What the Mob Can Learn from Payday Lenders

Carl Chancellor, a Pulitzer Prize-winning journalist who has been writing about social justice issues for decades, is a columnist for Change.org.

Frankly, I would have more respect for payday lenders if they would simply pull a gun on their customers and shout: "This is a stickup!" At least they would be honest about their intentions.

What else would you call charging someone 400 percent to upwards of 900 percent interest but robbery?

The mob offers better rates and easier terms than payday lenders.

With products also known as "payday advance" or "cash advance," payday lenders strip billions of dollars from poor and minority communities every year by offering dubious loans that are designed to keep people who are already hurting financially and having difficulty making ends meet trapped in a cycle of debt.

Of the estimated 19 million Americans who used payday loans last year, at least 12 million are trapped in a cycle of 400 percent interest loans (the numbers look deceptively smaller when listed over, say, a two-week period). According to the Center for Responsible Lending, U.S. borrowers who rely upon high-interest payday lending for quick cash are caught in a "debt trap" that costs them $3.4 billion each year.

That $3.4 billion is coming out of the pockets of people who can least afford it. Of the 23,000 payday lending centers doing business across America, most are concentrated in poor and minority communities. In 29 states there are more payday loan storefronts than McDonald's restaurants.

A typical payday borrower is a female African-American or Latina. Payday loans are disproportionately taken out by families headed by single women, about 62 percent of payday loan borrowers, according to the CRL. The only requirements for a payday loan are that the borrower has a checking account and a source of income.

Of course, payday lenders argue that they perform a valuable service, claiming they are the only option for debt-strapped consumers. But trust me, borrowing money at triple-digit interest rates (like 460 percent in Nebraska, 572 percent in Mississippi or 652 percent in Montana) is a bad deal that is only going to worsen a borrower's financial problems -- not solve them.

However, there is no arguing the fact that it's a very lucrative arrangement for payday lenders to follow a business plan designed to keep a borrower in debt.

To obtain a payday loan, typically around $350, a borrower gives a payday lender a postdated personal check or an authorization for automatic withdrawal from the borrower's bank account. In return, she receives cash, minus the lender's fees. On a $350 payday loan, a borrower pays about $60 in fees and walks out the door with $290 in cash.

The problem arises when the loan becomes due in two weeks. Most borrowers, because they already have a hole in their budget, cannot afford to pay the loan back in full and still make it to their next paycheck. Faced with their normal household bills and now the additional debt of the payday loan, what they end up doing is paying another $60 fee to rollover the same loan. Or, if they do pay the full $350 back, they immediately take out another payday loan with yet another $60 fee.

In either case, the borrower is paying $60 every two weeks to float a $290 cash advance while never paying down the original amount of the principal. The borrower is stuck in a debt trap -- paying new fees every two weeks that continue to add up.

According the National Association for the Advancement of Colored People, which has teamed with CRL to fight payday lending, the typical cash advance borrower takes out five payday loans a year and ends up paying on average $800 for the original $300 loan, a loss of $500 that goes purely toward interest -- and lender profit.

While the industry claims that its product is intended to help people get past the occasional financial emergency, repeat "serial" borrowing (five or more payday loans per year) accounts for 91 percent of all payday loans. Only two percent of payday borrowers who take out a loan don't come back within a year for another loan.

The abuse doesn't stop with the loan fees being charged by payday lenders, according to Uriah King of the Center for Responsible Lending. He pointed out that borrowers are routinely hit with insufficient fund penalties that add up quickly.

Payday lenders are quick to tender a borrower's postdated check, sometimes even before the due date. If the borrower's account is short on funds the check bounces and the payday lender charges an insufficient funds fee of about $25. What's more some lenders redeposit the same check multiple times, racking up multiple insufficient funds fees.

"Advance America, the country's largest payday lender, made more than $3 million in insufficient fund fees last year alone," King said.

The double whammy often comes when a borrower's bank, which has also charged overdraft fees, closes the borrower's checking account because of the overdrafts.

King noted that in February, a Michigan appeals court upheld a law that says payday loan companies can no longer charge borrowers triple damages plus $250 in court costs if their checks bounce. The law caps the amount a payday lender can collect for a returned check to the face value plus $25.

Historically, payday lenders have gone over the top in their collection practices, King said. Calling friends, family members and employers to collect on a debt is common industry practice, as is using "dubious" means to obtain court orders of default to garnish wages.

"This is a very aggressive industry," King said.

Like Michigan, many states have taken steps to rein in payday lenders with varying degrees of success. Case in point: my home state of Ohio.

In 2008, nearly 3.4 million Ohioans voted to cap annual percentage rates on payday loans to 28 percent, where the average rate had been around 391 percent. Problem solved, right?

Not when it comes to payday lenders, who promptly found several loopholes in Ohio law that allowed them to weasel around the will of the voters and continue to charge outrageous interest rates.

Ohio lawmakers have been considering a bill (HB 209) that will close those loopholes but the legislation has been tied up in committee for months. The very real fear is that lawmakers, many being influenced by payday lobbyists, will kill the measure or at the very least water it down. Tell lawmakers to end the debt trap in Ohio!

The payday lobby has floated reforms such as payment plans and other debt management measures for Ohio lawmakers to consider. What they don't want is a strictly enforced interest rate cap, which has been the only proven means to get a grip on this out-of-control industry.

Nationally, groups like the NAACP and CLR are pushing for a federal 36 percent interest rate cap for consumer loans that would eliminate the predatory practice of charging 400 percent for loans to working people. According to CLR, a two-digit interest rate cap is already saving residents in 15 states and the District of Columbia nearly $1.8 billion in predatory payday fees alone.

I find it astonishing how in Ohio and other states the predatory payday lending industry has gotten away with brazenly thumbing its nose at voters by refusing to abide by rules to protect consumers.

It’s time for us to push our federal and state lawmakers to put a stop to the kneecapping of our most vulnerable citizens by ending the corporate thuggery of payday lenders.

Photo credit: taberandrew