Growing up in rural East Texas, I thought I knew what poverty looked like -- I certainly didn't know what it cost. You don't unless you are locked in with few ways out and preyed upon by check cashers, payday lenders, pawnshops and rent-to-own bandits.
One doesn't need to read Gary Rivlin's Broke USA: From Pawnshops To Poverty, Inc. -- How The Working Poor Became Big Business /em> to be educated about how expensive being poor in America can be -- just walk into the Fruitvale or West Oakland neighborhoods of Oakland, California, in the San Francisco Bay Area. Or, you can walk down Mission Street in the Mission District or on Market Street in San Francisco and see lots of people lined up in front of payday lenders and check cashers on almost every corner. They are also in almost every American city and accounted for over $113 billion in business nationally in 2007, including check cashing, payday loans, money orders, and money wiring.
All told, $1.6 billion each year of interest, excessive fees, and other exorbitant costs are being charged to poor people every single day, making it almost physically and fiscally impossible for individuals to exit the poverty cycle. Most often, minorities and immigrants, as well as poor whites, are all locked in a financial roundabout in which there is no escape.
Today, the number of private check cashers, payday lenders and pawnshops is more than double the number of McDonald's franchises in the United States. More than 20 million Americans cash more than $60 billion in checks each year at check cashing businesses. Full time workers without a checking account typically pay $40 on average to cash paychecks, while payday lenders sell an additional $40 billion in expensive small-dollar ($300 maximum in California, but higher in other states) loans each year that carry fees 30 times the average credit card rate.
Dan Leibsohn, founder and former Executive Director of the Low Income Investment Fund (formerly the Low Income Housing Fund) may have figured out a way for communities to challenge this bottom-feeding capitalism. Leibsohn's present non-profit, Community Development Finance (CDF), has created a competitive non-profit community check cashing business in the Fruitvale neighborhood of Oakland, which for 16 months has been cutting check cashing costs to about one-third or less compared to other check cashing stores and is now making payday loans at half of the cost that the private sector parasite competitors charge. The non-profit check cashing business is close to being sustainable and is saving the community at an annual rate of over $125,000 in fees. By the end of the year, this savings may exceed an annual rate of $175,000.
CDF's program includes financial coaching and literacy training to assist low income households to increase wealth-building capacity and break the crisis mode of a never-ending need for a financial "fix" at the pay window of a private sector payday lender. Leibsohn calls the financial "habit" a much more personal vicious cycle than drug addiction. In addition, CDF is offering small business services, ties to banks and credit unions, and social service assistance to help people move into the financial mainstream while reducing excessively expensive financial services costs.
CDF's next major task is to increase payday loan accessibility, continue to cut fees for its services, and expand its coaching and other assistance, as well as expand the model beyond Oakland. Community Check Cashing opened in May 2009, right in the middle of the Great Recession, with the help of initial grants from both of the Haas Foundations, Rosenberg, and Casey Foundations. Leibsohn also recently received an award from the Federal Home Loan Bank's AHEAD program. It now serves perhaps 700 to 800 people in the neighborhood that need access to inexpensive financial capital and hopes to reach 1,000 households soon.
CDF's board believes that the Fruitvale model, or variations of this approach, can be successfully replicated in numerous neighborhoods across the country, but first it needs to prove that low-cost check cashing and inexpensive payday loans administered by non-profit community-based organizations can be sustainable following initial donor support. Dan Leibsohn worked for over six years to write a comprehensive business plan, and now needs a few more months and continued community support to make a once viewed long-shot a reality. Once that occurs, CDF would still need annual infusions of support to pay for the non-revenue producing activities.
CDF can be reached at (510) 479-1037 and is near the Fruitvale BART station in Oakland.
John Harrington is a CDF board member and contributor and a Registered Investment Advisor in Northern California.