Predatory Profiling: The Role of Race and Ethnicity in the Location of Payday Lenders in California

Abstract

In California and elsewhere, African Americans and Latinos have been found to make up a disproportionate share of payday loan borrowers. This paper evaluates whether and why the relative concentration of African American and Latino households is a factor that influences the location and clustering of payday lending storefront locations. We first examine the location of payday lenders, comparing their proximity to, and concentration in, African American and Latino communities relative to neighborhoods made up of primarily white households. To determine if payday lenders are serving areas that banks have neglected, we perform this same analysis on bank branch locations, incorporating neighborhood race and ethnicity to determine whether banks appear to be systematically under-serving such areas. Next, we determine the key factors explaining the location of mainstream financial institutions and see whether payday lenders follow the same location model, or if different factors better explain where they locate. A regression analysis is performed to isolate the effects of racial and ethnic composition from other variables.

Our analysis reveals that payday lending storefronts are most heavily concentrated in African American and Latino communities in California, even when controlling for other factors which may influence a payday lender's location such as household income. In addition, we find that the racial and ethnic composition of a neighborhood is the primary predictor of payday lending locations in our model. This finding differs with an analysis of mainstream financial institutions such as banks, where the primary explanatory factors of location are not tied to race or ethnicity. We conclude with a discussion of the possible factors that allow payday lenders to flourish even in the presence of mainstream banking alternatives. In part, we hypothesize that the payday lending industry exploits the preferences and fears of “underbanked” African American and Latino households.

Keywords: payday lending, access to credit, California, alternative financial services, racial disparities