Race, Class, and Representation: The Case of Payday Lending Regulation

• In Event: Economic Segregation, Arrests, and Predatory Lending

Abstract

The fringe economy is a wide-ranging set of financial institutions that extend credit, perform payment services, and provide financing for goods and services to low-income consumers, often at a steep markup compared with more mainstream financial institutions. Payday lenders—who make small-dollar, high-interest loans—make up the largest sector of the fringe economy. While critics vilify payday lenders for draining resources from under-resourced communities, the industry maintains that it provides a necessary service to cash-strapped consumers with few other options.

The regulation of payday loans is hotly debated in state legislatures. Dozens of bills that aim to curb predatory lending practices are introduced each year, but we have no systematic data on who sponsors these bills. While scholars largely agree that aggregate policy outcomes are biased towards affluent and organized interests, they disagree on whether, when, and why individual legislators are responsive to marginalized communities. Understanding who sponsors bills to reform payday lending provides empirical insight into these theoretical questions.

I use spatial data to measure both the prevalence of payday lending storefronts across state legislative districts, and the degree to which these stores are concentrated in minority communities. I find that legislators from high-prevalence districts are significantly more likely to sponsor reform bills than those from low-prevalence districts, and that has a larger impact on sponsorship than party affiliation. I also find that legislators of both parties are more likely to take action on payday loan reform when it is both highly prevalent in their district and more heavily concentrated in Black, rather than White, communities. This research sheds new light on classic theories of representation that explore race and class separately, suggesting that an intersectional focus on both race and class is necessary to understand the representation of marginalized communities.

Author

• Rhea Myerscough, University of California, Berkeley