UC Berkeley

The fringe credit industry offers high-cost credit products like payday and auto-title loans to a largely poor and non-white clientele. These products provide a way to meet pressing financial needs in the absence of other resources or options. However, due to the structure and fees often associated with these products, borrowers frequently experience extended indebtedness that reproduces financial insecurity and exacerbates existing racial wealth inequalities. The fringe credit industry has far fewer resources than the Big Businesses we typically think of as having captured policy. And they face organized opposition—a coalition of national and state consumer advocacy groups has lobbied to shut down the industry for decades. Further, this policy issue is not starkly polarized like so much of American politics. Rather, a majority of both Democratic and Republican voters support greater regulation, and Republican legislators frequently champion banning the industry. Yet, across the states, the fringe credit industry remains largely unregulated. How does the industry thwart unwanted regulation? And when do states succeed at passing regulation opposed by the industry?

I find that the fringe credit industry is successful because of its influence over consumers rather than legislators. I argue that the fringe credit industry is a predatory industry – a distinct type of industry that provides low-quality versions of necessary services to marginalized consumers who have few alternatives. I contend that these features of the industry shape how it influences policy and, in turn, shape the policymaking dynamics around this issue. Core consumers see this industry as predatory but also necessary, and due to their lack of alternatives, the industry can mobilize them against legislative efforts to regulate. Further, core consumers are disproportionately low-income and non-white, and the industry is geographically concentrated because of the persistent segregation of these groups. As a result there are few legislators for whom this issue is salient, and the industry can focus its relatively limited instrumental resources to dissuade them from sponsoring bills to regulate. Finally, I demonstrate that this equilibrium is likely to change only when more privileged consumers accustomed to better financial options are exposed to the industry and put pressure on a broader set of legislators to pursue regulation. As the power of this industry comes from the vulnerability of its core consumers, the persistence of predatory industries is best addressed by building better alternatives for those who rely on these costly services.