Smart Communities: Working Families, Ghetto Taxes, and Predatory Lending

A new report from the Bookings Institution calls attention to a perennial problem – people in lower income brackets often pay more for products and services than others in higher income brackets. Examples abound but the New York Times recently provided some that are typical: higher rates for car insurance, higher interest rates for home loans, not to mention the fact that blue collar workers are most often the target audience for “rent to own” stores where merchandise can be purchased at a low down payment but with high interest rates over a long period of time. With these sorts of strains on their already low income, these folks are most at risk for predatory lending practices.

The Brookings report gives a sense of the extent of these practices, and the impact they have on working families, by noting, “Reducing the costs of living for lower income families by just one percent would add up to over $6.5 billion in new spending power for these families. This would enable lower and modest-income families to save for, and invest in, incoming-growing assets, like homes and retirement savings, or to pay for critical expenses for their children, like education and health care.”

How do we help people who are not savvy consumers due to a lack of proper information? One traditional approach has been consumer education, these efforts are being matched by other institutional attempts to create more competitive marketplaces of goods and services in low-income areas. The Brookings report provides a clear structure in which such efforts can be understood:

• Promoting market opportunities in lower income neighborhoods (e.g. form public-private partnerships to bank the unbanked, develop low-cost insurance pools)
• Curb unscrupulous business practices in the lower income marketplace (e.g. limit development of high-price businesses, accelerate the release of federal tax refunds)
• Promote consumer responsibility and the power of low-income shoppers (e.g. promoting access to online price-lowering tools and financial education, as noted above)

Many of these practices are not new but the Brookings report does a great job of organizing what’s out there, describing some new efforts, and pointing to resources on the web for specific examples and more information. There are also one-page PDFs from particular states with key findings from each. One additional resource of note, our own Solutions for America website has detailed information the predatory lending aspect of this problem.