Payday Lenders Fuel Crime, Drive Down Property Values
A study published in the May 2011 issue of Criminology and Public Policy, a publication of the American Society of Criminology, states, "The evidence is consistent in indicating that payday lending is predictive of violent crime rates.
"The substantial costs that customers pay for using payday lenders have long been documented," the study continues. "Our findings indicate that important broader community costs also might persist – such as exposure to crime – that all residents pay when they reside in neighborhoods with a concentration of payday lenders."The study, from four professors at three different U.S. colleges, is entitled "Does Fringe Banking Exacerbate Neighborhood Crime Rates? Social Disorganization and the Ecology of Payday Lending." It examined the growth of payday lending in Seattle and drew several conclusions about how the presence of payday lenders impacts the communities in which they operate.
The researchers explained that it's been well proven that local institutions play a key role in shaping crime rates. For instance, places like libraries and recreational facilities are believed to drive down crime, while other places, like bars, serve to encourage it.
"We would like to add payday lenders to the list of local institutions that might affect community crime rates," the researchers stated.
Drawing on social disorganization theory, the researchers found that neighborhoods that have a relatively greater share of payday lenders exhibit higher crime rates -- even after taking into account poverty, unemployment, population turnover, and related socioeconomic factors known to be associated with crime.
"The safest neighborhoods in Seattle have no payday lenders in them," the researchers found. Meanwhile, "in the downtown and inner-city neighborhoods where payday lenders are more numerous, the violent crime rate is also highest."
The study's authors recommend a host of solutions, including zoning laws to limit the number of new payday lenders; increased access to small consumer loans and other financial alternatives to payday loans; and interest rate caps of 36% as some states have already done and as Congress mandated for payday loans to military members.
"This study shows that not only do individuals suffer from predatory lending practices, but entire communities can pay a price for a high concentration of payday lenders. Congress took an important step by limiting payday loan interest rates in military base communities, but it shouldn't stop there. Congress should do for all communities what it did for military families," said Gregory Squires, a professor of Sociology at George Washington University and a co-author of the study.
According to the study's authors – and several consumer advocates contacted for this story – this is the first such study that provides an empirical examination of the link between payday lending, also known as "fringe banking," and neighborhood crime.
The Impact on Home Values
The study further notes that since higher crime rates have been linked to declining property values, the presence of numerous cash advance stores could be directly or indirectly driving down home values in many communities.
"If a concentration of payday lenders reduced property values (and it's difficult to imagine it would increase values), then this effect would reduce the equity and wealth of property owners. In turn, property tax revenues would decline and thereby require a reduction in critical public services (e.g. schools, police and fire protection) or an increase in taxes for local residents and businesses," the study noted.
The authors said they chose Seattle because it is representative in many ways of other parts of the U.S., relative to the payday loan industry. Nevertheless, researchers added that further study of the issue is necessary nationwide.
Is Robbing Payday Loan Stores a Growing Trend?
Even if the researchers are wrong about the link between cash advance centers and neighborhood crime, it's interesting to note that there's been a rash of recent armed robberies at payday loan stores that have kept authorities busy from coast to coast.
For instance, in the past week alone:
- a masked man carrying a semi-automatic handgun robbed a South Carolina company called Accepted Cash Advance;
- two suspects held up the Texas Car Title and Payday Loan Shop in Waco, Texas. One of them wielded a gun and demanded cash before fleeing the scene; and
- two men exchanged gunfire with an armored car driver who was making a pickup at a payday loan store in Fort Worth, Texas. The robbers got away with an undisclosed amount of money. A $20,000 reward for their arrest is being offered.
Over the past month, there have been multiple reports of payday loan robberies in Illinois, along with numerous cases in California, Georgia, Indiana, KentuckyMissouri and elsewhere. In one instance, a desperate woman brandishing a knife was captured on surveillance video robbing a Dallas payday loan business.
An FBI spokeswoman said the agency doesn't keep statistics on robberies at cash advance businesses, and that crimes at these locations are reported to local authorities. So it's not clear that there's any real uptick in robberies at payday loan centers nationwide – or perhaps whether there's simply more media attention to such crimes.
Samantha Pepi, a spokeswoman for the Community Financial Services Association of America (CFSA), a trade group that represents payday lenders, said of the recent robberies: "We don't have any evidence of trends in that respect."
According to Pepi, CFSA represents more than 50% of storefront payday advance outlets in the U.S. (the association does not represent Internet lenders). According to CFSA data, in 2010, there were a total of 19,700 establishments, including online lenders, in America offering payday loans. The entire payday loan industry did $40 billion worth of transactions in 2010 and generated $7.4 billion in combined fees, CFSA figures show.
Jean Ann Fox, director of financial services for Consumer Federation of America, says, "We're most concerned with the adverse effects high-cost payday lenders have on consumers financially." Nevertheless, she noted that high crime rates at payday loan stores "wouldn't be unexpected.
"These stores cluster in low-to-moderate income communities," Fox says. "They're also check cashers and prepaid card sellers. As a financial services supermarket, they would have a lot of cash on hand, and they're often staffed by just one or two workers. I can see how that would be a magnet to crooks."