Tuesday, April 26, 2011

Making More Progress Against Payday Lenders

Legislation to regulate payday lenders is winding its way through the Texas Legislature. The bills (HB 2592, 2593, and 2594), while not as strong as we would like, is a positive step. We encourage you to call your legislator and let him or her know that Texas needs to put an end to exploitation masquerading as commerce.

Locally, we are making progress in getting a city ordinance passed in Dallas which will bring a halt to the proliferation of predatory lenders - particularly in low income areas. City Council Representative Jerry Allen has done yoemans work in helping craft what he is calling the 'toughest ordinance in the country'. A tall challenge to be sure, but, again, an important first step.

For those thinking the efforts of CitySquare and other organizations is long on complaints but short on solutions, we recognize that although reports for the 'need' for these businesses are being inflated, there are some people who do indeed need short term loans for personal emergencies or for businesses. CitySquare will soon be posting a list of payday loan alternatives on its website.

Still another challenge in this fight has been the many iterations of predatory lending that sap the economic viability of financially challenged communities: pawn shops, rent-to-own stores as well as refund anticipation loans. These loans are even more pernicious because you're actually borrowing your own money!

Check out this article in Mother Jones, by Gary Rivlin, author of 'Broke USA: From Pawnshops to Poverty, Inc. - How the Working Poor Became Big Business'...

"Over the years, entrepreneurs and corporate executives have devised any number of clever ways for getting rich off the working poor, but you'd have to look long and hard to find one more diabolically inventive than the RAL. Say you have a $2,000 tax refund due and you don't want to wait a week or two for the IRS to deposit that money in your bank account. Your tax preparer would be delighted to act as the middleman for a very short-term bank loan—the RAL. You get your check that day or the next, minus various fees and interest charges, and in return sign your pending refund over to the bank. Within 15 days, the IRS wires your refund straight to the lender. It's a safe bet for the banks, but that hasn't stopped them from charging astronomical interest rates. Until this tax year, the IRS was even kind enough to let lenders know when potential borrowers were likely to have their refund garnished because they owed back taxes, say, or were behind on child support."
"[Jackson] Hewitt didn't invent the refund anticipation loan. That distinction belongs to Ross Longfield, who dreamed up the idea in 1987 and took it to H&R Block CEO Thomas Bloch. "I'm explaining it," Longfield recalls, "but Tom is sitting there going, 'I don't know; I don't know if people are going to want to do that.'""

"He worked for Beneficial Corp., a subprime lender specializing in small, high-interest loans for customers who needed to finance a new refrigerator or dining-room set. His instincts told him the RAL

"But Longfield knew.He also knew Beneficial would make a killing if he could convince tax preparers—in exchange for a cut of the proceeds—to peddle this new breed of loan on his employer's behalf. Ultimately, Longfield persuaded H&R Block to sign up. But no one was as smitten as John Hewitt—who understood that people earning $15,000 or $20,000 or $25,000 a year live in a perpetual state of financial turmoil. Hewitt began opening outposts in the inner cities, Rust Belt towns, depressed rural areas—anywhere the misery index was high. "That was the low-hanging fruit," he says. "Going into lower-income areas and delivering refunds quicker was where the opportunity was.""
"Customers wanting a RAL paid Jackson Hewitt a $24 application fee, a $25 processing fee, and a $2 electronic-filing fee, plus 4 percent of the loan amount. On a $2,000 refund, that meant $131 in charges—equivalent to an annual interest rate of about 170 percent—not to mention the few hundred bucks you might spend for tax preparation. "Essentially, they're charging people triple-digit interest rates to borrow their own money," says Chi Chi Wu, a staff attorney at the National Consumer Law Center."
"In 1988, the first year he began offering the loans, Hewitt owned 49 stores in three states. Five years later, he had 878 stores in 37 states. And five years after that, when Cendant Corp.—the conglomerate that owned Avis, Century 21, and Days Inn—bought Jackson Hewitt for $483 million, his earliest backers received a $2 million payout on every $5,000 they'd invested. Today, with 6,000 offices scattered across the country, Jackson Hewitt is more ubiquitous than KFC, and has about as many imitators."

You can read the rest of the article here.

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