How 'fringe' lenders prey on urban poor

When traditional banks pull out of low-income neighborhoods, commercial check cashers, payday lenders and other "fringe" financial services take over, often charging high fees and interest rates to those who can least afford it.

To highlight the problem, the Annie E. Casey Foundation is launching a national campaign to educate low-income families about banking alternatives to corner pawnshops and check-cashing services, which can charge up to 10 percent.


The private charity will premier an 18-minute documentary video on the topic at 6 tonight at the Walters Art Museum, followed by a panel discussion.

"It's a lot of money that companies are making primarily from the low-income African-American and Hispanic communities," said Gwen Robinson, a program associate at the Baltimore foundation's headquarters. "So for a city like Baltimore, it's a particular problem."


Robinson stressed that not all check-cashing services or sub-prime lenders are bad. But some charge particularly high fees and take advantage of residents who have nowhere else to turn. And many consumers simply lack information about cheaper alternatives.

The documentary, called The Money Trap, features four real-life stories about people who became caught in a cycle of debt as a result of their dealings with fringe financial services.

"There are a number of challenges that low-income people face in trying to access credit, get loans or cash their paychecks, and these are problems that many middle-class people don't always realize are there," Robinson said.

The foundation's national campaign dovetails with efforts by Baltimore community organizations and banks to reach out to working-class neighborhoods.

Traditional banks all but abandoned Southwest Baltimore about five years ago. But things improved last winter, when a coalition of businesses and community organizations persuaded a credit union and check-cashing service to open a joint office in the Westside Shopping Center.

The unusual partnership between SSA Baltimore Federal Credit Union and A&B; Check Cashing gives residents access to financial services without having to drive across town. In exchange for a break on rent, A&B; agreed to lower its fee to $2.50 a month for check cashing. The credit union is open to anyone willing to plunk down a $6 membership fee.

"We're trying to offer a variety of services," said Althea E. Saunders-Ranniar, asset-building coordinator with the Bon Secours of Maryland Foundation, a partner in the program. "We want to get people back into the mainstream of financial institutions."

Oftentimes, banks simply can't afford to maintain branches in neighborhoods where there is a limited amount of business, said Gretchen Wyatt, a spokeswoman for the Maryland Bankers Association. "A lot of times a bank will close a branch because it's not profitable, either because it's not being used by consumers or they are going someplace else."


Maryland banks have been working with community groups to educate consumers about alternatives to fringe services, Wyatt said. Between 1986 and 2000, member banks reached an estimated 200,000 consumers through education programs.

State lawmakers joined the fight in 2000, passing a law limiting what check-cashing companies can charge for their services. A licensed check casher is allowed to charge no more than 2 percent to cash a government check, such as a tax refund. The limit is 10 percent on personal checks and 4 percent on all other checks, including payroll checks.

Unlicensed check cashers, who don't have to pay a state licensing fee, may charge no more than 1.5 percent for any type of check. Violators face stiff penalties.

"The fact of the matter is, the Casey Foundation is right," said John Bergbower, director of enforcement for the Maryland Department of Labor, Licensing and Regulation. "There was some gouging of consumers going on, especially in low-income areas."

Bergbower said 427 check cashers were registered with the state in October 2000, when enforcement of the law began. Of those, 328 are still active. About 113 unlicensed check cashers have been identified during the same period. Bergbower and one other person are the only state employees assigned to regulate the business.

"They're everywhere," he said. "The problem is manpower and resources."


Payday lending has essentially been outlawed in Maryland. Such lenders typically offer short-term loans that are secured by a postdated check, which is held until the borrower's next payday. The fees on payday loans typically run higher than the maximum rate allowed by state law.

"We have basically put a stop to payday lending in the state of Maryland, but we do still have issues because there are Internet companies that do it and we have to go after them once we locate them," Bergbower said.