Subprime Lending and Alternative Financial Service Providers: A Literature Review and Empirical Analysis(March 2006, 186p)
The last two decades have been marked by significant changes in consumer financial services. Two significant changes that have been evident are the rapid growth of both subprime mortgage lending and alternative financial service providers (AFSPs), such as check cashers, payday lenders, and pawnshops. A common concern with both of these industries is high fees for their services and disproportionate targeting of low-income and minority households. Another common element regarding these trends is the variety of studies arguing that the growth in use of these higher-cost financial services in low-income and minority communities is due in part to the absence of banks from these areas. But while much has been written in recent years on the growth of these two segments of the financial services market, there is limited research on the extent to which these phenomena are related. The purpose of this study is to examine subprime lending and the prevalence of AFSPs through a common lens to investigate the extent of similarities and differences in the prevalence of these activities in low-income and minority communities.
This study consists of two parts. The first part presents a review of the literature related to subprime lending and AFSPs. It also examines how regulation of financial services can support or hinder the expansion of access to mortgage capital and basic banking services in low-income and/or minority communities while at the same time providing an appropriate level of consumer protection in these new market segments. The second part of the study presents an empirical analysis of association between neighborhood characteristics (including race-ethnicity, income, and credit risk measures) and the patterns of subprime lending and location of AFSPs and banks in the Dallas metropolitan area.
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