(Lexington, SC) – In an attempt to piggyback off of President Biden’s important work on junk fees, the Consumer Financial Protection Bureau (CFPB) has recently proposed further regulating credit card late fees. While this might sound positive at first blush, a rule like this could have detrimental, unintended consequences – like making it more difficult for communities of color to access credit.
A recent study shows that “Black adults are more than twice as likely to be denied credit or approved for less than requested when compared to their white counterparts,” suggesting that 46% of Black adults who applied for credit were denied, compared with 22% of white adults. The CFPB’s proposed rule threatens to further widen that gap by changing the calculus for the credit unions, and small and Black-owned banks that service these communities.
Increasing fees, raising interest rates and annual fees, and/or changing their lending criteria are just some of the actions these lending institutions may need to consider if their ability to charge late fees changes. These changes could also limit the reach and impact Black-owned banks have in Black communities, areas that are often already traditional banking deserts, and the invaluable lines of credit for Black families and small businesses.
Reducing access to credit for small businesses, families of color, and many other families could have negative consequences. The Federal Reserve recently reported that 32 percent of American adults could not pay an unexpected $400 expense, leading many families to rely on credit to cover emergency costs. Survey data also shows that the majority (61%) of small business owners use their personal credit cards to fund their business — not simply for emergencies. Among those surveyed, the most common uses for personal credit cards include: meeting day-to-day operating expenses (63%), expanding the business and pursuing new opportunities (50%), and replacing and/or repairing large, long-lasting business assets (38%).
Cutting communities off from lines of credit at banks, credit cards, or other issuers will only further expose them to predatory lending practices. Payday lending is still authorized in 31 states. The CFPB estimates that 20% of payday loans already end up in default. This shouldn’t come as a surprise, given that the average payday borrowers earn about $30,000 per year, and 58% already have trouble meeting their monthly expenses.
Communities of color are already disproportionately targeted for payday loans. Black Americans make up roughly 13% of the total American population, yet they constitute 23% of all storefront payday loans. In Michigan, where the average payday loan interest rate is 370%, there are 7.6 payday stores for every 100,000 people in areas where the population is more than a quarter Black and Latino. Meanwhile, in Texas, while Black Americans make up roughly 12% of the population, almost 35% of the pictures on payday and title-lender websites were of Black American models.
It’s critical that President Biden and his administration take a closer look at the detrimental impact a short-sighted rule like cutting late fees will have on Black communities in South Carolina and across the country. Changing the institutional practices of banks will subsequently trigger them to change their fees, interest rates, or lending criteria, all of which will mean that credit either becomes more expensive or less available.
Fighting junk fees is a great idea, but it’s important to remember the ramifications of lumping unrelated credit card late fees into the same conversation. We simply can’t afford to further cut communities off from access to credit. It’s time to focus on policies and regulations that lift people up, not hold them back.
Jeremy Jones is the 3rd Vice Chair for the Lexington County Democratic Party. Jeremy is a well-known political activist in South Carolina and has held numerous leadership roles in the SC Democratic party, most recently, he served as the Vice President for the Young Democrats of South Carolina and is a Clyburn Fellow.