The Cumulative Costs of Predatory Practices

Spillover Costs
Borrowers are not the only ones who incur costs from lending abuses; communities and the economy
as a whole are also affected by lending abuses. These costs are even more difficult to estimate than
the costs that accrue to borrowers. However, there is evidence, and in some cases estimates, demonstrating
the effect. Spillover costs include the costs paid by others when a borrower cannot pay,
ongoing wealth disparities, a reduction in trust and stability in the financial system, and macroeconomic
costs such as recession and reduced economic output.
Others Pay When Borrowers Cannot
When borrowers cannot pay, others may step in to
settle the debt. One study found that 19% of borrowers
ultimately paid off their payday loan with help
from friends and family (Pew, 2012). Furthermore,
as the high costs of abusive loans deplete borrowers'
resources, they may turn to family and friends,
government benefits, or charitable assistance to
meet their needs. In these ways, lenders get paid,
but others ultimately pay the price.
As the high costs of abusive loans
deplete borrowers' resources, they
may turn to family and friends,
government benefits, or charitable
assistance to meet their needs.
Payday and car-title lending are associated with increased reliance on charity or government support.
For example, Texas Catholic Charities estimated that nearly half of payday borrowers that received
their charitable assistance identified the loans as contributing to their need to ask for help. The
charity estimated it spent $1 million in 2010 to help individuals who had payday or car-title
debt (Texas Catholic Conference, 2010). In addition, Melzer (2013) found that households who
lived within easy access to payday loan stores were 20% more likely to use food stamps and 10%
percent less likely to make required child support payments than similar households that did not
have access to these stores.
In cases where the government is the lender, the costs of default fall on the taxpayer. For example,
taxpayers fund the vast majority of student loans (CFPB, 2012). When borrowers cannot pay, the
government (that is, taxpayers) ultimately holds the debt, while the schools have long since
been paid.
Lending Inequities Contribute to Wealth Disparities
Wealth helps a household weather income disruption, pay for retirement, and increase its assets
over time. Importantly, wealth can be transferred to future generations. Although there is a
widening wealth gap between those at the top and the bottom of the economic ladder, there are
also disparities among different racial and ethnic groups of similar incomes. Lending abuses, which
disproportionately affect non-whites (as is discussed later in this chapter), perpetuate or expand
wealth disparities.
Figure 6 shows median wealth for a variety of subgroups. Not surprisingly, homeowners of all
races and ethnicities have considerably more wealth than renters. White families have considerably
higher dollar amounts of wealth than families of color overall, for both homeowners and renters.
In dollar terms, the median wealth gap between people of color and whites is more than $100,000
per household.
16
The State of Lending in America & its Impact on U.S. Households