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Bank Branches Abandon Poor Communities

This article was written by in Banking. 23 comments.


Whether banks are still dealing with the effects of the 2008 financial crisis, merging with other institutions, or taking advantage of increased automation opportunities, brick and mortar bank branches are closing more frequently than new locations are opening. According to the FDIC, 2010 was the first year in fifteen years that the balance tipped in favor of branch closings.

Most of these closings are taking place in poor communities. With new regulations, it’s more difficult for banks to make money on overdraft fees, and it’s possible that banks in poor communities rely on this type of revenue more than others. Banks are being replaced by payday loan storefronts and check cashing businesses, services that cater to the needs of poor communities, but are more predatory, more expensive, and more financially damaging to consumers and the community in the long run.

Banks face a dilemma. How can they cater to low-income communities while remaining profitable? Most likely more relevant than overdraft fees, in tough financial times, banks that lend money for homes in poor communities may be more likely to need to resort to foreclosure, though a foreclosure heat map from May 2010 shows that foreclosures occur more frequently in areas that have seen bubble-like real estate growth, such as California, Nevada, and Florida.

I’m not sure what the solution should be. Poor communities need financial services. Low-income households need choices other than what payday lenders and check cashing establishments provide. While families can be happy regardless of financial condition, banks should be helping to find innovative ways to increase financial security among the poorest communities.

New York Times

Updated June 18, 2014 and originally published February 24, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 23 comments… read them below or add one }

avatar Ceecee ♦53 (Newbie)

That is surprising…and a bit sad. Check cashing places take advantage. I don’t have an answer.

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avatar cubiclegeoff ♦896 (Dime)

This is not a surprise. Poor communities take the brunt of the pain in regard to many items, healthy food, bank services, mortgages, etc.

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avatar TakeitEZ ♦549 (Dime)

Cubiclegeoff’s comments are spot on.

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avatar tbork84 ♦1,867 (Half-Dollar)

That is a real shame, and its really sad that new legislation has turned the big banks away from some of the people who could most benefit from their services. I would love to see some credit unions move into those areas and offer services to fit the needs of lower income communities, but that may just be wishful thinking.

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avatar SteveDH

The Community Reinvestment Act (CRA, 1977) was enacted to insure banks and thrifts served their communities and prevented redlining of neighborhoods simple because of non-credit related issues. The law is still in effect but the banks can always reject loans applications because of income/credit worthiness. History has shown that loans in lower-income communities performed just as well as other communities when credit worthiness was the basis of the lending. (See Financial Crisis Inquiry Report, January 2011). Merger and Acquisitions approval takes into account an institution’s CRA “performance” but closing locations in these communities can only weaken the effectiveness of the CRA. The seems to be a no-win situation if the banks leave the community and are replaced by “payday loan joints”. Wish I had an answer.

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avatar Jeff

Maybe there are just fewer people with the requisite credit worthiness in lower income neighborhoods? I mean I’m sure there are, but maybe there are so few looking for loans that keeping a branch open isn’t worthwhile.

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avatar shellye ♦107 (Cent)

Cubiclegoff’s comments are spot on, as noted above. Another reason that banks may be closing in poorer communities is that those who live in the poorer communities have little or no understanding in how banks work, and have a great mistrust of the banking industry overall. They’ll pay outrageous check-cashing fees rather than have their paycheck direct deposited into a bank.

Very sad indeed.

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avatar gotr31 ♦224 (Cent)

It is sad, and I don’t think there is an easy answer or solution. Banks are out to make a buck just like anyone else. Our whole society has become less and less conscientious as time goes on.

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avatar krantcents

This will create a vacuum, where the Shylock banks, Title lenders, and check cashing companies will come in. Here comes the high interest rates! Many of the lower priced chains such as supermarket avoid the poorest neighborhoods, that is one of the reasons for higher prices. No competition.

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avatar Apex ♦478 (Nickel)

“banks should be helping to find innovative ways to increase financial security among the poorest communities.”

This is wrong. If someone wants to make that their charity mission that is fine but banks are not charities. Banks should find innovative ways to be profitable. Apparently very few of them are having any success doing that in poor neighborhoods. If there is money to be made there someone will come in and do it. If the payday lenders are the only ones who can do it then either there are forces keeping other options out or those are the only type of financial services that are currently considered profitable in those neighborhoods.

The truth can be uncomfortable for a lot of people and we want to believe that poor people just need a little break and then they can get up on their feet and get their finances on solid ground. The housing bubble is proof of the exact opposite. There is blame to go around in the housing bubble like crazy starting with the stupid bankers. But the crux of the problem was lending money to poor credit risks and selling the packaged debt as if it was high quality debt. This fueled house price increases and speculation which led into riskier and riskier mortgage products until even people with good credit were bad credit risks due to the amount of borrowing and the terms they had agreed to.

Poor credit risks are poor credit risks. They need to be charged higher interest rates and flat out denied for many types of loans. Anything other than that is either courting disaster or is a giant subsidy. The housing bubble turned out to be both.

Poor neighborhoods have poorer credit as a whole. Banks in their current tight lending standards are going to find almost no one in those neighborhoods to have a credit history that they would lend to. I think banks current stance is much closer to what it should always have been than what they got to during the housing bubble.

Credit standards will loosen up eventually but banks have no obligation to lend to people because they are poor. Welfare is handled by the government, not the banks.

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avatar SteveDH

“Credit standards will loosen up eventually but banks have no obligation to lend to people because they are poor.”
Yes & no. The CRA REQUIRES banks to lend in poor neighborhoods without charging higher fees. This law does not require the banks to lend to the uncreditworthy, but it prevents them from basing lending decisions differnetly by neighborhood. Being poor is relative – being able and likely to pay back a mortgage or car loan has nothing to do with being poor and everything to do with being honest. They are not required to lend because the people are poor but they are obligated to lend even though the people are poor.

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avatar Evan

Amen Apex!

Banks are a business and if there is little to no demand in a particular neighborhood then they shouldn’t have to/choose to operate there.

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avatar Rassah

Brick & Mortar bank? I don’t think I’ve been to one in a very long while. We have web banking, VISA check/credit cards, and automated ATMs. Even when opening a HELOC just last month, I have never seen the bank or the person I was dealing with. It was all done through Lendingtree, e-mail, and snailmail. At this point, the only reason I see for brick&mortar banks to exist in the poor towns, such as where my in-laws live, is because old folks don’t want to learn how to do this stuff on computers.

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avatar Barb Friedberg

Flexo, You hit on a very important subject. I’m as Capitalistic as the next person, but I am distressed to see such a callous tone in some of the commenters. Charging a large fee (percentage wise) to cash a check is abusive of the lower income folks, many of whom lack appropriate models or teachers to assist them in negotiating the financial world. There has to be a better way to teach financial literacy to the underserved and promote low cost/fee banking in lieu of expensive check cashing alternatives.

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avatar Ridwan ♦295 (Nickel)

I don’t know why schools don’t teach financial literacy. It’s such an important life skill. Financially responsible and savvy parents will teach their kids, but not every child is so lucky.

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avatar Apex ♦478 (Nickel)

I doubt any of the commenters disagree with your comment. I certainly don’t. It’s just that it is not the banks responsibility to teach people to be responsible or to try to ensure they are. And by not offering a service because it’s not profitable and thus making the payday lenders have a better market there that is not the banks responsibility either. They are not obligated to continue to offer a service at no profit or a loss just to keep more shady elements from moving in.

Solutions may be available but it is no responsibility of the banks.

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avatar Barb Friedberg

My question is why the banks are “really” leaving lower ses areas.I agree that banks are not social service agencies, but I wonder if there are broader issues wrt to their exit. Furthermore, if the banks offered more financial education, they would be helping their customers and potential customers build wealth for themselves and the bank!

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avatar Apex ♦478 (Nickel)

I don’t defend the banks because I think they are great. In fact, your last comment I think is not true and the banks are happy to exploit that. Since the advent of the credit card banks actually benefit by consumers being financially stupid because then they can charge them 20% interest. If all consumers were financially responsible and did not spend money they did not have and thus did not pay credit card interest, banks would make a lot less money. Banks want financially illiterate customers who have a good enough income source to keep paying the bills. Poor people may not actually be any more financially illiterate than the rest of us, they just lack the resources to pay the bills so the banks are not interested in them. Who they really want are financially stupid customers who make a good wage. Notice how banks are always sending out deals to write checks on your credit card or to transfer in balances. If your credit is sound they want you to take on as much high interest debt as you can possible carry.

No, I don’t want financially literacy coming from the banks. They cannot be trusted with that responsibility.

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avatar Cejay ♦1,521 (Half-Dollar)

Some great comments. Like others I am not sure what the answer is. Maybe, people need to step up to help others and then the ones that received the help pay it back and pay it forward. I know that I am probably a dreamer but that would be a great solution.

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avatar faithfueledbennetts ♦264 (Nickel)

I live in the sticks in TN, about 45 minutes outside of Nashville. I work in a great suburb of Nashville but am surrounded by LOTS of poor little towns like you mentioned. I think it is sad. Just driving through, seeing the lack of opportunity for business is very evident. I have never thought about the resident’s banking options but for many, I would guess they just stick money in a jar. If there is not much opportunity for employment in a town, I suppose banks do not have much room for success either.

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avatar skylog ♦368 (Nickel)

i do not find this surprising in any way, but that does not change the fact that it is unfortunate. i agree flexo, i have no idea what the solution is, or, to be honest, if there even is a solution.

while many advances in technology make certain tasks easier for a large percentage of the population, it does widen the gap for those who do have the said technology. the problem worsens as physical branches are not needed in such high numbers. it is hard to blame the banks in this case, they are a business, and if they can not reach their goals as a company in a certain area, they do not have much choice but to close the worst performing branches.

lastly, as others have stated, i feel that many personal financial problems that indivudials are suffering from in this country could be avoided with some teaching of basic concepts in school. it still baffles me how little is taught.

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avatar eric ♦1,549 (Half-Dollar)

Interesting news but very sad nonetheless. Poorer families are preyed upon by payday lenders already so having better options going away will probably make it worse.

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avatar wylerassociate ♦162 (Cent)

it is sad and unfortunately as those have stated already. I don’t know what the solution is.

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