Banking Department. “The Banking Development District (BDD) Program.” Accessed on February 20, 2012. http://www.dfs.ny.gov/banking/bdd.htm#whatis Orozco, Manuel. “The Remittance Marketplace: Prices, Policy and Financial Institutions.” Washington, DC: Pew Hispanic Center, 2004.

Osili, Una and Anna Paulson. “What Can We Learn about Financial Access from U.S. Immigrants.” FRB of Chicago Working Paper No. 2006-25. May 2008. http://ssrn.com/abstract=949941 Pew Charitable Trust. “Regulator Comment: Financial Habits and Patterns of Low-and Moderate Income Households.” November 22, 2011.

Phillips, Leigh and Anne Stuhldreher. “Building Better Bank Ons.” New America Foundation, February 2011. http://sfofe.org/wp-content/uploads/2011/09/BBBO-final.pdf Plunkett, Leah. “Small-Dollar Loans, Big Problems: How States Protect Consumers from Abuses and How the Federal Government Can Help.” Suffolk U.L. Review 31. March 2011.

Puzzanghera, Jim and Scott. E. Reckard. “Bank Fees Pay off - For Credit Unions.” Los Angeles Times, March 1, 2012. http://articles.latimes.com/2012/mar/02/business/la-fi-bankfees-complaints-20120302 Puzzanghera, Jim. “Credit unions, banks grabbing a share of payday loan dollars.” Los Angeles Times, March 11, 2012. http://articles.latimes.com/2012/mar/11/business/la-fi-bankspayday-loans-20120311 Rampell, Catherine. “Unbanked America.” New York Times, October, 27 2011. http://economix. blogs.nytimes.com/2009/12/04/unbanked-america/ RCW 31.45 Washington Check Cashers & Sellers Act Salmon, Felix. “Missouri, Payday Lending Haven.” Reuters; December 19, 2012. http://blogs. reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/ Salmon, Felix. “Adventures with Consumer Lending.” Reuters, January 5, 2012. http://blogs. reuters.com/felix-salmon/2012/01/05/adventures-with-consumer-lending-missouriedition/ Sawyer, Noah and Kenneth Temkin. “Analysis of Alternative Financial Service Providers.” Fannie Mae Foundation, 2004. http://www.urban.org/uploadedpdf/410935_altfinservproviders.pdf “Securing Payday Loans.” Editorial. Los Angeles Times, September 6, 2011. http://articles.latimes.com/2011/sep/06/opinion/la-ed-payday-20110906

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Schneider, Rachel. “One Size Does Not Fit All: A Comparison Of Monthly Financial Services Spending.” Center for Financial Services Innovation, June 2009. http://cfsinnovation. com/node/330606 Schneider, Rachel. “How Should We Serve the Short-Terms Credit Needs of Low-Income Consumers.” Center for Financial Services Innovation, April 2010. http://cfsinnovation.com/ node/440501 Schuh, Scott and Joanna Stavins. “Why Are (Some) Consumers (Finally) Writing Few Checks?

The Role Of Payment Characteristics.” Consumer Payments Research Center, November 2009. http://www.bos.frb.org/economic/wp/wp2009/wp0901.pdf Schuh, Scott and Joanna Stavins. “How Consumers Pay: Adoption and Use of Payments.” Federal Reserve Bank of Boston, December 2011. http://www.bos.frb.org/economic/wp/ wp2012/wp1202.htm Scinto, Madeline. “Study Says Being Impatient Is Trashing Your Credit Score.” Business Insider, December 8, 2011. http://articles.businessinsider.com/2011-12-08/news/30485046_1_ subprime-borrowers-credit-cards-average-credit-score Seidman, Ellen and Jennifer Tescher. “From Unbanked to Homeowner: Improving the Supply of Financial Services for Low-Income, Low-Asset Customers.” Center for Financial Services Innovation, November 2003. http://cfsinnovation.com/node/440020 Silver-Greenberg, Jessica. “Know More, Borrow Less.” Wall Street Journal, December 13, 2011. http://blogs.wsj.com/totalreturn/2011/12/13/know-more-borrow-less/ Silver-Greenberg, Jessica. “Attack of the New Bank Fees.” Wall Street Journal, January, 14 2012. http://online.wsj.com/article/SB10001424052970203436904577152580991517256. html Skiba, Paige and Jeremy Tobacman. “The Profitability of Payday Loans.” December 2007.

Skiba, Paige and Jeremy Tobacman. “Payday Loans, Uncertainty & Discounting: Explaining Patterns of Borrowing, Repayment & Default.” Vanderbilt Law and Economics Research Paper No. 08-33. August 21, 2008. http://ssrn.com/abstract=1319751 Skiba, Paige and Jeremy Tobacman. “Do Payday Loans Cause Bankruptcy.”

Vanderbilt Law and Economics Research Paper No. 11-13. November 9, 2009. http://ssrn. com/abstract=1266215 Sledge, Joshua. “From Financial Education to Financial Capability: Opportunities for Innovation.”

Center for Financial Services Innovation, March 2010. http://cfsinnovation.com/publications/article/440486 Smith, Michael P. “Testimony from Michael P. Smith, President and CEO of the New York Bankers Association before the Assembly Standing Committee on Banks.” May 26, 2005 Smith, Tony, Marvin Smith and John Wackes. “Alternative Financial Services Providers and the Spatial Void Hypothesis.” University of Pennsylvania, May 1, 2008. http://repository. upenn.edu/cgi/viewcontent.cgi?article=1461&context=ese_papers

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State of California Department of Corporations. “2010 Annual Report of Operation of Deferred Deposit Originators.” April 25, 2011. http://www.corp.ca.gov/Laws/Payday_Lenders/ pdfs/CDDTL2010ARC.pdf State of California Department of Corporations. “2007 Department of Corporations Payday Loan Study.” December 2007. http://www.corp.ca.gov/Laws/Payday_Lenders/Archives/ pdfs/PDLStudy07.pdf Stegman, Michael. and Robert Faris. “Payday Lending: A Business Model That Encourages Chronic Borrowing.” February 2003.

Stegman, Michael. “Payday Lending.” The Journal of Economic Perspectives, Vol. 21, No. 1 Winter 2007, pp. 169-190. http://www.econ.brown.edu/fac/Kfir_Eliaz/Pay_Day_Loans.pdf Stoinovici, Petru. “Restrictions on Credit: A Public Policy Analysis of Payday Lending.” PhD Dissertation, Clemson University, October 2008. http://etd.lib.clemson.edu/documents/1219953861/umi-clemson-1797.pdf Swagler, Roger, John Burton and Joan Koonce Lewis. “The Operations, Appeals and Costs of the Alternative Financial Sector: Implications for Financial Counselors.” Financial Counseling and Planning Vol. 6, 1995. Association for Financial Counseling and Planning Education, 1995. http://www.afcpe.org/assets/pdf/vol610.pdf Theodos, Brett and Jessica F. Compton. “Research on Financial Behaviors and Use of Small-Dollar Loans and Financial Services - Literature Review.” Prepared for the US Department of the Treasury by the Urban Institute, April, 2010.

Tescher, Jennifer. “The Underserved Are Not Who You Think They Are.” American Banker, October 25, 2011. http://www.americanbanker.com/bankthink/underserved-not-who-youthink-they-are-tescher-1043510-1.html Tseng, Thomas and Daniel Tellalian. “Household surveys conducted by New American Dimensions and Emerging Markets, Inc. between 2009 and 2011 in Los Angeles underwritten by the Pew Charitable Trusts.”

Tseng, Thomas, Daniel Tellalian and Eleni Constantine. “Unbanked By Choice: A Look At How Low-income Los Angeles Households Manage The Money They Earn.” PEW Health Group, July 20, 2010. http://www.pewtrusts.org/our_work_report_detail. aspx?id=59978 Tseng, Thomas, Daniel Tellalian and Eleanor Blume. “Slipping Behind: Low-Income Los Angeles Households Drift Further from the Financial Mainstream.” PEW Health Group, October 8, 2011. http://www.pewtrusts.org/our_work_report_detail.aspx?id=85899365257 Tucker, Randy. “Banks Offering Customers Loans Against Their Paychecks.” Dayton Daily News, November 2011. http://www.daytondailynews.com/news/dayton-news/banks-offeringcustomers-loans-against-their-paychecks-1281077.html “Unbanked Americans: Alienated, Tapping the Market for Financial Outsiders.” The Economist, March 2011.

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United Way Alliance for Economic Inclusion. “Understanding the Impact of Alternative Financial Services.” 2011. http://raisetexas.org/resources/Guide_to_Understanding_Alternative_Financial_Services_04_2011.pdf US Department of the Treasury, Office of Financial Education and Financial Access. “Banking On Opportunity: A Scan of the Evolving Field of Bank On Initiatives.” 2011.

US Senate Roll Call Votes 111th Congress, On Passage of the Bill HR 4173 As Amended Washington State Department of Financial Institutions. “2009 Payday Lending Report.” 2009. http://www.dfi.wa.gov/consumers/education/payday_loans.htm Washington State Department of Financial Institutions. “2010 Payday Lending Report.” 2010. http://www.dfi.wa.gov/consumers/education/payday_loans.htm Whitney, Meredith. “America’s ‘Unbanked’ Masses.” Wall Street Journal, February, 24 2012. http://online.wsj.com/article/SB10001424052970204909104577235590714208670. html Woodruff, Mandi. “10 Biggest Banking Trends You Can Expect to See in 2012.” Business Insider, December 2011. http://online.wsj.com/article/SB10001424052970204909104577235 590714208670.html Zinman, Jonathan. “Restricting Consumer Credit Access: Household Survey Evidence of Effects Around The Oregon Rate Cap.” Journal of Banking & Finance, October 2008. http:// www.dartmouth.edu/~jzinman/Papers/Zinman_RestrictingAccess_jbf_forth.pdf