Horizons Community Blog (Colville, WA)

(Part 2 in a Series)

By Terri Elders

The Aspen Institute Community Strategies Group has identified The Nasty Nine, “a fistful of predatory lending traps that strip cash from hard-working rural families.” These include such practices as check cashing services, buy here/pay here car dealers and “courtesy” overdraft loans.

Until I attended the November training at Cedarbrook Conference Center at SeaTac, with the Colville RuFES team, I assumed most working folks had bank accounts. Then I learned that approximately 28 million people in America have no formal relationship with a mainstream financial institution. That’s right. An estimated one in four low-income families has no checking or savings accounts, nor credit union memberships. So how do they pay bills and cash payroll checks and IRS refunds?

Convenient but Costly Check Cashing

I initially was surprised that leading the list of these nine legal but costly services is check cashing. For most, a bank account is the first step on the road to financial security. I remember feeling grown-up when I finally got my first bank account and wrote my first check. So when I think of people who might not have bank accounts, I think of recent immigrants, college students, or the working poor who hold down two or three jobs to make ends meet.

Today, though, some middle class people have been divorced by their banks. Maybe they once had a checking account, but became overdrawn and could not pay the overdraft fees. Perhaps they earned just enough to cover basic expenses, then got hit with an unexpected emergency, such as tow truck charges when their car got stuck in the snow, or a substantial co-pay for a prescription. These unanticipated events could lead to another overdraft, which in turn could get them blacklisted on the Chex Systems, which is the credit bureau for bank accounts that are overdrawn. Many banks will not open accounts for people who are on this list, which can disenfranchise them for years.

Then there are those, like my Grandpa Louie, whose family lost money in the bank crash of l929, who avoided banks for a lifetime. My family always suspected he stored his cash in cigar boxes in his garage, where of course, it did not draw interest. My late husband, who worked in the gaming industry, where a large percentage of income comes from tips, told me that many of his colleagues in the card rooms confided they were strictly “cash and carry,” and didn’t trust banks.

People unable or unwilling to open a traditional checking account often feel that check cashers are their only option. Many remain open outside regular bank hours, and for some it might be worth the fee on occasion to have immediate access for funds.

But for others who routinely cash checks at a premium, and pay bills in cash or with money orders, and who draw no interest on whatever sayings they accrue, billions of dollars of assts are lost. Amazingly, a recent Brookings Institute study shows that American low-income households without bank accounts spend at least $4 billion on check-cashing and bill-payment services annually.

If check-cashing fees were deposited into a savings account, they could provide the foundation for asset development and goals, such as home ownership, small businesses, and education. By providing a cushion for the unexpected, a savings account can also eliminate the necessity of relying on payday lenders in an emergency.

“Over a lifetime, the average full-time, unbanked worker will spend more than $40,000 just to turn his or her salary into cash,” wrote former President Bill Clinton, a Democrat, and California Governor Arnold Schwarzenegger, a Republican, in a Jan. 24, 2008, Wall Street Journal column on the plight of those living outside the financial mainstream.

Aspen Institute additionally points out many check-cashing services serve as gateways to other predatory transactions such as payday lending.

Possible Solutions:

• Avoid services charging 3% to 7% of check’s face value.
• Find a low-cost checking account or share draft account at a credit union. A good account will be free, with no charges on checks, withdrawals, fund transfers or monthly statements.
• Open a small savings account, and contribute to it regularly.

Buy Here/Pay Here Car Dealers

When I returned after a decade of service overseas with the Peace Corps, I relocated to Little Rock, AR. I had yet to reestablish credit in the US, so bought a ten-year-old Geo Storm from such a dealer. I failed to have it checked by an independent mechanic, and subsequently within a few months spent twice the cost of the vehicle on repairs. Rushed, I simply had not thought it through and fell prey. Fortunately, I had cash reserves to cover the cost of repairs. But many do not.

No credit/Poor credit auto dealers take advantage of those desperate to get a car to drive to work, take the kids to school and for medical visits and shopping. Those living in rural areas where there is no public transportation are particularly vulnerable.

These dealers buy the cheapest cars available at auto auctions and sell them for up to 100% more than they are worth, with high interest/long term financing. Sometimes the down payment the purchaser makes completely covers the dealer’s total investment in the vehicle. Interest rates may begin at 25% APR, and even run much higher. Customers may pay for the car several times over, unlike a conventional car loan.

What is really nefarious is that dealers keep a spare set of keys and repossess the vehicle the night after a payment is missed. Aspen claims the average car is repossessed and resold five times annually.

Possible Solutions:

• Consider mileage and the year of the vehicle. Look for something less than 7 years old, with mileage less than 100,000 miles. Such a car will have 5 to 7 good years of drivability left.
• Find a dealer who can arrange bank financing.
• Find someone to co-sign, if credit is poor.

Consider mileage and the year of the vehicle. Look for something less than 7 years old, with mileage less than 100,000 miles. Such a car will have 5 to 7 good years of drivability left.
Have the vehicle checked out by an independent mechanic.

Courtesy Overdraft Loans

It might sound good at first, an automatic “loan” to honor checks, ATM withdrawals and cash-card transactions. But overdrafts pay off for the banks, not the consumers. When consumers allow an overdraft, it increases the probability of subsequent fees, because consumers have less money to cover other transactions. Subsequently, those with less end up paying more.

Just a few months ago, at the time of my husband’s death, I wrote some checks which I thought would clear the day my SSA direct deposit would be posted. To my surprise, I got hit with a $35 courtesy overdraft. Somehow my mortgage payment check got deducted from my balance before the SSA deposit got credited. At the time, I thought it just a coincidence. Now I am not so certain.

According to Aspen Institute, some banks routinely process courtesy-loan customers’ deposits last, and checks in largest-to-smallest order to maximize customer fees. In 2007 banks charged at least $17.5 billion to issue $15.8 billion in overdraft loans.

Households hit hardest by overdrafts pay an average of $1,374 a year in fees, estimates G. Michael Flores, founder of Bretton Woods, a management advisory firm that works with financial institutions. If consumers overdraw on a $20 debit card transaction, are charged the median fee of $27 and repay the credit in two weeks, they're effectively paying a 3,520% APR, according to the Federal Deposit Insurance Corporation.

President Obama signed legislation this past May limiting certain credit card practices, including rate increases on existing debt. Meanwhile, the Federal Reserve is examining the fairness of certain overdraft practices.

Possible Solutions:

• Read the fine print when opening a checking account with this type of service.
• Create a checking reserve to avoid overdrafts.

Next week: Payday loans, refund anticipation loans and rent-to-own.