Rapid growth of the “fringe economy”—check-cashers, payday lenders, buy-here-pay-here auto sales, refund anticipation loans, rent-to-own furniture and appliances, auto title loans, and pawnshops—has precipitated a volatile debate about whether such financial services represent an adaptive response to the credit needs of low- and moderate-income families or predatory exploitation of economically hard-pressed consumers.
A review of this sector’s growth and its various financial service offerings suggests that the fringe economy addresses the lack of access to financial services for many poor and working class families; however, their expansion has broader implications not only for income and wealth inequality, but for the provision of social welfare benefits and thus the integrity of the welfare state. These tensions have been particularly exposed during the Great Recession and its aftermath, leading to debates over how policy should help meet the financial service needs of families with lower incomes and fewer resources as well as how to regulate this new market of financial services. The formation of an independent Consumer Financial Protection Bureau (CFPB) in the recent Dodd-Frank financial reform bill creates an immediate regulatory vehicle for intervening in this market and protecting low-income households from exploitive financial products. The policy prescriptions the new CFPB might pursue will vary depending upon the regulator’s conception of the fringe economy, and could contribute significantly to strengthening the delivery of social welfare policies.
Click here to read the entire paper