Making nice with the loan sharks: payday lenders thrive because big banks won't serve the poor, but that doesn't excuse their predatory practices.

• Author: Colarusso, Laura
• Position: The Unbanking of America: How the New Middle Class Survives - Book review

The Unbanking of America: How the New Middle Class Survives

by Lisa Servon

Houghton Mifflin Harcourt, 272 pp.

On November 8, South Dakota approved a ballot measure that prohibits payday lenders and other small-dollar loan makers from charging an annual interest rate of more than 36 percent. It was a rare moment of bipartisanship in an otherwise ugly election season. Democrats, Republicans, and faith leaders from across the state came together to support the regulation, which passed with about 75 percent of the vote. The result marked the fourth time in eight years that a state chose to rein in usurious lending practices through the ballot box.

For some time now, public sentiment toward these high-interest, short-term loans has been souring. In March 2015, President Obama called for cracking down on payday lenders because they trap "hardworking Americans into a vicious cycle of debt." Four months later, the Pentagon imposed a rate cap of 36 percent on firms that lend money to service members. The Consumer Financial Protection Bureau (CFPB), the agency created as part of the Dodd-Frank reform act and tasked with protecting against deceptive business practices, has also proposed rules to ensure that creditors are vetting whether their customers have the ability to settle their balances. But in her new book, The Unbanking of America: How the New Middle Class Survives, Lisa Servon asks that we consider a different perspective. She argues that payday lenders and other alternative financial institutions like check-cashing companies serve a "logical, albeit expensive" purpose for those that don't trust or even have access to banks. And the people who opt for the former over the latter are often making a rational choice, no matter how predatory the terms of use.

Servon, a professor of city and regional planning at the University of Pennsylvania, contends that decades of consolidation within the banking industry have led to a system that is sclerotic and unresponsive to the needs of millions of Americans. Gone are the days when parents would take their children to the local community savings and loan to start putting their allowance away for a rainy day. Four commercial banks--Chase, Wells Fargo, Bank of America, and Citi--together hold about $7 trillion in assets, or 44 percent of the industry's total. Despite the efforts of the CFPB, these organizations have faced no real consequences for their worst abuses, according to Servon. "It's become easier...