the high price of being poor in kentucky - brookings · the brookings institution metropolitan...

T h e B r o o k i n g s I n s t i t u t i o n M e t r o p o l i t a n P o l i c y P r o g r a m

THE HIGH PRICE

of BEING POOR

in KENTUCKYH o w t o P u t t h e M a r k e t t o Wo r k f o r K e n t u c k y ’s L o w e r - I n c o m e Fa m i l i e s

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Contents

ACKNOWLEDGMENTS ...........................................................................3

EXECUTIVE SUMMARY...........................................................................4

INTRODUCTION ......................................................................................9

METHODOLOGY: MEASURING THE HIGH PRICE OF BEING POOR IN KENTUCKY ........................................................11

Basic Financial Services ....................................................................11Transportation ...................................................................................12Housing .............................................................................................12Groceries ............................................................................................13Lower-Income Families Defined.........................................................13The Survey of Kentucky Consumers...................................................13

FINDINGS: LOWER-INCOME CONSUMERS IN KENTUCKY FACE HIGHER PRICES..........................................................................14

I. Basic Financial Services..................................................................14II. Cars ..............................................................................................21III. Homes .........................................................................................25IV. Groceries ......................................................................................30

SOLUTIONS: REDUCING THE HIGH PRICE OF BEING POOR IN KENTUCKY ........................................................................................33

Goal One: Promote Market-Based Solutions......................................35Goal Two: Curb Unscrupulous Practices ...........................................38Goal Three: Promote Financial Responsibility ...................................41

APPENDIX...............................................................................................43Kentucky Consumer Survey Results ...................................................43

ENDNOTES.............................................................................................46

The Brookings Institution © 2007

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First, we would like to thank theAnnie E. Casey Foundation, whomade this report possible. In partic-ular, we would like to thank BonnieHoward, Jane Walsh, DanaJackson, Sammy Moon, andCarolyn Gatz, who provided criticalguidance to us during this project.We would also like to thank DougNelson and Ralph Smith. Theirwork on the “high costs of beingpoor” provided the intellectualfoundation for our analysis. Here,we focus on just one cost of beingpoor—the higher prices lower-income families in Kentucky payfor basic necessities. Their workexplores numerous other types ofhigher costs of being poor, includ-ing the out-of-reach prices lower-income families face for somenecessities, the benefits they loseby working, and the higher burdenthey manage to pay for many typesof basic necessities. The range ofthese higher costs of being poor areexplored in numerous essays,including a 2003 Kids Count essaytitled “The High Costs of BeingPoor: Another Perspective onHelping Lower-income FamiliesGet By and Get Ahead.”

We would also like to thanknumerous people in Kentucky whoprovided us with critical feedbackand insight, including: BruceTraughber, Cathy Hinko, DeVoneHolt, Julia Inman, Maria GerwingHampton, Lisa Locke, RosanneKruzich, Ron Jackson, Dr. AdewaleTroutman, Lauri Andress, MaryGwen Wheeler, Bill Shreck, StevePence, James Clay Smith, SteveTrager, Rodney Berry, KeithSanders, Blake Haselton, CritLuallen, Tom Emberton, DavidAdkinson, and Ed Monahan.

We also want to thank the hun-dreds of families that took time totalk with us about their experienceswith high-cost goods and servicesand the challenges they face raisingfamilies on low incomes. With theirinput, we were better able to inter-pret meaning from the quantitativedata at the center of this report.

Matt Fellowes is a fellow at theBrookings Institution; Terry Brooksis the executive director of theKentucky Youth Advocates; ValerieSalley is a Kentucky-based policyanalyst; and Mia Mabanta is a senior research assistant at theBrookings Institution. This report isbased on Fellowes’ 2006 Brookingsreport From Poverty, Opportunity,which is available at http://www.brookings.edu/metro/pubs/20060718_povop.htm.

The responsibility for the con-tents of this report is ours alone.

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Acknowledgments

We are profoundly grateful to the many people who

shared their expertise, insight, and resources with

us while we prepared this report.

Note: The views expressed here do not necessarily reflect those of thetrustees, officers, or staff members of the Brookings Institution, the boardsor staff of the Annie E. Casey Foundation, or any of the leaders inKentucky who we consulted during the development of this report.

Higher prices start with themorning drive to work: Lower-income workers in Kentucky (thoseearning less than $20,000 peryear) are more likely to pay aboveaverage rates for auto loans, paynearly $400 more for car insur-ance, and pay a higher stickerprice for their car than theirhigher-income counterparts. Thosewho leave for work from a homethey own are twice as likely to havea high-cost mortgage as are theirhigher-income neighbors, oftencosting thousands of dollars moreover the life of the loan. On theway back from work, more lower-income workers use nontraditionalfinancial services, paying higherfees for cashing a check or takingout a short-term loan. Takentogether, these higher prices addup to hundreds, sometimes thou-sands, of dollars in extra costs foralready tight family budgets.

The good news is that state andlocal leaders around the countryare rallying behind new, innovative,practical, and low-cost initiatives tolower these prices. With these andother initiatives as models for

action, public and private leaders inKentucky can now also reducethese higher costs of living, and doso in ways that defy the substantialbudgetary, economic, and partisanpressures that limit so many effortsto grow the middle class. Througha combination of initiatives thatlower business costs, curbunscrupulous behavior, and boostconsumer knowledge, public andprivate leaders can bring downthese prices.

This report is a roadmap for howto reach this goal and improve thespending power and economicsecurity of lower-incomeKentuckians. In short, we find:

Kentucky’s lower-income familiestend to pay higher than averageprices than other consumers forbasic necessitiesDepending on where lower-incomeconsumers live and what combina-tion of necessities are consumed,lower-income families can pay up tothousands of dollars more thanhigher-income consumers everyyear for basic financial services,cars, car loans, car insurance, home

insurance, home loans, furniture,appliances, electronics, and otherbasic necessities. In particular:

■ Cashing Checks: According toour survey, about 35 percent ofregular customers of high-costcheck-cashing establishmentsin Kentucky earn less than$20,000 annually, and about62 percent earn less than$40,000. Unlike most otherstates, Kentucky places no lim-its on the fees that establish-ments can charge for checkcashing. A random survey ofsuch establishments inKentucky found that fees tocash a check range from 1 to10 percent of the face value ofa check.

■ Short-Term Loans: Nearly 70percent of regular customers ofhigh-cost payday loan andpawnshops in Kentucky arelower-income residents. InKentucky, maximum fees forthese loans are $15 every twoweeks on a $100 loan, or a rate38 times higher than thatcharged by the average creditcard company for the same

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Executive Summary

From Ashland to Paducah and every community in

between, Kentucky’s lower-income working families often

pay a premium for goods and services, making it difficult

for them to build wealth, save for their children’s futures, and

invest in their upward mobility.

loan amount. Among Southernand border states, such feesrange from zero (in Georgia,Maryland, North Carolina, andWest Virginia, where thisindustry is banned) to 17 per-cent of a loan’s value or higherin Alabama and Mississippi.The number of high-cost pay-day lenders in Kentucky hasmore than doubled since 1999,from 353 to 779 establish-ments, opening at a rate of oneevery four days in 2006.

Kentucky pawnshop fees,another source of high-costloans in lower-income markets,are limited to 22 percent permonth. Fees for pawnshops inother Southern states rangefrom no limit (in Arkansas,Maryland, and West Virginia)to 20 percent or more (innearly every other state in theregion).

■ Tax Services: According to oursurvey of Kentucky households,about one in three lower-income households pays a for-profit tax preparation service todo their taxes. These samelower-income households aretwo to six times more likely asall others to use refund antici-pation loans, carrying fees thatgenerally range between $10and $80.1

■ Car Prices: More than 72 per-cent of lower-income house-holds in Kentucky own a car.Nationwide, consumers fromlower-income neighborhoodspay up to $500 more, on aver-age, to buy the same car that a consumer from a higher-income neighborhood buys.

■ Car Loans: Nationwide, lower-income consumers pay at least2 percentage points more foran auto loan than the averageamong all other consumers. NoKentucky data are currentlyavailable to measure auto loansprices in the state.

■ Car Insurance: In a sample ofprices from three insurancecompanies, drivers from lower-income Kentucky counties andneighborhoods pay, on average,$384 more per year for autoinsurance than drivers in high-income neighborhoods, holdingother factors constant. Thehighest fees are charged inlower-income neighborhoods inLouisville and in many ofKentucky’s rural eastern coun-ties. Prices may be even higherbecause of other factors—con-sidered by some companies inthe calculation of insuranceprices—that are correlated withhousehold income, like creditreport information, educational

attainment, and occupation.■ Home Loans: In 2005, 41 per-

cent of the mortgages to lower-income households inKentucky were defined by theFederal Reserve as high-costmortgages, compared with just16 percent of mortgages sold tothe highest-income householdsin the state.

■ Home Insurance: In a sampleof prices from three insurancecompanies, homeowners inKentucky’s lower-incomeneighborhoods pay, on average,at least $363 more annually forhome insurance than home-owners in high-income neigh-borhoods, holding other factorsconstant. Prices may be evenhigher because of other fac-tors—considered by some com-panies in the calculation ofinsurance prices—that are cor-related with household income,like credit report information,educational attainment, andoccupation.

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■ Furniture, Appliances, andElectronics: Fifty-nine percentof rent-to-own customers earnless than $25,000 a year.Reported prices for buyingfrom rent-to-own businessescan double the price of a product.

■ Groceries: While smaller, andoften more expensive, grocerystores are generally found inLouisville and Lexington’slower-income neighborhoods,the statewide picture inKentucky is quite different. In fact, large grocery stores,which typically offer lowerprices, are present in 35 per-cent of lower-income neighborhoods, while amongthe highest-income neighbor-hoods, only 19 percent havelarge stores.

Kentucky has made substantialinvestments in helping to boostthe income of lower-incomeworkers, but it has done little toaddress problems on the otherside of a family’s ledgerChronicled in the Governor’sSummit on Quality of Life report,Kentucky is already moving forward

on many fronts to reduce povertyby increasing educational attain-ment, creating job opportunities,and making work pay.2 State law-makers have heavily invested in thequality of education, both at the K-12 and postsecondary levels. TheKentucky Housing Trust Fund isone of several initiatives to buildwealth among lower-income fami-lies. Statewide outreach to increaseparticipation in programs such asthe federal Earned Income TaxCredit (EITC) have ensured thatmillions of dollars are returned toKentucky’s families and likely spentin the local economy. These efforts,along with other well-establishedstate and federal initiatives, arecentral to helping lower-incomeworkers move up the economic lad-der and join the middle class.

Yet, Kentucky still stands out forits low wages and very high povertyrates. According to the most recentcensus data, Kentucky has the sixthlowest median income in the coun-try, the fourth highest poverty rate,and the eighth highest childpoverty rates. What’s more, theAppalachian region of the state isamong the poorest areas incountry.3 Thus, although progress

has been made, much more isneeded.

Among the reasons why povertyin Kentucky has persisted despitethe state’s antipoverty investmentsis that Kentucky, like most otherstates, has focused almost all of itsantipoverty investments on strate-gies to boost the income of thepoor. That emphasis makes sense tosome extent: Without risingincomes, no one can move up theincome ladder. But, earnings andassets represent only one side ofthe family budget ledger. In fact,the spending side—the cost of liv-ing—is also an obstacle to upwardmobility. Higher prices for basicnecessities diminish the ability ofearnings to foster economic mobil-ity by thwarting efforts to save andinvest in their children, education,homeownership, and retirement.Higher costs of living also erodethe impact of investments in thepoor by making these programsmore costly than they need to beand preventing more people fromclimbing up the rungs of the eco-nomic ladder.

In fact, some of the highestprices for basic necessities inKentucky are in its poorest areas,

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including the Appalachian region,where everything from mortgages toinsurance is comparably moreexpensive than in most other areasof the state. Faced with thesehigher prices, a dollar earned bythese families does less to helpthem get ahead than if it wereearned by someone with a higherincome.

Kentucky can lower these higherprices and do so in ways that defythe traditional politics and fiscalcosts of initiatives that focus onboosting the income of Kentucky’spoor families. The poor do notneed to pay more.

The moment is ripe for publicand private leaders to reduceboth real and perceived highercosts of doing business withlower-income consumers, curbmarket abuses that inflate prices,and invest in consumer education State and local leaders and theirprivate-sector partners should enactreforms that reduce the unneces-sary cost burdens faced by thesesame families. Specifically:

■ Public and private leadersshould lower real and per-ceived roadblocks to doingbusiness with lower-incomemarkets by promoting mar-ket-based solutions.Businesses will respond toprofitable opportunities toengage lower-income con-sumers and in doing so createmore options for these familiesto lower their costs and getahead. Engaging the businesscommunity should occur inconcert with community out-reach to help promote main-stream businesses among

lower-income households inKentucky.

■ Public and private leadersshould weed out high-pricedbusinesses in lower-incomeneighborhoods. At the locallevel, leaders can use theirlicensing and zoning authorityto curb the development ofthese businesses. At the statelevel, leaders can enact stricterregulations as well—as long asthere are responsible main-stream alternatives in place.

■ Public and private leadersshould help consumers navi-gate the complex choices intoday’s market. Ultimately,consumers must be able to

make smart bets on gettingahead, which requires consid-erable consumer savvy amid anincreasingly complex market.Among the many choices con-sumers now face are hundredsof different mortgage products,dozens of mortgage and insur-ance companies, new breeds offinancial services, and thegrowing importance of creditreports and scores. To increaseconsumer awareness,Kentucky’s leaders shouldexpand access to the Internet(with its wealth of consumer

information) among lower-income families (64 percent ofKentucky’s lower-income con-sumers lack such access cur-rently). Kentucky’s public andprivate leaders also shouldbuild on financial educationinvestments by a) evaluatingthe gaps in financial educationdelivery in their jurisdictions;b) using best practices to fillthose gaps; and c) establishinga method for measuring theimpact of investments in finan-cial education. ■

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Among the reasons why poverty in Kentuckyhas persisted despite the state’s antipovertyinvestments is that Kentucky, like most otherstates, has focused almost all of its antipovertyinvestments on strategies to boost the incomeof the poor.

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Over the past decade, sweepingeconomic, market, and policychanges in Kentucky all interactedto increase the market demandamong lower-income consumers forbasic necessities. Most importantly,a growing economy over the lastdecade, combined with major wel-fare reform that tied benefits tonew work requirements, sent thou-sands of lower-income families intoKentucky’s labor force.6 In turn,this spurred new demand for all ofthe many necessities tied to work,including cars to get to a job,houses to invest new paychecks in,and financial services to save for,buy, and protect assets.

As demand increased for thesenecessities, the supply side of thismarket too underwent significantchange. While mainstream busi-nesses often missed this opportu-nity to respond to surging demand,numerous higher-priced alternativebusinesses did. Over the pastdecade, for instance, hundreds ofhigh-priced non-bank financialservices storefronts have popped upin Kentucky to meet rising demandamong lower-income householdsfor check cashing, short-term loans,tax preparation, and money wiringservices.7

At the same time, the growinguse of risk-based pricing helpedopen up numerous lower-incomecredit markets once eschewed bybusinesses, and greatly increasedlower-income consumers’ access toa host of credit products, fromcredit cards to mortgages.8

But, as demand for and the sup-ply of necessities expanded inKentucky’s lower-income markets,many of these new lower-incomecustomers were participating in amarketplace without sound options.Bank accounts with high minimumbalance requirements and overdraftfees, for instance, are often notsensible for lower-income workers.

In addition, these lower-incomeconsumers were new (often the firstgeneration in their family to own ahome or have a car loan) to many ofthese markets, such as mortgagesand insurance, leaving many ofthem vulnerable to unscrupulouspractices. That is reflected by thefact that Kentucky’s lower-incomeconsumers are comparatively lessinformed when they enter intothese transactions. Only 30 percentof lower-income families inKentucky, for example, have a solidunderstanding of credit scores andtheir importance to access and pric-

ing. Similarly, only about 15 percentof Kentucky’s lower-income house-holds shop and compare when theybuy mortgages, and only about one-half shop around when buying cars.

The result is that today lower-income families in Kentucky areoften paying more for basic neces-sities than their higher-incomeneighbors, which impedes theirability to get ahead while also hold-ing back economic growth in thestate. This report examines theprices charged to lower-incomefamilies in Kentucky for basicnecessities: financial services, auto-related products, home financingand household goods, and gro-ceries. These products account forapproximately 70 percent of a typi-cal household budget.9

On the basis of this analysis, ourbottom line is clear: for a widerange of goods and services, lower-income families pay more.However, leaders in Kentucky havea range of low-cost, practical,bipartisan, and proven strategies forlowering these higher prices, oftenin ways that stimulate marketopportunities for Kentucky’s main-stream businesses.10 ■

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Introduction

Lower-income families in Kentucky often pay hundreds, some-

times thousands, of dollars more in higher prices for basic

necessities than their higher-income neighbors.4 Although

not a new problem, the costs today are much greater in scope.5

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We analyzed three basicfinancial services:check cashing, short-

term loans, and tax preparation.12

To determine how much consumerstypically pay for these services, weused five major sources of data.The first is the 2004 Survey ofConsumer Finances (SCF) admin-istered by the Federal Reserve. Thissurvey estimates the proportion ofhouseholds in different incomegroups that use mainstream bank-ing services, such as banks and

credit unions. The survey is con-ducted every three years and wasbased in 2004 on interviews with4,522 families.13 The second sourceis a survey we commissioned,which is described in more detailbelow. The third data source isinformation collected from bankingregulators in Kentucky and else-where in the country.

Our fourth source of data isFederal Deposit InsuranceCorporation (FDIC) records ofbank branch locations. We supple-mented these data with informationon non-bank financial services inKentucky obtained from a direct

data request of the Kentucky Officeof Financial Institutions. We alsopurchased data on credit unionsand other basic financial serviceproviders maintained by InfoUSA, a private data vendor. In total, weexamined information on 2,963providers of basic financial services,from mainstream banks and creditunions to nontraditional financialservices, such as check-cashingestablishments, payday lenders, andpawnshops. We then used Census2000 data to estimate the medianincome in the neighborhood whereeach establishment is located.

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M E T H O D O L O G Y :

Measuring the

High Price of Being

Poor in Kentucky

We use state and local consumer data from all 120 of

Kentucky’s counties, supplementing, where neces-

sary, with national data (for more detail on data

sources, see below). Where data are unavailable for individual

consumers, we rely on neighborhood, county, or ZIP code data.

Unfortunately, no comparative data were available for other goods

and services than those outlined below, such as health care, enter-

tainment, apparel, and personal insurance.11

Basic Financial Services

In Kentucky, approximately 72 percent of lower-incomehouseholds own at least one

car. We focus on three types ofcosts associated with automobileownership, including the purchaseprice of the car, the cost of a loan,and the cost of car insurance.14

To gauge purchase price differ-ences, we rely on Scott Morton,Zettelmeyer, and Silva-Risso’smodel that estimates the independ-ent effect of a buyer’s income onthe price paid for a car.15 Using aunique national database of morethan 650,000 car purchases, theseresearchers developed a uniquemodel to control for more than twodozen factors that might influ-ence the price that differentcustomers pay for the sameautomobile, including race-ethnicity, educational attain-ment, renter status, andneighborhood income.16 Usingthis model, we can estimatethe average mark-up fee driversfrom lower-income neighborhoods typically pay.

To assess what different house-holds pay to borrow the sameamount of money for an auto loan,we again use the 2004 SCF.17 Wealso analyze the price of insuringthe exact same car and driver indifferent parts of state. On thewebsites of three large insurers inthe state—Geico, Allstate, andProgressive, which togetheraccount for about 23 percent ofthe national auto insurance mar-ket—we entered a similar profile ofa car and driver and obtained autoinsurance premium quotes for theminimum amount of legally

required insurance.18 To generateas conservative an estimate as pos-sible, we selected an optimal set ofcharacteristics for the driver: 35years old, married, with a cleandriving record, a short (five-mile)daily commute to work, and lim-ited annual mileage (between10,000 and 15,000 miles). The carwas a five-year-old Ford Taurus,which is approximately equal invalue to the median value of auto-mobiles owned by individuals inthe lowest income quintile, accord-ing to the 2004 SCF.

We entered this car and driverprofile for every ZIP code in thestate. With this data, we then usedthe Census 2000 survey to estimatethe median income in each of these

ZIP codes.19 In this way, we wereable to analyze the relationshipbetween neighborhood income andthe price of auto insurance.

The analysis is not without limi-tations. It does not, for example,account for the credit or insurancescore of the driver and the role thatthis information can play in shap-ing auto insurance premiums.20 Theanalysis also omits several factorscommonly believed to raise theprice of auto insurance for lower-income drivers, including the dri-ver’s occupation and educationalattainment.21 Stronger disclosurelaws in Kentucky would make suchan analysis possible.

Our analysis of housingcosts includes prices paidfor mortgages, home

insurance, and furniture and appli-ances. Although this does notexhaust the list of important hous-ing-related costs—such as mainte-nance, rent, and property taxes—nodata suggest that prices for any ofthese necessities are higher forlower-income families than otherhouseholds in Kentucky.22

To examine how mortgage pricesvary by household income, welooked at two data sets. The first isthe 2004 SCF. These data allow usto compare how the typical amountborrowed and the typical rate

charged for mortgages vary acrossdifferent income categories.

We supplemented this analysiswith data from the 2006 HomeMortgage Disclosure Act (HMDA),which provides information on alarge share of mortgages originatedin the state. These data flag high-priced loans, defined by the FederalReserve Board as those with anannual percentage rate (APR) of 3percentage points above compara-ble Treasury notes for first liens,and 5 percentage points above forjunior liens. The Federal ReserveBoard estimates that this definitioncaptures more than 95 percent ofthe subprime market. Recent com-

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Transportation Housing

In this study, we define lower-income neighborhoodsas any census tract in Kentucky whose medianincome is lower than 80 percent of all other censustracts in the country.

parisons with private data, however,suggest that the board’s definitionof “high cost” captures a substan-tially smaller share of the subprimemarket.24

To analyze the price of homeinsurance, we used a method simi-lar to that described above for autoinsurance. To assess the price offurniture and appliances, we usedtwo different resources. The first issurvey data collected by the FederalTrade Commission, which analyzedvarious characteristics associatedwith 12,000 customers of rent-to-own stores.25 The second resourceis the InfoUSA database describedabove. Using these data, we wereable to build a profile of rent-to-own customers, while also illustrat-ing where these establishments aregeographically concentrated, bymedian household income, acrossKentucky.

Unfortunately, we were notable to directly assess theprice of food at different

stores across the state.26 However,because store size is strongly corre-lated with the price of products, wecan make inferences about pricesbased on store size.27 To do this, werelied on a comprehensive data-base—maintained by TDLinx—ofall grocery stores in Kentucky, from“mom-and-pop” corner stores toWal-Mart—in other words, a verydiverse group of stores. This data-base contains information abouteach establishment’s location, size,and annual revenue.

Lower-Income Families DefinedIn this study, we define lower-income neighborhoods as any cen-sus tract in Kentucky whosemedian income is lower than 80percent of all other census tractsin the country. Lower-incomehouseholds are defined as anyhousehold in Kentucky that earnedless than $20,000 in 2006, orabout 60 percent of the medianincome in the state.

As with any measure of povertyor lower income, there are impor-tant limitations. First, a lowincome can go farther in smalltowns such as Hazard or Pikevillethan in cities such as Lexington orLouisville, suggesting that a place-specific measure of low incomemay be more ideal. Second, not allsurveys measure the same units. Afamily with children earning themedian income in the state is cer-tainly less well off than an individ-ual living alone with the sameincome. Unfortunately, the data donot allow us to make these distinc-tions. Similarly, ideally we wouldhave distinguished between indi-viduals, households, and families,but those distinctions wereunavailable in the datasets used inthis report. For these reasons, werefer to “lower-income” house-holds, consumers, and neighbor-hoods throughout the resultssection of this analysis, and con-

trast these units to either all otherhouseholds in Kentucky or specifi-cally “higher-income” households,consumers, and neighborhoods.

The Survey of KentuckyConsumersThe Brookings Institution commis-sioned the University of Kentucky’sSurvey Research Center to admin-ister a statewide survey ofKentucky households in winter2007.28 Households were selectedusing a modified list-assistedWaksber-Mitofsky random-digitdialing procedure, which ensuresevery residential telephone line inKentucky had an equal probabilityof being called. Calls were madefrom January 19 through February24, 2007. Callers made up to 15attempts with each number in thesample. In addition, callers madeup to 10 scheduled return calls tothose who were reached at aninconvenient time. Callers alsomade a one-time attempt to con-vert refusals. This procedureresults in a representative sampleof the Kentucky population ofhouseholds based on 830 com-pleted interviews. The responserate for the survey was 33.7 per-cent. The margin of error isapproximately 3.4 percentagepoints at a 95 percent confidencelevel. A full review of the survey isincluded in the appendix. ■

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Groceries

Income thresholds for households and neighborhoods

Households Neighborhoods

Lower Income Below $20,000 Below $33,392

Moderate Income $20,000 – $39,999 $33,392 – $42,006

Middle Income $40,000 – $59,999 $42,007 – $51,613

Higher Middle Income $60,000 – $79,999 $51,614 – $67,301

High Income $80,000 and up $67,302 and up

Income thresholds for households and neighborhoods

Lower-income families inKentucky tend to pay morefor basic financial services

than higher-income familiesbecause of their greater reliance onhigh-cost non-bank financial serv-ice companies, including checkcashers, payday lenders, pawn-

shops, and tax preparation firmsthat sell refund anticipation loans.Depending on where lower-incomefamilies live and the types of serv-ices they consume, these highercosts can range from a few dollarsto more than $2,000 annually.29

Lower-income consumers aremuch more likely than higher-income consumers to pay highprices to cash checks and takeout short-term loans.30

Higher prices for Kentucky’s lower-income families start with the mostbasic of financial services: cashinga check. More than one-fourth (28percent) of lower-income con-sumers surveyed lack a checkingaccount to deposit their checks in.That’s reflected by the fact thatabout one in five lower-incomehouseholds in Kentucky report thatthey have used higher-cost check-cashing businesses. Of these, 31percent use these services regularly.In contrast, just 5 percent of high-income consumers in Kentuckyhave ever used this service. Also,about 35 percent of regular cus-tomers of high-cost check-cashingestablishments in Kentucky earnless than $20,000 annually, andabout 62 percent earn less than$40,000. Together, these statistics

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F I N D I N G S :

Kentucky ’s Lower-

Income Consumers

Face Higher Prices

Kentucky’s lower- and moderate-income consumers are morelikely to buy high-priced basic financial services than higher-income households

Source: Authors’ analysis of a statewide survey commissioned by The Brookings Institution,

and administered by the University of Kentucky’s Survey Research Center

Note: For a definition of income thresholds see table on page 13.

More than one-fourth of lower-income consumers surveyed do not havea checking account

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

28%

12%

6%

1% 0%

I. BASIC FINANCIAL SERVICES

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point to the broadly higher demandfor check-cashing services amongKentucky’s lower-income house-holds compared to those with ahigher income.

Unlike most other states,Kentucky places no limits on thefees that can be charged for thisservice. A random survey of suchestablishments in Kentucky foundthat fees to cash a check rangebetween 1 and 10 percent of theface value of a check; and themedian fee that Kentucky’s check-cashing customers report paying isabout 5 percent of a check’s value.

For the customer earning anafter-tax income approximatelyequal to the minimum wage in thestate, or $10,500 annually, payingto cash a check (at 5 percent of thecheck’s face value) adds up to morethan $500 annually.

Certainly, check-cashing busi-nesses provide an essential servicefor some of these unbanked lower-income families, particularly thosewho lack the paperwork (e.g., a driver’s license) that most banksrequire of prospective customers,or who had trouble maintainingbank accounts in the past. Yet, thatservice comes with a steep pricebecause the check casher’s busi-ness model is built around and sus-tained by very high prices. Wherebanks pay for their operating costs,such as employees, utilities, andbrick and mortar retail branches, byselling a suite of financial services,most check-cashing businesses onlysell a handful of financial serviceproducts. With fewer products tosell and similar capital costs,check-cashing establishments mustsell their smaller number of prod-ucts at comparably higher prices.

Yet, there is growing market pres-sure to lower those higher prices.Recent industry reports suggestthat a growing number of bankshave started offering accounts withno maintenance fees, no minimumbalance requirements, and nocheck-cashing fees.31 This fits withour finding in the statewide surveywe commissioned: Only 15 percentof Kentuckians report paying a

monthly fee to maintain anaccount, including only about 27percent of the lower-income house-holds that already have a checkingaccount. As that trend spreads,banking accounts should lookincreasingly more attractive tolower-income consumers in thestate.

Another promising trend forlower-income families are the grow-

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Many more lower-income households use check-cashing services than high-income households

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

31%

20%

10% 9%

5% 5%

3%5%

15%

0%

Proportion of households that have used check-cashing businesses

Proportion of check-cashing customers who regularly use service

ing use of stored value cards. Bankssell these password protected debitcards to employers. Employers inturn deposit employees’ pay on adebit card instead of issuing a pay-check. Banks see these products asa way to improve their value to cor-porate customers, and employerssee this as an easy way to promotesavings and wealth among theiremployees, while saving money on

check processing and printing.32

Unfortunately, it is difficult toknow how widespread either mar-ket trend is in Kentucky, making itincumbent for policy leaders to sortout and promote appropriate bank-ing products in the state’s lower-income markets. In neighborhoodswhere they already exist, leadersshould promote and market thoseproducts; where they do not, lead-

ers need to use one of the variousincentives discussed at the end ofthis report to foster a profitablemarket for these products.

Higher prices paid byKentucky’s lower-income house-holds go beyond just cashing acheck. For those 72 percent sur-veyed who already have checkingaccounts, more than 20 percenthas used a high-priced paydayloan, pawnshop, or title-lendingestablishment for short-term cashadvances, instead of or in additionto lower-priced credit cards. Incontrast, just 3 percent of higher-income consumers have used this product. What’s more, nearly70 percent of regular customers ofhigh-cost payday loan and pawn-shops in Kentucky have a lowerincome.

The market for these high-pricedservices in Kentucky is vast andrapidly growing. Between 1999 and2006, the number of payday lenderretail locations grew by 121 percentin Kentucky. New establishmentsnow open in Kentucky at the rateof one every four days, collectingan estimated $145 million in feesfrom their mostly lower- and mod-erate-income customer base.33 Thisgrowth was even faster at thenational level, however. In 1992,there were about 300 such estab-lishments in the country, but by2006 that number had grown tomore than 20,000, issuing $40 bil-lion annually in loans. Togetherwith other high-priced non-banklenders, they collected more than$10 billion in fees.34

In Kentucky, fees add up soquickly because these businessesare allowed to charge up to 38times more than the fee charged by

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Demand for payday and other nontraditional loans are much higher inlower-income households, and lower-income households are slightlymore likely to use these services regularly

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

18%

21%

8% 8%

1%3%

0%

16%

0%

14%

Proportion of households that have used these businesses

Proportion of customers who regularly use service

the average credit card for the sameloan amount. To put that numberin perspective, a family with onesalaried worker netting $30,000 ayear would pay about $270 to bor-row $300 six times a year from apayday lender. Several states havebarred such services, includingGeorgia, Maryland, North Carolina,and West Virginia.

Lower-income families are alsomore likely than higher-incomefamilies to use pawnshops.35 InKentucky, pawnshop fees range upto 22 percent per month. Althoughlower than fees charged by paydaylenders in the state, that rate is still10 times higher than that charged

by the average credit card company.In comparison, fees for pawnshopsin other Southern states range fromno limit (in Arkansas and WestVirginia) to 20 percent or more (innearly every other state in theregion).

Consumers who overdraw theirchecking accounts, effectively usingthem as a source of short-termloans, can also pay high prices.36

For instance, one major bank inKentucky charges more than $30per overdraft, or bounced check.Used six times in a year, this “serv-ice” would cost $180—still high,but less than the $270 to borrow$1,800 from a payday lender. Ifthat family splits that overdraft feebetween two bounced checks,though, these fees can quickly out-pace charges levied by alternativesources.

But, unlike payday loan cus-tomers, who tend to be lower andmoderate income, higher-incomehouseholds are about as likely aslower-income households to bouncea check. According to our survey ofKentucky households, approxi-mately 42 percent of lower-income

households report having bounceda check compared with about 44 percent of the highest-incomehouseholds. Overdraft fees associ-ated with those bounced checks willadd up to steep prices for all incomegroups.

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Source: Authors’ analysis of data from the Kentucky Office of Financial Institutions

The number of payday loan services in Kentucky has more than doubledsince 1999

20062005200420032002200120001999

352398

440 470

544

641695

779

Consumers who overdraw their checking accounts,effectively using them as a source of short-termloans, can also pay high prices.

Lower-income consumers arealso more likely than higher-income consumers to pay highfees to get their tax returnsquicklyAccording to our survey ofKentucky households, more than29 percent of lower-income con-sumers pay to have their taxes pre-pared compared with 52 percent ofall other households.37 Demandmay be lower among Kentucky’slower-income households for taxpreparers because fewer of thesehouseholds file taxes, and there arenow widespread efforts in the stateto provide free tax preparation serv-ices for the state’s lower-incomehouseholds.

Nevertheless, demand existsamong the state’s lower-incomehouseholds for fee-based tax prepa-ration services in part because oftheir higher relative demand forrefund anticipation loans, anothershort-term loan product that

advances the estimated tax refundfor a fee. In fact, our survey ofKentucky households indicates thatabout 33 percent of lower-incomehouseholds that use a paid tax pre-parer claim the refund anticipationloan. That compares with 17 per-cent of households in Kentuckyearning between $20,000 and$39,999; 19 percent of householdsearning between $40,000 and$59,999; 6 percent of householdsearning between $60,000 and$79,999; and 5 percent earningmore than $80,000.38 Although nonationwide or regional estimate ofthe cost these loans exists, onerecent study suggests that fees gen-erally range between $10 and $80.39

The higher demand among lower-income consumers in Kentuckyfor non-bank, high-priced finan-cial services is reflected in thedense concentration of thesebusinesses in Kentucky’s lower-income communities The highest per capita concentra-tion of alternative check-cashingand short-term loan providers isfound in the lowest-income neigh-borhoods statewide.40 There are997 alternative financial services inthe state. In the lowest-incomecommunities, there is one of theseestablishments for every 3,047 resi-dents. In contrast, communities inKentucky with the highest incomehave one establishment for every17,580 residents.

These statewide trends arereflected in the state’s populationcenters: Louisville, Lexington, andOwensboro. Among these areas,Louisville shows the starkest con-trast across its neighborhoods, withone of these alternative financialservices for every 2,457 residents inits lower-income neighborhoods. Incontrast, there is just one of theseestablishments per 56,704 resi-dents in Louisville’s highest-incomeneighborhoods

However, mainstream financialinstitutions are poised to moreaggressively compete with thesealternative providers. Besides thefact that over 72 percent ofKentucky’s lower-income house-holds already have a checkingaccount; statewide, 57 percent ofthe lower-income neighborhoodssurveyed have at least one bank orcredit union. Moreover, eachcounty in the state has at least onebank or credit union. In fact, amajority of these high-cost non-

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Source: Authors’ analysis of data from the Kentucky Office of Financial Institutions,

Federal Deposit Insurance Corporation, and InfoUSA


Payday loan and check-cashing services are disproportionately located inlower-income neighborhoods

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

1,9623,047

1,9103,530

2,424

4,325

2,223

7,752

1,941

17,580

Population per check casher/non-bank short-term lender

Population per bank or credit union

bank financial service companiesare often just down the street frommainstream banks and creditunions. Among Kentucky’s commu-nities with an alternative financialprovider, 87 percent also had amainstream financial institution.

Why do lower-income consumersface these higher-priced financialservices?Three major market dynamics driveconsumers’ purchasing decisions,each of which can be targeted bypolicymakers.

Banks and credit unions face bothreal and perceived higher costs of

doing business with lower-incomeconsumers. With smaller amounts ofmoney to cover the costs of living,lower-income consumers are muchmore likely to fall behind on creditand loan bills compared to otherborrowers.41 While that propensitycan be overstated, it still exists andhelps drives up the costs of sellingbasic financial services to the poor,and deters banks and credit unionsfrom marketing products to lower-income consumers.42 At a minimum,lower-income consumers, for exam-ple, need a checking account withno or very low minimum balancerequirements, an affordable over-draft protection plan, and no or verylow maintenance fees.

Banks in Kentucky and else-where are also at a disadvantage inthese markets because of regulatoryrequirements that require substan-tial paperwork and private financialinformation for opening accounts,requirements not imposed on alter-native financial services. Traditionalbanks are also at an unfair advan-tage given the high fees alternativeservices can charge, as notedabove. Together, these marketdynamics mean that introducingnew products and services in lower-income markets can be relativelyexpensive for banks and creditunions, creating both real and per-ceived costs of selling mainstreamfinancial service products toKentucky’s lower-income con-sumers.

Questionable business practicesalso drive up prices in lower-incomemarkets. In some cases, this meansthat regulatory protections areinsufficient. As this section hasnoted, for instance, Kentucky’s

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Lower- and moderate-income families surveyed are more likely to havefallen behind on a mortgage payment

HighIncome

HigherMiddle Income

MIddleIncome

ModerateIncome

LowerIncome

19%

17%

5%4%

0%

In Kentucky, the most often cited reason forunbanked households to not use banks and credit

unions is that they have never really thought aboutopening up a bank account.

Consumers from lower-incomeneighborhoods typically paybetween $50 and $500 more forthe same car than consumersfrom higher-income neighbor-hoods Most lower-income households sur-veyed in Kentucky own at least onecar. In such a rural state, cars areoften imperative to travel betweenwork and homes.

Most lower-income car ownerswill have paid a higher price for theexact same car than higher-income

households. Although several stud-ies have attempted to explain thisdynamic, Scott Morton and her colleagues’ is probably the most rig-orous (see the Methodology sectionfor a description).44 After control-ling for several factors known toinfluence car prices (make andmodel of car, when sold, and soforth), they find that race, educa-tion, homeowner status, and neigh-borhood income all help drive upprices by a typical amount ofbetween $50-$500 in extra charges

check-cashing businesses have nolimit on the fees they can chargefor check-cashing services, com-pared to states like West Virginiaand New York, where fees arecapped at under 2 percent of theface value of a check. Similarly,Kentucky’s short-term loanproviders can charge a rate that is35 to 40 times higher than theaverage rate charged by credit cardcompanies. In reaction to the highprices charged by short-term loanproviders, other Southern and bor-der states, like Georgia, Maryland,North Carolina, and West Virginia,have banned payday lending alto-gether, and Virginia has set a maximum monthly pawn fee of 10 percent.

Finally, there is a consumer edu-cation gap between lower- andhigher-income consumers, drivinglower-income consumers to buyfinancial service products that arenot in their best financial interest.In Kentucky, the most often citedreason for unbanked households tonot use banks and credit unions isthat they have never really thoughtabout opening up a bank account;the next most cited reason is thatthese consumers do not trust bankswith their money; and the next isthat there is too much paperwork.These responses point to the veryreal opportunity that Kentucky’sleaders have to bring moreKentuckians, particularly thosewith a lower income, into thefinancial mainstream. There is nota good reason to do otherwise.

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About three of every four lower-income households surveyed inKentucky owns a car. Although many of these cars are less expen-sive than those owned by higher-income families, evidence suggests

that households in lower-income neighborhoods tend to pay higher pricesfor cars, auto loans, and insurance.43

Lower- and moderate-income consumers are more likely thanhigher-income households to pay higher prices for cars andrelated products.

II. CARS

for these consumers. No data areavailable on the Kentucky car mar-ket that would allow for a similaranalysis. There is no reason to sus-pect, however, that Kentucky isinsulated from the market dynam-ics that give rise to these findings.

On average, lower-income con-sumers pay at least 2 percentagepoints more for auto loans thanhigher-income consumersAccording to our survey ofKentucky households, approxi-mately one in five lower-income carowners owes money on an autoloan, accounting for about 7 per-cent of the Kentucky auto loan mar-ket. Here again, however,lower-income borrowers tend to payhigher prices for auto loans thanhigher-income drivers. No data existon exact amounts charged for loansin Kentucky. However, we can usenationwide surveys to infer the mar-ket dynamics in the state. On thebasis of national surveys, the aver-age annualized rate of interest paidby lower-income households was9.2 percent in 2004. In contrast,households earning between$30,000 and $60,000 annually paidan average rate of 8.5 percent.Households earning between$60,000 and $90,000 paid an aver-age rate of 7.2 percent. Those earn-ing between $90,000 and $120,000paid about a 6.2 percent rate, andthose earning more than $120,000paid about 5.5 percent.

To put those rate differences inperspective, the median lower-income consumer with a $5,000auto loan—approximately themedian value of cars owned by alower-income household—wouldpay $1,256 in interest over five

years at a rate of 9.2 percent. Incontrast, the median householdearning more than $120,000 a yearwould pay $730 in interest over fiveyears. That represents a savings of

more than $500 to the higher-income household relative to alower-income household with a typ-ical, or median, car loan in theirrespective income brackets.

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Source: Authors’ analysis of data from several of the state’s major auto insurance providers


Kentucky residents who live in lower-income neighborhoods pay $384 more (or 49 percent) more in auto insurance premiums than those inhigh-income neighborhoods

HighIncome

HigherMiddle Income

MIddleIncome

ModerateIncome

LowerIncome

$1,168

$876 $843 $837$784




Most Kentucky families surveyed own at least one car, and the propor-tion with car loans rises with income

Proportion of car owners with an auto

Proportion with at least one car

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

72%

17%

88%

19%

99%

37%

98%

49%

93%

57%

Surveyed drivers from lower-income communities pay, onaverage, $384 more per year for auto insurance than high-income driversAcross Kentucky, the highest pricesfor auto insurance in our sample ofquotes from three major insurancecompanies are found in the state’slowest-income neighborhoods. On average, car owners in lower-income neighborhoods paid $384more annually to insure the samelow-cost car versus in high-incomeneighborhoods.

Residents of both urban and

rural communities pay higherprices for auto insurance. However,the higher prices for insurance areconcentrated in the eastern coun-ties of the state, the most danger-ous areas of the state in which todrive. In Rowan and Bath counties,for example, a married driver with aperfect driving history and a carworth $5,100 would pay $624 forinsurance. That same driver wouldpay more than $1,600 a year toinsure the same car in the easterncounties of Floyd or Johnson.

Couple these regional differ-ences with differences by occupa-

tion, credit score, and education—characteristics highly associatedwith income, and also factored intopricing decisions by some compa-nies—and lower-income driversmay pay even steeper prices.45 Thissuggests, though it certainly doesnot prove, that lower-income driv-ers may systematically pay higherprices for auto insurance. But,more than any other issue we dis-cuss in this report, the dearth ofgood data impairs our understand-ing of the relationship betweenincome and insurance prices.

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Residents in the eastern part of the state pay the highest auto insurance rates

Jefferson County

Average sample annual premium (2006)

Low ($753 or less)

High ($1,340 or more)

Unknown

$754 – $817

$818 – $925

$926 – $1,339

Fayette County

Source: Authors’ analysis of data from major home insurance providers

Notes: Sample rates were obtained for a driver who is 35 years old, married, has a clean driving record, commutes five minutes daily, and

drives between 10,000 and 15,000 miles annually. Values are shown by ZIP code. Colors represent quintiles of average sample premiums

across Kentucky; the most darkly colored ZIP codes, for instance, have higher average sample insurance rates than those in 80 percent of all

other ZIP codes in the state.

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Lower-income families surveyed are less likely than others to compareprices on cars before buying

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

58%55%

39%

60%

44%41%

72%

40%40%

65%

37%41%

71%

48%39%

Proportion who compared car insurance prices before purchase

Proportion who compared car loan prices before purchase

Proportion who compared car prices before purchase




More than 70 percent of lower-income Kentuckians surveyed have littleunderstanding of credit reports and the impact they have on pricing forloans and insurance

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

71% 70%

51% 54% 57%

Why are these auto and auto-related products more expensivefor lower-income households? Three factors cause these higherprices:

Sellers of these auto productsface real and perceived risks forof doing business in lower-incomeneighborhoods. Lower-income con-sumers in Kentucky are more likelyto miss loan payments and to livein areas with higher insurancerates.46 In the lower-income area ofeastern Kentucky, for example, roadconditions, the presence of coaltrucks, and the limited number ofaccessible auto repair businessesmay each play a part in the higherpremiums lower-income drivers pay.Businesses in turn pass on thesehigher costs to consumers in theform of higher prices. These realhigher costs also can foster a per-ception of higher costs of doingbusiness with these consumers,particularly when measurement ofrisks is imprecise, such as withinsurance pricing.

Questionable business practicesinflate the prices charged tolower-income consumers for car-related necessities. Evidence thatcar dealers systematically chargehigher prices for black customers isone example of unscrupulous,price-inflating behavior.47 Also, themuch higher interest rates lower-income drivers pay for auto loansmay, in addition to poor credit orpayment histories, also stem fromunscrupulous businesses inflating

While a modestly higher proportion of lower-income householdsreport that they did not shop around before buying an auto loan,about the same proportion across income groups report that they

shopped around before buying a car and car insurance.

Kentucky’s lower-income home-buyers are twice as likely ashigher-income households to buya high-cost mortgageMore than 41 percent of lower-income households that bought ahome in 2005 have what theFederal Reserve defines as a high-cost mortgage, compared with just16 percent of high-income house-holds.49 These high-cost mortgagesadd up to considerable sums ofextra money, which could havebeen devoted to savings and invest-ments. For instance, the monthlypayment on a typical high-costmortgage for a median-priced homein 2005 would be approximately

$807 a month, or about $290,000over the course of a fixed-rate 30-year loan. In contrast, homeownerswith a standard mortgage wouldpay approximately $605 a month,or $218,000 over the course of aloan, or a savings of more than$70,000 compared with the high-cost mortgage.50

Although Kentucky’s lower-income consumers are much morelikely than other consumers to payhigh prices for mortgages, they arenot the majority of the high-costmarket. In fact, of the 40,000 high-cost mortgages originated inKentucky in 2005, lower-incomehouseholds bought only about

prices. One could infer from thefaster rise in car ownership rateamong lower-income families thanamong higher-income families thatmany of these customers may nothave the experience or knowledgeto spot and avoid unscrupulousbusinesses that overcharge.48

Finally, a consumer educationgap exists between lower- andhigher-income consumers. Morethan 70 percent of lower- and mod-erate-income Kentuckians surveyedhave little understanding of creditreports and the impact they haveon pricing for loans and insurancecompared to about 51–57 percentin higher-income groups. Withoutthat knowledge, unscrupulous cardealers, lenders, and insuranceagents can easily justify high pricesby confusing the customer aboutthe real risks they pose to theseller. Still, the differences betweenKentucky’s income groups in con-sumer knowledge are less pro-nounced when it comes to buyingauto-related necessities comparedto other necessities. While a mod-estly higher proportion of lower-income households report that theydid not shop around before buyingan auto loan, about the same pro-portion across income groupsreport that they shopped aroundbefore buying a car and car insur-ance. This doesn’t mean they bringthe same amount of information tothe bargaining table, but it cer-tainly means they’re taking a criti-cal step to gather that informationat about the same rates as everyoneelse in the state.

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Of those buying homes in 2005, more lower-income householdssurveyed have a high-cost mortgage than higher-income house-holds. Home insurance is also more expensive for lower-income

families. When furnishing their homes, more lower-income consumers usehigh-priced rent-to-own stores than higher-income families surveyed. Thissection explains each of these higher prices in more depth.

Lower- and moderate-income consumers are more likely thanhigher-income households to pay higher prices for home-relatedproducts

III. HOMES

2,000 of these, or about 6 percent.Moderate-income borrowersobtained a larger number of high-cost mortgages, totaling 33 percentof all 2005 high-cost mortgages.The remaining 62 percent of themarket for high-cost mortgages inKentucky was middle- and higher-income consumers. Because of theirlarger numbers, though, a smallerproportion of these higher-incomeconsumers buy high-cost mortgagesthan lower-income consumers.

Demand for high-cost mortgagesin the state is in both urban andrural areas. Lower-income borrow-ers in rural southeastern Kentuckyhave high demand for high-costloans: of the eight counties withthe highest rates of these mort-gages in the state—where morethan one-half of mortgages arehigh-cost—all are lower-incomeand in this region. At the sametime, more than 8,000 high-costmortgages were originated inLouisville, representing 20 percentof high-cost mortgages in the entirestate. In Louisville’s lower-incomeneighborhoods, 37 percent of mort-gages originated in 2005 were high-cost. Another 2,500 of thehigh-cost loans originated in thestate were in Lexington.

In a sample of prices from threeinsurance companies, homeown-ers in Kentucky’s lower-incomeneighborhoods pay, on average,at least $363 more annually forhome insurance than homeown-ers in high-income neighbor-hoods, holding other factorsconstant.As with auto insurance, insuring ahome in Kentucky’s lower-income

neighborhoods is typically moreexpensive than insuring a compara-ble home in high-income neighbor-hoods. Across the state, we findthat the average cost of insuring acomparably valued home is $363higher in Kentucky’s lower-income

neighborhoods than in high-incomeneighborhoods.

Unlike auto insurance, however,the highest rates for home insur-ance in lower-income communitiesare concentrated strictly in ruralareas, rather than in both urban

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Source: Authors’ analysis of data from the 2006 Home Mortgage Disclosure Act


More than twice as many lower-income Kentucky homebuyers have a high-cost mortgage than high-income families

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

41%

36%

30%

24%

16%

Source: Authors’ analysis of data from several of the state’s major auto insurance providers


Lower-income homeowners pay $1,603 on average in home insurance premiums annually, or $363 more per year than high-income homeowners

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

$1,603

$1,299 $1,271 $1,224 $1,240

and rural areas as they are for carinsurance. Counties in the south-ern and southeastern sections ofthe state have average home insur-ance rates of more than $1,600 ayear compared with an average rateof less than $1,200 in the moreurban western and northern areasof the state.

Nevertheless, these analyses ofhome insurance rates are limited inthat we only examine how ratesvary across neighborhoods, ratherthan across individuals. Home

insurance prices could be higherfor lower-income homeowners inKentucky because some of theirpersonal characteristics raise priceson insurance, such as credit score,occupation, and education, all ofwhich are closely correlated withhousehold income.51 However, thelimited disclosure laws in the insur-ance industry limit the availabledata to analyze the full impact ofthese factors.

Kentucky’s lower-income con-sumers also tend to pay more forfurniture and appliances becausethey more frequently shop atrent-to-own establishmentsLower-income consumers are muchmore likely than higher-incomeconsumers to buy furniture andappliances from rent-to-own stores.A recent analysis by the FederalTrade Commission (FTC) foundthat 59 percent of rent-to-own cus-tomers earn less than $25,000 ayear.52 Renting to own means that

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Lower-income families in rural areas of the state pay the highest home insurance rates

Jefferson County

Average sample annual premium (2006)

Low ($1,170 or less)

High ($1,671 or more)

Unknown

$1,171 – $1,365

$1,366 – $1,540

$1,541 – $1,670

Fayette County

Source: Authors’ analysis of data from major home insurance providers

Notes: Values are shown by ZIP code. Colors represent quintiles of average sample premiums across Kentucky; the most darkly colored ZIP

codes, for instance, have higher average sample insurance rates than those in 80 percent of all other ZIP codes in the state.

consumers pay more for a piece offurniture or electronics than if theysimply bought the item outrightbecause of numerous fees thesestores charge.

Because Kentucky’s disclosurelaws in the rent-to-own industry arelimited, statewide estimates of theprices charged by rent-to-own

establishments are unavailable.However, analyses from other statessuggest that a washing machinecould cost more than $1,000 ifpurchased from a rent-to-own busi-ness.53 In contrast, a consumer whobought that same washing machinewith a credit card charging a 24

percent interest rate would pay just$480 over an 18-month period.54

Processing fees, delivery fees,installation fees, in-home collectionfees, home pick-up fees, productinsurance fees, and late paymentfees all account for these higherprices at rent-to-own establish-ments.55

Kentucky communities withincomes below $51,000 all have amuch higher concentration of rent-to-own stores than higher-incomeareas. Communities in the secondlowest income group, those commu-nities with a median incomebetween $33,392 and $42,006, haveone store for every 18,042 residentscompared with one store for every158,221 residents in the highest-income communities. More than 70 percent of Kentucky’s rent-to-own stores are located in lower- andmoderate-income neighborhoods.

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Source: Authors’ analysis of data from InfoUSA


Lower-income Kentucky communities have a much higher concentrationof rent-to-own stores than high-income areas—one store for every31,296 residents compared with one store for every 158,221 residents inhigh-income neighborhoods

High Income

Higher Middle Income

Middle Income

Moderate Income

Lower Income

31,296 18,042

27,782

54,267

158,221

Kentucky’s lower-income consumers know lessabout the importance of credit reports and scores,

two key consumer characteristics that affectprices for mortgages and home insurance.

Why are home-related purchasesmore expensive for lower-incomeconsumers?To bring down prices for lower-income families, leaders shouldaddress three market dynamics thatdrive up these prices:

Businesses incur some highercosts of doing business when serv-ing lower-income markets. Asreported in an earlier figure, lower-income homeowners in Kentuckyare four times more likely to fallbehind on mortgage payments thanare higher-income homeowners,and therefore lenders face highercosts of doing business with lower-income consumers. These costs arerationally passed on to consumers.Higher delinquency rates amonglower-income borrowers also lowertheir credit scores, which makesthese consumers appear morerisky.56 These real higher costs alsodrive perceptions of higher costs,

even when there may be limiteddata to support those perceptions.

Questionable practices by somebusinesses drive up housing pricesfor lower-income families.Research has indicated that asmany as 20 percent of all borrowerswho purchased a high-cost mort-gage could have qualified for alower-priced mortgage, whichwould have saved them hundreds,sometimes thousands, of dollars ininterest charges every year.57

Similarly, state regulators are ask-ing whether insurance rating terri-tories—like ZIP codes—and othernon-house-related criteria shouldbe used by insurance companies todetermine prices, given that severalof these criteria vary systematicallywith household income. “The bot-tom line” according to Florida’sGeneral Counsel to the Office ofInsurance Regulation, “is webelieve the lowest income strata

have the worst credit scores, andthey are paying higher rates as aresult of that.”58 Here, the theory isthat by removing this variable inthe calculation of insurance prices,leaders will be able to lower theprice of insurance for lower-incomehouseholds.

Lower-income consumers tendto be less informed than higher-income consumers about mort-gages and other home-relatedpurchases. In Kentucky, we foundthat more than 86 percent of sur-veyed lower-income homeownersdid not compare prices beforechoosing their mortgage, while 51percent of higher-income home-owners did so. Research indicatesthat consumers who comparativelyshop pay lower prices than thosewho do not.59

As noted above, Kentucky’slower-income consumers know lessabout the importance of creditreports and scores, two key con-sumer characteristics that affectprices for mortgages and homeinsurance. Without that knowledge,Kentucky’s lower-income consumersmay buy homes without first assess-ing whether they would be betteroff waiting and first improving theircredit scores, which will improvethe loan and insurance prices forwhich they qualify.

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Roughly one-half of middle- to high-income homebuyers compare mort-gage prices before buying compared with only 14 percent of lower-income homeowners surveyed

HighIncome

HigherMiddle Income

MiddleIncome

ModerateIncome

LowerIncome

14%

31%

49%

44%

49%

In fact, larger grocery stores are more highly concentratedthroughout the state in lower- andmoderate-income neighborhoodsthan in higher-income neighbor-hoods. In particular, there is onelarge grocery for every 7,693 resi-dents of the state’s lower-incomecommunities, compared with onelarge store for every 22,603 resi-dents of a high-income community.

The story is different inLouisville and Lexington, however,where larger grocery stores aremore limited in lower-incomeneighborhoods. In Louisville’s low-est-income neighborhoods, for

example, there is one large store forevery 7,495 residents comparedwith one for every 14,176 residentsof a high-income neighborhood.Residents in Louisville’s West End,a lower-income community, musttravel through several neighbor-hoods beyond their own to accesslarger, and likely lower cost, grocerystores. For families relying on pub-lic transportation or those withyoung children, the extra distancemay make such travel difficult, andforce them to rely instead onsmaller and more expensive stores.

Why might Kentucky’s urbanlower-income neighborhoods tendto have less access to larger,likely lower-priced, grocerystores? Higher costs of doing business inlower-income communities and,perhaps, some questionable busi-ness practices, may help drive down access in Louisville’s and

Elsewhere in the country, lower-income neighborhoods tend to havefewer per capita large grocery stores (greater than 10,000 squarefeet) than higher-income neighborhoods. This is important because

larger stores tend to sell food at lower prices than small stores.60 However,Kentucky largely bucks this trend, containing roughly equal numbers oflarge grocery stores per capita in lower- and higher-income communities.To be sure, not all communities in Kentucky have access to a large grocerystore: 21 counties have no mid-sized or large grocery stores. However, fewerthan one-half of these are lower-income communities.

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Higher costs of doing business in lower-incomecommunities and, perhaps, some questionable

business practices, may help drive down access inLouisville’s and Lexington’s lower-income neigh-

borhoods to large grocery stores.

With the exception of communities in Louisville and Lexington,Kentucky’s lower-income communities tend to have as muchaccess to larger, likely lower-priced, grocery stores as the state’shigher-income neighborhoods. However, data are too limited todirectly assess prices across these different stores.

IV. GROCERIES

Lexington’s lower-income neighbor-hoods to large grocery stores.Higher costs are brought about bythe unconventional market demandassessments that often are neededin lower-income markets, whichcomports with recent evidence thatthere is generally a large amount ofunmet market demand in lower-income neighborhoods, largelybecause of the inadequacy of con-ventional market demand assess-ment tools. Social Compact, forinstance, has illustrated in numer-ous studies that traditional meth-ods of estimating market demandsystematically undercount demand

in lower-income neighborhoods.61

One company that sees enormousopportunity in lower-income neigh-borhoods is Wal-Mart, whichrecently announced plans to open150 stores in underserved lower-income markets.62 At the sametime, though, relatively more strictzoning requirements, and thehigher expense of urban land anddevelopment, help drive downaccess in urban lower-incomeneighborhoods. Such trends pushback against the trend in the indus-try to build large, one-stop destina-tion supercenters.63 ■

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S O L U T I O N S :

Reducing the High

Price of Being Poor

in Kentucky

K entucky’s public and private sector leaders can bring

down the higher prices lower-income families tend to

pay for basic necessities, creating a valuable opportunity

for lower-income families in the state to save, invest, pay off debt,

and avoid high-cost credit. Many of these strategies can also foster

the market dynamics necessary to expand the wealth of Kentuckians

over time, along with the economy. In fact, the needed solutions are

as much about helping lower-income families as they are about

helping to expand mainstream businesses in Kentucky.

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To capitalize on this opportunity,Kentucky’s public and private lead-ers should adopt a three-prongedstrategy.

First, Kentucky’s leaders need towork to bring down the higher costsof doing business with lower-incomeconsumers. This report has shownthat the state’s lower-income con-sumers are more likely to fall behindon payments, live in riskier areas ofthe state, and not have informationabout the importance of creditscores and reports. On top of that,traditional market products and

demand assessments, and perhapsrisk assessments too, are often lessappropriate and reliable in lower-income markets than in higher-income markets. Together, thesecharacteristics of lower-income con-sumers drive up costs for busi-nesses, which are then passed on toconsumers. Kentucky must look atthe examples of other states thathave chartered new strategies forbringing down these higher costs forbusiness, which are then passed onto lower-income consumers in theform of lower prices.

Second, Kentucky’s lower-income markets are beset byunscrupulous and unnecessarilyhigh-priced businesses. That high-priced payday lending businessesare opening at the rate of one everyfour days in 2006 should be unac-ceptable to Kentucky’s leaders,given the proven, substantiallylower-cost alternatives that arebeing sold in other marketsthroughout the country. At thesame time, the very high relativenumber of Kentucky’s lower-income consumers that are paying

high prices for their mortgages and insurance products should be a cause for concern amongKentucky’s public leaders, and evi-dence of a business opportunity forKentucky’s mainstream, responsiblebusinesses to move into these mar-kets with lower-priced alternatives.

Finally, this report has providedevidence that Kentucky’s lower-income consumers do not have asmuch information as they need tomake sound financial decisions.They are systematically less likelyto comparatively shop among com-panies when buying goods and serv-ices and they know less about theimportance of credit reports andscores than their higher-incomeneighbors. Also, in our survey ofKentucky households, the most

common reason given amonglower-income consumers for notusing a bank was that they neverreally thought about opening up abank account; the next most citedreason is that these consumers donot trust banks with their money;and the next is that there is toomuch paperwork. Together, this setof evidence should be a wake upcall for leaders in Kentucky thatlower-income consumers in thestate are not making the best possi-ble use of their scarce resources,missing important opportunities toget ahead through savings andinvestments in wealth-buildingassets.

All three elements of this policyagenda are discussed in more detailbelow, animated by initiatives inother areas of the country that arestriving to bring down higher costsof doing business with lower-income consumers, curb unscrupu-lous behavior, and boost theconsumer knowledge of lower-income consumers.

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Finally, this report has provided evidence thatKentucky’s lower-income consumers do not have

as much information as they need to make soundfinancial decisions.

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GOAL ONE:

Promote market-based solutions that lower the higher costs ofdoing business with Kentucky’s lower-income consumers

This report has documented a range of higher costs faced by busi-nesses in Kentucky’s lower-income markets, from higher delin-quency rates to the need for nontraditional products and customer

service, which cost money to develop and bring to market. Therefore, thefirst step leaders should take to lower costs for their lower-income con-stituents is to support mainstream businesses in lower-income markets thatoffer reasonable and competitive prices for basic necessities.

In this section, we outline examples from around the country promotingan array of mainstream products for lower-income families.

Create Employer-Based Payday Lending Alternatives:

North Carolina State Employees’ Credit Union

In 2001, the North Carolina State Employees’ Credit Union (NCSECU)

began offering a payday loan alternative to its 1.2 million members after

noticing increased use of payday loans by its members. The Salary

Advance Loan (SALO) is a revolving loan, with a maximum outstanding

balance of $500, offered at an APR of 12 percent. That compares in

Kentucky to the 390 percent APR charged by payday lenders in the state

for the same loan amount.

One of the most innovative features of the product is a forced savings

component, which requires that 5 percent of each advance be placed in a

special savings account. The account is unrestricted, but if the member

withdraws savings, he or she cannot access a SALO for six months. This

feature is designed to provide members with an incentive to let savings

accumulate until the funds are sufficient to ease reliance on borrowing.

Since the product was introduced, NCSECU has loaned $305,405,278,

generating $1,919,097 in interest income for the credit union. The manda-

tory savings component has resulted in more than $6 million in new

deposit funds. The mandatory savings feature is popular with NCSECU

members, 75 percent of whom report that this is the first time in their

lives that they have had any significant savings. It has also reduced

NCSECU’s credit risk by providing increased security for SALO loans.

For more information:

www.ncsecu.org

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Subsidize the Development of Low-Cost Bank Products:

New York’s Banking Development Districts

Because New York’s lower-income neighborhoods have limited access to

bank and credit unions, the Democrat-led statehouse worked with the

Republican governor to pass legislation that created Banking

Development Districts throughout the state. This legislation authorized

the state banking department to provide below-market rate deposits,

along with market-rate deposits, to bank branches that open in under-

served lower-income neighborhoods, or Banking Development Districts.

As Diana Taylor, the former superintendent of the state banking depart-

ment, says, “The state has all this money, and it has to be put some-

where. Why not put this money to work for something?”64

Kentucky does not need to subsidize the opening of branches in lower-

income neighborhoods, given that these neighborhoods have relatively

more access to banks and credit unions than New York. The state may

nevertheless want to consider passing similar legislation to jumpstart

banks and credit unions’ move into the payday lending market with more

reasonably priced short-term loan products.

The potential savings for Kentucky’s lower- and moderate-income fami-

lies is enormous because banks and credit unions can offer these prod-

ucts at lower comparable rates. Alternative basic financial service

providers like payday lenders and check cashers have to pay for their cap-

ital costs—buildings, employees, utilities, etc.—with a very narrow range

of products. Banks and credit unions, on the other hand, have already

sunk these costs, paying for them based on a much wider range of prod-

ucts. This allows banks and credit unions to sell these products at a lower

comparable rate. Credit unions are already heavily subsidized by the fed-

eral and state governments, and should already be selling a reasonably

priced alternative. To help encourage banks to enter this market,

Kentucky’s leaders should consider passing something similar to New

York’s plan.


www.banking.state.ny.us/bdd.htm

The potential savings for Kentucky’s lower- andmoderate-income families is enormous because

banks and credit unions can offer these products at lower comparable rates.

Develop Refund Anticipation Loan Alternative

Bank of Oklahoma

Bank of Oklahoma has partnered with the Community Action Program of

Tulsa County and Doorways to Dreams (D2D) to split refunds in its

Refunds to Assets Program. By offering a refund anticipation check (RAC)

rather than a refund anticipation loan, these partners are able to reduce

costs to lower-income tax filers and promote savings. Tax filers who par-

ticipate can receive part of their refund for immediate use while the

remainder is deposited in an account at Bank of Oklahoma or, if they are

homeowners, used to make a mortgage payment.

About one-third of the tax filers offered the option to split their refunds do

so. As a result, people deposit, on average, $583 into a savings account,

which is the equivalent to about one-half of their refunds. Before this prod-

uct was available, 75 percent of those using it had never had savings in

reserve.


www.d2dfund.org/r2a/index.php

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Create Low-Cost Insurance Pools

California’s Low-Cost Automobile

Insurance Program

Kentucky’s lower-income families

are not alone in facing relatively

more expensive insurance premi-

ums. However, other states have

taken aggressive steps to lower

the price of auto insurance for

these consumers, in part to lower

the high uninsurance rate in

lower-income markets, as well as

to promote more affordable

options for lower-income drivers

already having difficulty making

ends meet.

California offers one of the

more far-reaching programs to

lower the cost of auto insurance.

California now requires insurers

in the state to offer a low-cost

auto liability insurance policy to

qualified drivers who earn less

than 250 percent of the poverty

line in eight urban counties,

where large shares of the state’s

lower-income drivers are concen-

trated.66 Insurance under this pro-

gram costs as little as $314 in

San Francisco.

Insurance companies benefit

from this program because it

pools both the real and perceived

higher risks in lower-income

markets while also helping to

boost the insurance rate in lower-

income markets. Lower-income

consumers benefit because it

lowers the cost of insurance and

allows them to buy insurance

and protect their assets.


www.insurance.ca.gov/0400-news/

0100-press-releases/0070-2006/

release051-06.cfm

Form Public-Private Partnerships to Bank the Unbanked

Bank of San Francisco

More than 30 percent of Kentucky’s lower-income households regularly

turn to high-priced check cashers, costing a typical a minimum wage

earner over five years nearly half his or her annual income.

San Francisco instead connected these consumers to reasonably priced

products at banks and credit unions. The office of the mayor, the office of

the treasurer, the Federal Reserve Bank of San Francisco, and 20 partici-

pating banks and credit unions formed four working groups with the goal

of converting 20 percent of the unbanked population into bank account

holders in two years. The first working group is developing appropriate

market products, the second is devising strategies to market those prod-

ucts, the third is working to bring community voices to the process, and

the fourth will track progress.65


www.sfgov.org/site/bankonsf_index.asp?id=46628

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Promote Competition in Insurance Markets

Kentucky’s Insurance Shopping Guides

Kentucky, along with numerous other states, have started publishing auto and home insurance shopping guides,

which advertise the cost of a comparable amount of insurance sold by each of the licensed insurance companies

in the state.67 Such guides promote competition because they speed up the search time needed by consumers to

comparatively shop for insurance prices. Instead of a consumer having to call every insurance company in the yel-

low pages, for instance, consumers just need to log onto to these state webpages, find the county that they live in,

and look at the rates being offered by all of the insurance companies that sell insurance in their county. This one-

stop destination is a low cost, easy way to lower the prices that lower-income consumers tend to pay for insur-

ance.

Kentucky’s guides illustrate that annual premiums for the exact same line of insurance can vary by over $1,000,

depending on the insurance company. Some of this price variance is explained by the different mixes of risk that

insurance companies are exposed to in the market, but it also has to do with different pricing strategies across

companies.

For these efforts to continue to be effective, however, leaders should aggressively market this resource and keep

the information up to date. State and local leaders in Kentucky can work with the media, community leaders, and

insurance companies to advertise this resource.


www.ins.state.ny.us/homeown/html/hmonguid.htm

Promote Responsible Mortgage Companies

University of Pennsylvania’s Guaranteed Mortgage Program

Buying a mortgage is complicated. In addition to choosing from dozens of

brokers and lenders, Kentucky’s consumers also must choose between dozens

of different mortgage products. Such choice allows consumers to buy mort-

gage products tailored to their financial interests, but it also leaves them vul-

nerable to unscrupulous brokers and lenders who may take advantage of

consumers who do not fully understand their options. Economists, for exam-

ple, have found that about 20 percent of those who bought a high-cost mort-

gage qualified for a prime-priced loan.68

To help mainstream lenders connect with consumers, and to help promote

homeownership, the University of Pennsylvania created a guaranteed mort-

gage program for its employees. The university entered into an agreement

with Advance Bank, GMAC Mortgage Corporation, and Citizens Bank, three

lenders in the Philadelphia market. By connecting families to preapproved

lenders, the university is ensuring that its employees are connected to respon-

sible mortgage companies that offer reasonable prices. This promotes main-

stream companies in Philadelphia’s housing markets.


www.business-services.upenn.edu/communityhousing/mortgagePrograms.html

Curb High-Priced Basic Financial Services

Moratoriums on and Price Caps for Check Cashers and Payday Lenders

Leaders in several states have recognized payday lenders and other alter-

native financial services drain tens of millions of dollars from the pockets

of lower-income consumers, and they have taken steps to curb their

growth (see Appendix).

Several cities and states have passed moratoriums on business licenses

for these companies. Similarly, some cities have passed strict ordinances

that specify minimum distances between these establishments. In Pima

County leaders banned such businesses from doing opening within 1,200

feet of a similar business or within 500 feet of any private residence.

Other states have banned these businesses outright, or have lowered

the prices they can charge. In 2004, Georgia capped the annual percent-

age rate for short-term loans sold in the state at 16 percent and elimi-

nated the ability of these businesses to rent the charter of banks in states

with less stringent laws.


www.ncsl.org/programs/banking/paydaylend-intro.htm

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GOAL TWO:

Curb unscrupulous business practices in lower-income markets

Compared to their higher-income counterparts, Kentucky’s lower-income consumers do less shopping around when they buy credit;live in more expensive areas of the state for some types of transac-

tions; and they are more likely to fallbehind on payments. Together, thesecharacteristics act to curb the interestof mainstream responsible businessesin the state from serving lower-incomemarkets. In their place, unscrupulousbusinesses can blossom, chargingunnecessarily high prices for everydaygoods and services. Left unaddressed,these bad apples in the business com-munity can erode the potential for mainstream businesses to thrive in thismarket because the high prices they charge for everyday goods and servicescan erode the financial security of Kentucky’s lower-income households.

To address these issues, many states have used their regulatory power topromote more reasonable prices in lower-income markets. This sectionreviews some of the more prevalent regulatory efforts in recent years, whichKentucky may consider as options to lower prices for the poor and promotemainstream businesses in the state.

Kentucky’s lower-income consumers do lessshopping around when they buy credit; live inmore expensive areas of the state for sometypes of transactions; and they are more likelyto fall behind on payments.

Limit the Variability of Insurance Fees by Income

Regulate the Use of Credit Scores and Territories by Insurance Companies

Leaders in other states have reacted to price variability by taking action to

limit the extent to which insurance prices can vary with household

income. Florida, Maryland, and Hawaii have banned or significantly

curbed insurance companies from using credit report information to set

certain insurance rates.69 During the past two years, state legislatures in at

least three states (Washington, Michigan, and West Virginia) have pro-

posed similar bills. In addition, bills under consideration in Tennessee,

Missouri, and North Dakota would prevent premium increases on the

basis of credit scores, a change that would protect those who fall on hard

times after they already have been underwritten. Together, these legisla-

tive and regulatory steps are examples for Kentucky’s leaders.


www.insurance.wa.gov/publications/news/Final_SESRC_Report.pdf

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Curb Abuses by Car Dealers

Car Buyer Bill of Rights

Getting a good price for a car depends on consumers doing significant research before showing up at the dealer-

ship. Prices for cars, loan terms, warranty options, and maintenance histories (if used) are some of the pieces of

information consumers should have to ensure that they are offered a fair price. As this and other reports have

shown, not everyone gets a fair shake. Consumers in lower-income neighborhoods, particularly those who rent

their home, lack a college education, and are black systematically pay higher prices for cars.

Leaders in several states have taken steps to curb these practices by car dealers. With the passage of the Car

Buyer Bill of Rights last year, California requires car dealers to itemize components of a buyer’s monthly install-

ment bill, and makes it illegal for them to add terms of the contract without first disclosing additions to the con-

sumer. The law also caps the incentive financial institutions can provide to dealers for selling high-priced loans

and requires dealers to submit information to the consumer about the role of credit scores in determining auto

loan rates. The measure also provides for an optional cooling-off period. Consumers can pay a fee for the right to

return the car within 48 hours. Together, these efforts mark an important step forward in educating and protecting

consumers.


www.dca.ca.gov/legis/2005/miscconsumer.htm

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Discourage Questionable Practices in the Mortgage Market

State Mortgage Lending Laws

Leaders in other states have taken action to curb certain questionable

practices in the otherwise responsible mortgage industry.70 In 2006, states

considered more than 50 bills to curb abusive practices. One of the

stronger laws was passed in New Mexico and includes restrictions on

prepayment penalties, limits refinancing practices that strip equity from

homeowners, and requires that borrowers receive financial counseling

prior to buying a high-cost mortgage. An analysis of its impact found that

although the volume of the high-cost market has not been affected, the

number of bills sold with unnecessary price-inflating features is substan-

tially lower than in other states without these protections. Leaders in

Kentucky should consider these models to limit price-inflating practices.


www.responsiblelending.org

Limit Prices at Rent-to-Own Businesses

Rent-to-Own State Laws

The high cost of rent-to-own transactions have prompted leaders in sev-

eral states to limit the amount by which these businesses can inflate

prices. While Connecticut allows rent-to-own businesses to charge as

much as 100 percent of the merchandise’s price in fees and rental costs,

Wisconsin has capped that rate at 30 percent.

Although the first line of action in Kentucky should be to educate con-

sumers on the higher prices they are paying, Kentucky’s leaders can also

follow the example of other states and cap the prices charged by rent-to-

own businesses.


www.ftc.gov/reports/renttoown/rtosummary.shtm

Finally, this report has provided evidence that Kentucky’s lower-income consumers do not have as much information as they need

to make sound financial decisions.

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GOAL THREE:

Promote financial responsibility among lower-income consumers

Kentucky’s leaders must help lower-income consumers make betterfinancial decisions. Given that unbanked households have seldomeven thought about opening up a bank account, or that most lower-

income Kentuckians do not understand credit reports and scores and fail toshop around for goods and services, there is clearly great opportunity tobring more Kentuckians into the financial mainstream through better infor-mation. This section reviews a handful of states that have are attempting toaddress this problem. ■

Invest in Consumer Education,

Promote Financial Education

Kentucky has one of the most

stringent high school financial

education requirements in the

nation.72 Yet it is unclear what

impact this requirement is having

because school leaders are not

held accountable for adhering to

the requirement. In fact, state

education leaders in the state

expressed pessimism that chil-

dren were receiving a financial

education of any kind. Clearly,

more accountability is needed to

ensure that every high school

junior is as familiar with the idea

of a credit score as he or she is

with an ACT or SAT score.

Kentucky’s public and private

leaders should build on these

investments by a) evaluating the

gaps in financial education deliv-

ery in their jurisdictions; b) deter-

mining the best practices that

can be used to fill those gaps;

and c) establishing a method for

tracking the impact of invest-

ments in financial education.

Together, these three steps can

provide a foundation for lower-

income consumers to make more

responsible decisions.


www.chicagofed.org/cedric/

financial_education_research_

center.cfm

Promote Internet Access and Use

One of the best resources for consumers is the Internet. The best con-

sumer examples include:

• Lendingtree.com, which compares information on mortgages

• Einsurance.com and progressive.com, which compare prices for insur-

ance premiums

• Carbargain.com, cardirect.com, cars.com, and Edmunds.com, which

provide prices and other information on new and used cars

• Shopping.com, which compares prices for appliances and electronics

• Prosper.com, which provides high-risk borrowers relatively

low-cost loans

In addition to these shopping sites, Kentucky’s state departments pro-

vide very useful information to consumers. The state’s Department of

Insurance provides a shopping guide that compares rates for a compara-

ble amount of insurance offered by companies licensed in the state. Such

a resource, if made available to Kentucky’s lower-income consumers,

would give them a much needed leg up to find the lowest possible price

for insurance in the state.

However, nearly two-thirds (64 percent) of Kentucky’s lower-income

consumers do not have regular access to the Internet, compared with just

18 percent on average of all other consumers.71 Further, very few of those

who do have online access report using it to compare prices or do

research when buying major goods and services.

Kentucky has a number of options to boost Internet access among

lower-income consumers, from continuing to transform their libraries into

computer-based learning centers to directly subsidizing computer pur-

chases and Internet access for lower-income households. Whatever option

Kentucky chooses, it must with equal vigor ensure that consumers use the

online information. Outreach to community and business leaders can help

them make this information available to lower-income consumers.


www.pewinternet.org

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Appendix. Survey Responses, by Household Income

Household IncomeLess than $20,000 – $40,000– $60,000– $80,000 $20,000 $39,999 $59,999 $79,999 or more

Homeownership and Home Loans

Proportion of respondents who own a house 46% 55% 85% 89% 89%

Proportion of homeowners who have an outstanding mortgage 38% 49% 57% 76% 79%

Proportion of mortgage borrowers who have refinanced 33% 33% 35% 51% 46%

Proportion of mortgage borrowers who chose a loan company by…

…using the Internet to do research 9% 8% 11% 19% 26%

…using the Internet to obtain quotes from companies 5% 7% 10% 20% 18%

…getting a referral from a trusted source 59% 55% 69% 42% 68%

…using advertisements from companies 11% 13% 19% 20% 16%

…obtaining quotes from companies using means other than the Internet 14% 30% 49% 43% 49%

Proportion of mortgage borrowers who have missed a payment 19% 17% 5% 4% 0%

Car Ownership and Car Loans

Proportion of respondents who own a car 72% 88% 99% 98% 93%

Proportion of car owners who chose a dealer by…



…using advertisements from car dealers 24% 28% 38% 20% 44%

…using the dealer located closest to them 50% 38% 49% 39% 31%

Proportion of car owners who obtained multiple quotes before purchasing 58% 60% 72% 65% 71%

Proportion of car owners with an outstanding auto loan 17% 19% 37% 49% 57%

Proportion of auto loan borrowers who chose their loan company by…




…using advertisements from companies 29% 21% 39% 11% 22%

…just using the dealer from which car was purchased 78% 71% 93% 64% 47%

Proportion of auto loan borrowers who obtained multiple quotes 55% 44% 40% 37% 48%

before taking out a loan

Proportion of car owners who have auto insurance 93% 98% 100% 100% 100%

Proportion of insured car owners who chose their insurance company by…




…obtaining quotes from companies using means other than the Internet 61% 59% 60% 59% 61%

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DIX

Appendix. Survey Responses, by Household Income (continued)


Basic Financial Services and Assets

Proportion of respondents who have a checking account 72% 88% 94% 99% 100%

Proportion of checking account holders who pay a monthly maintenance fee 27% 17% 10% 16% 10%

Proportion of of checking account holders who receive their 25% 50% 64% 78% 74%

paycheck via direct deposit

Proportion of checking account holders who have overdrawn their account 43% 52% 42% 41% 45%

Proportion of respondents who do not have a checking account because…

…there are no banks or credit unions located near their homes 1% 5% 0% 0% n.a.

…they are not eligible due to a poor banking history 2% 14% 16% 0% n.a.

…they do not feel welcome at banks and credit unions 2% 2% 11% 0% n.a.

…they have never considered opening an account before 12% 26% 34% 0% n.a.

…there is too much paperwork required 10% 12% 11% 0% n.a.

…they don’t trust banks or credit unions 30% 11% 20% 0% n.a.

…of some other reason 42% 30% 8% 100% n.a.

Proportion of respondents who have savings or investments, excluding houses 22% 62% 77% 96% 97%

Proportion of respondents who have a savings account 67% 80% 78% 87% 90%

Proportion of respondents who own one or more credit cards 34% 60% 76% 89% 91%

Proportion of credit card holders who have been late on a payment 40% 32% 31% 33% 38%

Proportion of respondents who have used a check-cashing business 20% 10% 9% 5% 5%

Proportion of respondents who have used an alternative short-term 21% 8% 8% 1% 3%

loan business

Proportion of alternative short-term loan users who regularly frequent 18% 0% 16% 0% 14%

these businesses

Tax Services

Proportion of respondents who used a paid tax preparer last year 29% 53% 48% 54% 56%

Proportion of paid tax preparer users who claimed a refund 33% 17% 19% 6% 6%

anticipation loan (RAL)

Proportion of paid tax preparer users who used this service 84% 80% 78% 61% 82%

primarily to claim a RAL

Proportion of paid tax preparer users who used this service because…

…they did not understand how to fill out tax forms 43% 48% 36% 33% 39%

…they did not want to take the time to fill out tax forms 36% 37% 48% 61% 58%

…it was the only way to claim a RAL 21% 16% 16% 6% 3%

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DIX

Appendix. Survey Responses, by Household Income (continued)


Financial Literacy and Awareness

Proportion of respondents who have regular Internet access 36% 66% 83% 91% 98%

Proportion of respondents who have seen their credit report 35% 58% 75% 78% 82%

Proportion of respondents who have seen their credit report and…

…found mistakes in it 42% 30% 39% 49% 44%

…found mistakes in it and were able to get them corrected 51% 63% 74% 87% 76%

…found mistakes in it as a result of their identity being stolen 31% 20% 11% 8% 13%

Proportion of respondents who found mistakes and...

…found mistakes 100% of the time 22% 20% 7% 11% 18%

…found mistakes 50–99% of the time 27% 20% 22% 25% 10%

…found mistakes 25–49% of the time 7% 10% 7% 11% 12%

…found mistakes less than 25% of the time 44% 50% 64% 53% 61%

Proportion of respondents who think that one’s credit history can influence…

…eligibility for a loan 71% 89% 91% 94% 94%

…the interest rate charged on a loan 74% 86% 91% 94% 92%

…eligibility for Social Security benefits 13% 13% 15% 10% 13%

…insurance coverage or premiums 45% 59% 71% 69% 71%

…eligibility for employment 48% 44% 62% 67% 65%

…eligibility to obtain a driver’s license 8% 4% 3% 5% 9%

…eligibility to rent a home 60% 75% 85% 83% 84%

Proportion of respondents who know that they can view their credit 55% 69% 74% 81% 83%

report for free once annually

Proportion of respondents who know where to obtain a free copy 37% 51% 65% 69% 67%

of their credit report

Proportion of respondents who regularly use grocery store coupons 52% 48% 53% 50% 39%

Proportion of respondents who think they would benefit from a free 48% 53% 51% 34% 38%

class about price comparison for basic necessities

Average amount respondents would be willing to pay for such a class $35 $18 $33 $27 $40

Proportion of respondents who would like to see the state fund 88% 91% 93% 90% 86%

financial education classes in public schools

Source: Authors’ analysis of a statewide survey commissioned by The Brookings Institution, and administered by the University

of Kentucky’s Survey Research Center

1. This differs from IRS reports because IRSdata is based on filers and our survey isbased on households (a different universe).Also, the IRS measure of low-income filersincludes all those who earn less than themaximum income threshold for EarnedIncome Tax Credit benefits, which is nearlytwice the income level used in our measureof low-income. Annual information aboutEITC usage around the country can befound at:http://webapps.brookings.edu/EITC/.

2. Governor’s Summit on Quality of Life in theCommonwealth, cosponsored by the gover-nor’s office, the Kentucky Cabinet forFamilies and Children, National GovernorsAssociation, the Kentucky Community andTechnical College System, and the FordFoundation, October 17, 2002.

3. Based on an analysis of three-year averagesfrom the Census Bureau’s AmericanCommunity Survey.

4. This section of the report is adapted fromMatt Fellowes, From Poverty, Opportunity:Putting the Market to Work for Lower-incomeFamilies (Washington: Brookings Institution,2006).

5. See, for example, David Caplovitz, The PoorPay More (New York: Free Press, 1967).

6. U.S. Census Bureau, Administrative andCustomer Services Division, StatisticalCompedia Branch, U.S. Department ofCommerce, Bureau of Economic Analysis.

7. See Matt Fellowes, “Grounds forCompetition: The Basic Financial ServiceInfrastructure in Lower-IncomeNeighborhoods.” Presented at the 2006Louis L. Redding Public Policy Forum,University of Delaware, 2006, available athttp://www.brookings.edu/metro/speeches/20060317_financialserv.htm (April 2006).

8. More on this time trend can be found inMatt Fellowes. 2007. “Making Markets AnAsset for the Poor.” Harvard Law and PolicyReview. 1(2); and Brian Grow. May 11,2007. “The New Poverty Economy.”BusinessWeek.

9. Authors’ analysis of the 2004 Survey ofConsumer Expenditures.

10. Because of limits on data availability, we donot examine the other parts of a typical fam-ily’s budget, including utilities, health care,or entertainment.

11. The remainder of this section is adaptedfrom Fellowes, From Poverty, Opportunity.

12. Credit cards and debit cards are two otherfinancial service products often thought of as“basic,” but no data are available to compareprices for these products.

13. For more information about this survey, seeBrian K. Bucks, Arthur B. Kennickell, andKevin B. Moore, “Recent Changes in U.S.Family Finances: Evidence from the 2001and 2004 Survey of Consumer Finances,”Federal Reserve Bulletin 92 (February 2006):A1-A38.

14. There may be other types of higher auto-related costs, such as the cost of gasolineand the cost of maintaining a car. Gas maycost more in lower-income neighborhoodsbecause of the higher costs of security andbecause stations are more likely to be locatedin urban neighborhoods. Maintaining a carmay be more expensive because lower-income households are much more likely to drive a used car than higher-incomehouseholds. Unfortunately, we were unableto find data on these costs.

15. Fiona Scott Morton, Florian Zettelmeyer,and Jorge Silva-Risso, “ConsumerInformation and Price Discrimination: Doesthe Internet Affect the Pricing of New Carsto Women and Minorities?” Working Paper8668 (Cambridge, MA: National Bureau ofEconomic Research, 2001). Also see IanAyers and Peter Siegelman, “Race andGender Discrimination in Bargaining for aNew Car,” American Economic Review 85(1995): 304-21; David W. Harless andGeorge Hoffer, “Do Women Pay More forNew Vehicles? Evidence from TransportationPrice Data,” American Economic Review 92(2002): 270–279.

16. For more information about direct, indirect,and total effects, see Rex Kline, Principlesand Practice of Structural Equation Modeling(New York: Guilford Press, 1998).

17. The SCF is the only resource of which weare aware that assesses how prices for autoloans vary by household income. However,for a local market assessment see Anne Kim,“Taken for a Ride: Subprime Lenders,Automobility, and the Working Poor”(Washington: Progressive Policy Institute,2002).

18. According to the Insurance InformationInstitute, Allstate has about 10 percent of the auto insurance market, Progressivehas about 7 percent, and Geico has about a6 percent market share. See http://www.iii.org/media/facts/statsbyissue/auto/ (accessedApril 2006). We chose the minimum insur-ance amount because we wanted as conser-vative an estimate as possible. A downside,however, is that these estimates should not

be compared across the metropolitan areasin our analysis given that we consider a dif-ferent amount of insurance across each ofthese areas. For a comparable assessment ofaverage prices, see publications by theNational Association of InsuranceCommissioners or data available from theInsurance Information Institute(www.iii.com).

19. This methodology is derived from a series ofstudies that have analyzed price varianceacross ZIP codes. See, for example, Scott E.Harrington and Greg Niehaus, “Race,Redlining, and Automobile InsurancePrices,” Journal of Business 71(3) (1998):439-469; R. Klein, “Urban HomeownersInsurance Markets: Problems and PossibleSolutions.” Working Paper (Washington, DC:National Association of InsuranceCommissioners, 1995); Missouri Departmentof Insurance, “Affordability and Availabilityof Personal Lines Insurance in UnderservedCommunities” (St. Joseph: 2004).

20. The Washington Office of the InsuranceCommissioner, Texas Department ofInsurance, the Michigan Office of Financialand Insurance Services, and the MissouriDepartment of Insurance have all under-taken analyses to estimate the relationshipbetween credit scores and driver income. Aforthcoming Federal Trade Commissionanalysis promises to be generalizable to otherstates.

21. See, for example, Albert B. Crenshaw andCaroline E. Mayer, “Geico’s Risk CriteriaChallenged: Insurer Denies That Educationand Occupation Are Used to Discriminate,”Washington Post, p. D01, March 21, 2006.

22. But see evidence of systematic differences intax assessments: Matt Fellowes and BruceKatz, The Price Is Wrong: Getting the MarketRight for Philadelphia’s Working Families(Washington: Brookings Institution, 2005).

23. Robert B. Avery, Glenn Canner, and RobertE. Cook, “New Information Reported UnderHMDA and Its Application in Fair LendingEnforcement,” Federal Reserve Bulletin(Summer 2005).

24. For more information about this comparison,see Keith S. Ernst and Deborah N.Goldstein, “Comment on Federal ReserveAnalysis of Home Mortgage Disclosure ActData.” CRL Comment #1 (Durham: Centerfor Responsible Lending, 2005).

25. James M. Lacko, Signe-Mary McKernan, andMonoj Hastak,”Survey of Rent-to-OwnCustomers” Bureau of Economics StaffReport (Washington: Federal TradeCommission, 2000).

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Endnotes

26. For other examples of grocery baskets usedin this line of research see LashawanRichburg Hayes, “Do the Poor Pay More? AnEmpirical Investigation of Price Dispersionin Food Retailing.” Industrial RelationsSection Working Paper no. 446 (Princeton,NJ: Princeton University, 2000); Phillip R.Kaufman, James M. MacDonald, Steven M.Lutz, and David M. Smallwood, “Do thePoor Pay More for Food? Item Selection andPrice Differences Affect Lower-incomeHousehold Food Costs.” AgricultureEconomic Report no. 759 (Washington: U.S.Department of Agriculture, EconomicResearch Service, 1997); Trinity Center forNeighborhoods, “Food Pricing in Hartford,Connecticut: Supplement to the SelfSufficiency Study” (Hartford: 2002).

27. Evidence suggests that smaller stores chargehigher prices than larger stores. Becauselower-income neighborhoods generally havemuch less access to larger stores thanhigher-income neighborhoods, we can inferthat food is, on average, more expensive inlower-income neighborhoods. For evidenceof the relationship between store size andprice see Phillip R. Kaufman and Charles R.Handy, “Supermarket Prices and PriceDifferences: City, Firm, and Store-LevelDeterminants.” Technical Bulletin Number1776 (Washington: U.S. Department ofAgriculture, Economic Research Service,1989); Howard Kunreuther, “Why the PoorPay More for Food: Theoretical andEmpirical Evidence,” Journal of Business 46(1973): 368–383.

28. University of Kentucky, Survey ResearchCenter, http://www.survey.rgs.uky.edu,(859)323-4684.

29. Assuming a charge of 5 percent for a payrollcheck, a family in Lexington with a netincome of $30,000 a year earned from onesalaried worker can pay up to $1,500 to cashchecks from a private company. If they alsooccasionally took out a payday loan or apawnshop loan, in addition to paying for atax preparation service and refund anticipa-tion loan, this family would pay at least$2,000 in fees.

30. We jointly analyze these companies becausean increasing number of establishments thatprovide one service also sell other services.For evidence of this market trend, seePatrick Bolton and Howard Rosenthal, edi-tors, Credit Markets for the Poor (New York:Russell Sage Foundation, 2005). Also seeSheila Bair, “Low Cost Payday Loans: TheOpportunities, the Obstacles.” (New York:Annie E. Casey Foundation, 2005).

31. Jane J. Kim, “Banks Sweeten Promotions forNew Checking Customers; Rates CreatingProfit Pressures—Bounced-Check Fees,Other Penalties Rising” Wall Street Journal.April 2, 2006.

32. For more information see Center forFinancial Services Innovation, www.cfsi.org(February 2007).

33. Authors’ analysis of Kentucky Office ofFinancial Institutions data. Data do notinclude Internet-based short-term loanproviders that Kentucky consumers canaccess in addition to those licensed inKentucky.

34. Katy Jacob, “Highlights from the InauguralUnderbanked Financial Services Forum”(Chicago: Center for Financial ServiceInnovation, 2006).

35. John P. Caskey, “Fringe Banking and theRise of Payday Lending.” In Patrick Boltonand Howard Rosenthal, eds., Credit Marketsfor the Poor (New York: Russell SageFoundation, 2005).

36. Late payments on a credit card can alsoexceed the APR charged by these alternativeshort-term loan companies.

37. This differs from IRS reports because IRSdata is based on filers and our survey isbased on households (a different populationuniverse). Also, the IRS measure of low-income filers includes all those who earn lessthan the maximum income threshold forEarned Income Tax Credit benefits, which isnearly twice as high as our measure.

38. This is among the population of Kentuckyhouseholds that use a paid provider.

39. Alan Berube, Anne Kim, Benjamin Forman,and Megan Burns, “The Price of PayingTaxes: How Tax Preparation and RefundLoan Fees Erode the Benefits of the EITC”(Washington: Brookings Institution, 2002).

40. We jointly analyze these companies becausean increasing number of establishments thatsell one service also sell the other service.See Bolton and Rosenthal, Credit Markets forthe Poor.

41. Matt Fellowes and Mia Mabanta. 2007.“Borrowing to Get Ahead, and Behind: TheCredit Boom and Bust in Lower-IncomeMarkets.” Washington, DC: The BrookingsInstitution.

42. For instance, in the appendix we report thatwhile lower-income homeowners inKentucky are much more likely than higher-income homeowners to fall behind on mort-gage payments, lower-income householdswith credit cards are about as likely as allother households to miss payments. Also, wefind that the propensity to overdrawaccounts is about the same across incomegroups. There is some selection bias limitinginferences from these results—i.e., the 25percent of unbanked lower-income house-holds are probably systematically different,as a group, than the 75 percent that arebanked.

43. This section of the report is largely adaptedfrom Fellowes, From Poverty, Opportunity.

44. Scott Morton, Zettelmeyer, and Silva-Risso,“Consumer Information and PriceDiscrimination.” See also Ayers andSiegelman, “Race and GenderDiscrimination in Bargaining for a New Car,”and Harless and Hoffer, “Do Women PayMore for New Vehicles?”

45. See, for example, Crenshaw and Mayer,“Geico’s Risk Criteria Challenged.”

46. Fellowes and Mabanta, “Borrowing to GetAhead, and Behind: The Credit Boom andBust in Lower-Income Markets.”

47. Ayers and Siegelman, “Race and GenderDiscrimination in Bargaining for a New Car.”

48. Bureau of Transportation Statistics,Transportation Statistics Annual Report(Washington: U.S. Department ofTransportation, Research and InnovativeTechnology Administration, Bureau ofTransportation Statistics, 2005).

49. These loans are defined by the FederalReserve Board as 3 percentage points abovecomparable Treasury notes for first liens and5 percentage points above for junior liens. Inusing this definition, the board estimatedthey would capture more than 95 percent ofthe subprime market. For more information,see Robert B. Avery, Glenn Canner, andRobert E. Cook, “New Information ReportedUnder HMDA and Its Application in FairLending Enforcement,” Federal ReserveBulletin (Summer 2005). Note, however,that recent comparisons of private-sectordata with these public data suggest that theFederal Reserve’s definition of “high cost”mortgages misses a large proportion of thismarket. For more information about thiscomparison see Ernst and Goldstein,“Comment on Federal Reserve Analysis.”

50. What is considered “typical” was assessedusing supplemental information from theSCF.

51. See, for example, Crenshaw and Mayer,“Geico’s Risk Criteria Challenged”; MattFellowes, “Credit Scores, Reports, andGetting Ahead in America”; WashingtonOffice of the Insurance Commissioner,“Washington Insurance Underwriting andPricing.” Submitted to the state legislature,December 2003.

52. Lacko, McKernan, and Hastak, “Survey ofRent-to-Own Customers.” But seeAssociation of Progressive RentalOrganizations (www.rtohq.org) for an indus-try perspective on its customer base.

53. State of Maryland, Office of the AttorneyGeneral, “Rent-to-Own: Worth theConvenience?” (Baltimore: 2003), atwww.oag.state.md.us/consumer/edge109.htm (April 2007).

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54. According to one recent survey, the averagecredit card APR was 12.6 percent in 2004across 146 different credit card products. Formore information, see San FranciscoConsumer Action. “2005 Credit CardSurvey” (San Francisco, 2005).

55. State of Wisconsin, Department of FinancialInstitutions, “Rent to Own, (Madison, nodate), available at www.wdfi.org/wca/consumer_credit/credit_guides/rent-to-own.htm (April 2006).

56. Fellowes, “Credit Scores, Reports, andGetting Ahead in America.”

57. Howard Lax, Michael Manti, Paul Raca, andPeter Zorn. “Subprime Lending: AnInvestigation of Economic Efficiency,”Housing Policy Debate 15 (3) (2004):531–571.

58. Harriet Johnson Brackey,” Insurers, StateDuel Over Role of Credit Scores in Auto andHome Insurance Rates,” South Florida Sun-Sentinel, July 13, 2006.

59. Austan Goolsbee and Jeffrey Brown, “Doesthe Internet Make Markets MoreCompetitive? Evidence from the LifeInsurance Industry,” Journal of PoliticalEconomy, 110 (2002): 3.

60. Fellowes, “From Poverty, Opportunity:Putting the Market to Work for LowerIncome Families.”

61. To view these studies, see www.socialcom-pact.org

62. Robert Berner, “Wal-Mart’s Urban Renewal.”BusinessWeek, April 4, 2006.

63. LISC has a number of interesting resourceson grocery store development in urban areas,including successful examples from aroundthe country at http://www.lisc.org/content/article/detail/2857

64. Clint Riley, “New York Uses Banks to Kick-Start Renewal,” Wall Street Journal, March21, 2006.

65. For an excellent assessment of recent effortsby banks and credit unions to compete withhigh-priced, short-term loan providers, seeBair, “Low Cost Payday Loans.”

66. The auto insurance quotes from Californiapresented in the results section of this reportwere open-market quotes, and do not reflectthe substantial cost savings available throughthis program.

67. New York’s Department of Insurance,Consumer Shopping Guide for Homeownersand Tenants Insurance (Albany: 2002).

68. Lax, Manti, Raca, and Zorn, “SubprimeLending.”

69. See the Washington Office of the InsuranceCommissioner, “Washington InsuranceUnderwriting and Pricing.”

70. For an excellent review of these bills, and theeffect that they have had on the market, seeWei Li and Keith S. Ernst, “The Best Valuein the Subprime Market: State PredatoryLending Reforms” (Washington: Center forResponsible Lending, 2006).

71. Authors’ analysis of statewide survey com-missioned for this report.

72. National Council on Economic Education,“Survey of the States: Economic andPersonal Finance Education in Our Nation’sSchools in 2004” (Washington: 2005).

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About the Metropolitan Policy Program

The Metropolitan Policy Program was launched in 1996 to provide decisionmakers cutting-edge research and policy analysis on the shifting realities ofcities and metropolitan areas.

The program reflects our belief that the United States is undergoing a pro-found period of change—change that affects its demographic make-up, itsmarket dynamics, and its development patterns. These changes are reshap-ing both the roles of cities, suburbs, and metropolitan areas and the chal-lenges they confront. For that reason, a new generation of public policiesmust be developed that answers to these new circumstances.

Our mission has therefore been clear from the outset: We are redefiningthe challenges facing metropolitan America and promoting innovative solutions to help communities grow in more inclusive, competitive, andsustainable ways.

For More Information

Matt FellowesThe Brookings Institution1775 Massachusetts Ave., NWWashington, DC 20036Phone: 202.797.6140E-mail: [email protected]

Dr. Terry I. Brooks, Executive DirectorKentucky Youth Advocates11001 Bluegrass ParkwayJeffersontown, KY 40299Phone: 502.895.8167 E-mail: [email protected]

The Brookings Institution

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www.brookings.edu

Direct: 202-797-6139 • Fax/direct: 202-797-2965

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