Monday, July 26, 2010

Shining Light on the Other End of Predatory Lending

Heads up about an important installation in a series about debt in the Dallas Morning News and a future book to be reviewed in our Urban Engagement Book Club.

They deal with the same issue: payday loan centers.

It is a concern with those of us at Central Dallas Ministries, because we work with people who are in poverty. In doing so, we not only deal with the needs of people in poverty, we also deal with the things that keep them poor. Pay day loan companies are one of those institutions, clustered in low income neighborhoods which prey upon the desperation of hard working, but low income residents. Excessive interest rates, high fees, conspire together to keep these people in debt.

"On July 2, a 74-year-old Dallas widow named Yvonne Sands received her monthly Social Security check of $1,360. Shortly after 7:30 a.m., she withdrew money from the bank and drove off to renew four payday loans with annual percentage rates of about 250 percent to more than 300 percent."

"Sands can't afford to pay back the loans all at once, and they come due every month. So each month, she takes out new loans to pay for the old ones, shelling out nearly $400 in fees in the process."

"Over the last year, Sands has paid more than $4,200 in fees on those four loans – far more than the $1,850 she received in principal. And that's not counting fees on two other loans she paid off earlier this year, one of which carried an annual rate of about 660 percent."

""I'm just trying to dig myself out of this hole I'm in," Sands said."

"For better or worse, millions of Americans like Sands borrow billions of dollars a year from payday lenders. Catering to low- and middle-income customers, payday lenders provide quick cash to just about anyone with a checking account and a steady income."

On December 16, our book club, which meets at First United Methodist Church in downtown Dallas will be looking at "Broke, USA: From Pawnshops to Poverty, Inc.How the Working Poor Became Big Business", by Gary Rivlin. It's an interesting and serious look at an industry which at its peak was more numerous in the U.S. than McDonald and Burger King combined and which, in 2008, was frequented by more than 14 million households borrowing more than $40 billion and paying it back in installments of anywhere between $200-$800 at an average interest rate of 210%!

Rivlin, who had unfettered access to what he referred to as 'the poverty business', attended an annual convention of payday loan industry executives and store owners:

"The stomping piano chords and tambourine slaps blaring over the loudspeaker are at once familiar. They are the opening notes to the early Motown hit, "Money (That's What I Want)." The nation's check cashers and payday lenders have a dangerously low sense of irony, I mused. We are a respectable business, their leaders have been saying since the founding of the National Check Cashers Association in the late 1980s. Sure, we cater to a hard-pressed, down-market clientele but we are not the money grubbers the popular culture makes us out to be. We provide a useful service critical to the working of the U.S. economy. Our products are heavily regulated and fairly priced. Yet here they were kicking off their 20th annual gathering in October of 2008 with a musical production based on a song whose lyrics repeat, more than thirty times, that what the singer wants, more than love and more than happiness, is lots of money."

"The convention was being held in Las Vegas. The women dancing across the stage were young and buxom and dressed in skimpy sequined outfits. The men were buff and tan and similarly underdressed. We could have been sitting in any show room on the Strip except the lyrics had been rewritten for the occasion. Instead of an unconscious self-parody the skit was actually aimed at a handy target in those dark and unsettling days in the fall of 2008: the country's bankers. If not for the behavior or the banks, their industry would not be nearly so robust. The banks abandoned lower income neighborhoods starting thirty years ago, creating the vacuum that the country's check cashers filled. The steep fees the banks charge on a bounced check or overdue credit card fuels a lot of the demand for payday advances and other quick cash loans. The big Wall Street banks had stepped in and provided money critical to the expansion plans of many in the room, but never mind: These entrepreneurs selling their financial services to the country's hard-pressed sub-prime citizenry are nothing if not opportunistic. The nation's narrative, they argued, was theirs. The banks, who were booed lustily throughout the two-day conclave, would serve as the poverty industry's new boogieman."

You can listen to an interview with Rivlin here.

These shops aren't operating in an economic vacuum, they are the virtual 'branches' of the large financial institutions that have helped fund their expansion: JP Morgan Chase, Bank of America, Wells Fargo and Wachovia.

Of course these banks do have their supporters. "Under certain circumstances, taking out a payday loan can be cheaper than other immediately available alternatives, advocates say."

""The industry exists because we offer our customers a product that is more desirable than the alternatives," said Rob Norcross, a spokesman for the Consumer Service Alliance."

And then, there's the flip side. "Brian Melzer, a finance professor at Northwestern University, found in his own study that the more people had access to payday loans, the more they had trouble paying basic costs."

""I find no evidence that payday loans alleviate hardship," Melzer said in his study. "On the contrary, I find that loan access leads to increased incidence of difficulty paying mortgage, rent and utilities bills; moving out of one's home due to financial troubles; and delaying needed medical care, dental care and prescription drug purchases.""

"Moreover, some borrowers take months to pay back their loans, paying high fees over and over. Based on data collected by regulators in Florida and Oklahoma, between a quarter and a third of payday borrowers use 12 loans or more in a year, Melzer said."

""It's a product that is very, very difficult to repay," said Don Baylor, senior policy analyst at the Center for Public Policy Priorities in Austin. "It ends up becoming a much larger and larger burden on a household over time.""

It's apparently a challenge to get the attention of officials in Texas.

"The chairman of the Texas Finance Commission, Bill White, has served 25 years as an executive with Cash America International Inc ., a pawnshop and payday loan company in Fort Worth. Payday loan regulation is not a priority at the moment, he said."

""The complaints on payday lending are minuscule," he said. "It just has not risen to the level where I personally need to be involved in it.""

"In the wake of the severe recession, he is intensifying efforts to oversee banks, savings institutions and mortgage lenders."

""In times of stress, our main focus is to protect the public's deposits," he said."

It's a myth that everyone living in low income neighborhoods want to be poor. There are certain vicious cycles that come with low wages, living pay check to pay check that make an individual, a family, a community, vulnerable to predators. These businesses, which on one level could be helpful, trap low income and workers, and some in tough financial circumstances, in debt cycles that can be difficult to escape. Raising public awareness and supporting the legislation to curtail usury is critical in dealing with poverty.


nicol said...

Payday loans companies are nothing but legal long sharks. I have been there where I used them and wished I never would have. I know tell anyone that ask me about them to RUN as fast as you can. It's so true, you see Pay Day companies on almost every block and every shopping center in "low income areas", they know what they are doing.
Our Atty. General needs to run them out of the state of Texas. Some states have done such and people that used them and had loans outstanding where left free and clear of the loans. I can't remember what state(s) it was, but I read about it about two years ago. Something really needs to be done and fast.

Anonymous said...

You might run them out of the state but then what? These are lenders of the last resort, and the borrowers are almost always totally credit unworthy without other recourse. What are the impoverished masses to do? Perhaps ask Uncle Obuma to wire some cash?