Advertising Injustices: Marketing Race and Credit in America

• Publication year: 2021

Advertising Injustices: Marketing Race and Credit in America

Jim Hawkins

Tiffany C. Penner

ADVERTISING INJUSTICES: MARKETING RACE AND CREDIT IN AMERICA

Jim Hawkins^* Tiffany C. Penner^**

Abstract

Access to affordable credit played a central role in the Civil Rights Movement. But today, racial and ethnic minorities oversubscribe to high-cost lending products like payday loans and underuse more affordable credit options that traditional banks offer. These trends remain even when controlling for demographic variables like income, credit score, and education. While research verifies that these disparities exist, little work explains why.

This Essay argues that advertising entrenches these racial inequities. Two empirical studies we conducted of advertising by banks and payday lenders suggest that payday lenders steer African Americans and Latinos to their products while banks market to whites. For instance, though African Americans make up only 23% of payday lending customers, 35% of the "model" customers featured in advertising on these lenders' websites depict African Americans. Meanwhile, almost 30% of mainstream bank websites featured no African American models. Almost 75% featured no Latino models. Only 3% did not feature a white model. Even after the outcry over racial injustice in 2020, banks did not appreciably increase the representation of people of color on their websites.

This needs to change. We argue that lenders themselves are the first and simplest source for racial justice in advertising credit. Both payday lenders and banks can easily ensure that their advertising reflects the communities they serve. Congress and the Consumer Financial Protection Bureau also have a role to play. Amendments we propose to the Equal Credit Opportunity Act, the Community Reinvestment Act, and the regulations that implement them call for advertising that welcomes people of color to affordable credit sources.

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Introduction...........................................................................................1621

I. Fringe Banking and Race...........................................................1624

A. Banking on the Fringe ............................................................ 1625
B. Overuse of Fringe Banking by Members of Racial Minority Groups.................................................................................... 1628

II. Advertising Race and Credit....................................................1630

A. Using Websites to Assess Credit Marketing ........................... 1631
B. Methodology ........................................................................... 1636
C. Study Results ........................................................................... 1638
D. The Consequences of Advertising Only Predatory Products to Minority Groups ..................................................................... 1643

III. Advertising Toward Equity......................................................1645

A. Self-Regulation by Banks ........................................................ 1645
B. Legislative/Regulatory Action ................................................ 1647
C. Regulatory Action Under the Community Reinvestment Act .. 1651
D. Too Little to Matter? .............................................................. 1655

Conclusion...............................................................................................1656

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Introduction

Advertising matters for racial justice, and no market reveals this reality more clearly than consumer credit. Lenders offering credit at extremely high prices, such as payday lenders, target members of racial minority groups.¹ African Americans² and Latinos³ use these "fringe banks"⁴ at a disproportionately high rate.⁵ Mainstream banks, however, often omit minorities entirely from their marketing efforts.⁶

Consumer credit played a central role in the civil rights movement.⁷ As credit became more important in society, "access to fair credit emerged as an important

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platform from which to address persistent social and economic inequality."⁸ Sustainable, reasonably priced credit remains essential to modern economic life in America: "The ability to purchase a home depends, for most individuals, on access to credit, as does the ability to purchase a car, to obtain post-secondary education, or to start a business."⁹ In addition to helping acquire assets, credit allows people to deal with uneven income patterns and to survive financial emergencies.¹⁰ Pushing African Americans and Latinos outside mainstream banking services and into high-cost, high-risk products creates a second-class tier of banking.¹¹

America has a long history of economic exploitation of African Americans through slavery, sharecropping, and crop-lien agreements.¹² Lenders historically segregated the market for debt based on race by redlining certain neighborhoods, and the effects of that history remain today.¹³ One result of this segregation is the high use of fringe banks by African Americans.¹⁴

While there is consensus that African Americans and Latinos use fringe banks at a disproportionately high level,¹⁵ researchers have not entirely discovered why. Even after controlling for other socioeconomic factors like wealth, education, and credit scores, economically significant disparities remain between how majority and minority racial groups use credit.¹⁶ Economists have suggested that supply-side factors may provide the explanation.¹⁷ Yet, academics have largely neglected the effects of an important aspect of the credit business—how lenders market credit.¹⁸

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The small body of literature that addresses race and fringe banking almost uniformly overlooks the importance of advertising.¹⁹ Recently, a few papers have empirically assessed the relationship between race and marketing credit, mostly in the context of credit card offers sent through the mail. Examining credit card mailings to households, Song Han and coauthors found that "white consumers are almost three percentage points more likely to receive an offer than otherwise identical nonwhite consumers."²⁰ Simon Firestone's more in-depth analysis of mailings yielded similar findings:

Blacks were approximately 27% less likely to receive offers from credit card lenders during the sample period, even after controlling for variables such as credit history, household income, and local economic conditions. Hispanics were 17% less likely to receive an offer, after including controls. The discrepancy is robust to lender-specific regressions and the inclusion of a large number of explanatory variables.²¹

Despite this preliminary analysis, however, these sources point to the significant need for research into race and marketing credit.²²

This Essay seeks to meet that need. We present evidence from two studies of lenders in Houston, Texas—one of fringe banks and one of mainstream banks. We found that payday and title lending advertising targets African American and Latino customers. For instance, while African Americans make up only 15.6% of auto title lending customers and 23% of payday lending customers, 34.8% of the photographs on these lenders' websites depict African Americans. Similarly, 77.3% of the advertisements at physical locations in our study targeted racial minority groups. However, mainstream banks often focus advertising on

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whites.²³ For example, our review of mainstream lender websites featuring white, African American, and Latino models found that almost 30% featured no African American models. Almost 75% featured no Latino models. In contrast, only 3%—a single bank's website—did not feature a white model.²⁴ Even after the outcry over racial injustice in 2020, banks did not appreciably increase the representation of people of color on their websites. This needs to change.

While other social justice reforms require complicated solutions or deep social and cultural transformations, reforming advertising laws is a relatively simple way to make an immediate and meaningful impact on the economic lives of minorities. Lawmakers have blueprints for stopping discriminatory advertising, but they have simply overlooked these reforms. Advertising that entrenches racial economic subordination needs to end in American credit markets. This Essay proposes two politically appealing ways that lawmakers could ensure more equitable credit markets for all Americans.

Part I introduces the fringe banking industry, including the dangers and drawbacks of the market. It also surveys the evidence that African American and Latino borrowers turn to this industry in greater proportion than other borrowers. Part II argues that advertising steers people of color away from mainstream banking and toward fringe banks. Here we present the methodology and findings of our two studies. Finally, Part III suggests that policymakers, as well as lenders, can change advertising practices to stop overuse of fringe credit by racial minority groups.

I. Fringe Banking and Race

Consumer financial services in America operate in two major segments: mainstream banks and fringe banks. Mainstream banks offer checking and savings accounts, credit cards, and installment loans. While the cost of these services varies, they are relatively inexpensive compared to fringe banks.²⁵

The other segment is fringe banking, a part of the credit market that operates on the margins of what we might consider normal banking practices.²⁶ For many years, people with poor credit, no credit files, or no bank account have turned to fringe banks when they face liquidity crises.

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The first section below provides an overview of the relative harms, costs, and risks of fringe banking, as compared to mainstream banking. The second section explains that minorities disproportionately use fringe banks.

A. Banking on the Fringe

The expression "fringe banking" is somewhat misleading because these institutions are hardly on...