Payday Lending Part 2: A National Debate

This is Part 2 of Andrew Metcalf's series on payday lending in Rhode Island. Read Part 1 here: Payday Loans Come Under Scrutiny.

National research by the Center For Responsible Lending (CRL), a financial advocacy organization, notes that high percentages of individuals that take out a payday loans often get caught in a cycle of indebtedness.  

A report by the CRL titled “Payday Loans, Inc.:  Short on Credit, Long on Debt” found that customers new to payday loans are indebted an average of 212 days during their first year of payday loan use.  That report tracked 11,000 first-time borrowers over two years in Oklahoma.

In addition to data from Oklahoma, CRL also analyzed data from Colorado and Florida and supplemented that data with interviews of borrowers conducted in New Mexico and California.  The conclusion of their report stated, “The typical payday borrower remains in payday loan debt for much of the year, and many borrowers remain indebted in payday loans for even greater periods of time.”

The data used in the report notes that 75.9 percent of borrowers took out 12 or fewer loans in Oklahoma per year, but 24.1 percent took out 12 or more per year between October 2009 to November 2010.

In 2006, after many members of Congress were made aware of soldiers falling into payday debt traps they enacted the Military Lending Act.  This bill established a maximum rate of 36 percent APR for military members and their families.

"I've seen soldiers at Payday who were financially strapped, terribly vulnerable, and willing to sign anything to get a few dollars," said Senator Jack Reed, at a Senate hearing on the Military Lending Act, "And I think this behavior, if it's targeted to exploit soldiers, is absolutely reprehensible... a 36 percent cap, I think is more than reasonable."

Rep. Frank Ferri (D-Warwick) said that payday loans were given a special exemption from  Rhode Island lending laws in 2001 because they were believed to be different from normal bank loans, but new research has proven that they have a detrimental effect.

“It sounds like legal loan-sharking to me,” said Rep. Ferri, who submitted the bill to cap interest rates on the loans at 36 percent.

He said members he has spoken to about the bill have been supportive.

Congressman David Cicilline, a known advocate for the poor, also took a stand on the issue.

“We want to have access to credit,” said Cicilline. “But I think it’s important that credit be available to people at affordable rates.”

He said that people who are in tough or low-income situations, “Don’t deserve to pay a higher rate of interest than people who are much more affluent.”

He stressed maintaining financial relationships with banking institutions as the best way to help people pull themselves out of poverty.

“I think we have got to make credit available to people at affordable rates,” said Cicilline. “We ought to have a cap in the region that protects families and low-income individuals from paying these outrageously high interest rates.”

Critics say many payday loans are taken out of necessity by low-income individuals to cover sudden costs like unforeseen medical care, car repair or other immediate expenses.

“They market toward someone that’s paycheck to paycheck, who has minimal savings and is facing a financial emergency,” said Uriah King, vice president of state policy for CRL.

Jamie Fulmer a spokesperson for Advance America, said the average borrower's income is around $50,000.

In order to take out a payday loan, borrowers must have an income and a bank account. An individual shows the center a pay stub or bank receipt, proving their income, then writes a post-dated check for the amount of the loan and the additional fees, which the center later cashes.

Some borrowers will not budget properly so when the payday centers cash their postdated checks, they will bounce.  This results in bank fees such as those experienced by Roger Harris, a disabled veteran from Woonsocket, who was profiled for an article to be released later this week.

“Any objective look at payday lending makes it pretty clear that it’s a defective product,” King, “Once you get tangled up, you’re more likely to file bankruptcy, more likely to lose your bank account due to excessive overdraft, more likely to delay medical care and nearly half of borrowers will default once they get into these cycle loans.”

King’s comments reiterate what many critics say about payday loans:  that people get caught up when they take out money for a financial emergency and then must use all or most of their next paycheck to pay back the payday loan. As a result they are left with nothing for day-to-day expenses until their next paycheck. In order to hold them over until that time, they take out another payday loan and the cycle continues.

Payday centers argue that a 36 percent cap on interest rates would effectively eliminate their ability to operate in Rhode Island. 

The Community Financial Services Association, CFSA, a lobbying organization set up by the payday loan industry, claims on their website that payday loans give consumers access to short-term credit, that widespread demand proves their necessity in the marketplace and that they are transparent and clear with their customers.

The Providence Journal made similar points.

“I challenge you to find somewhere in Rhode Island that will offer short-term credit,” said Jamie Fulmer, a spokesperson for Advance America.

Rhode Island Credit Union said it would provide a two-week loan at 10-20 percent APR based on a person’s credit score and proof of income.

Coastway Credit Union said they would provide a 3-year loan for $500 at 14.5 to 16.5 percent APR that could be paid back in two weeks if the customer wanted to. The representative said, however, that the loan can only be taken out by individuals with “decent” credit.

Fulmer also said that credit card fees, overdraft fees and bounced check fees are far worse than the interest rates his company charges.

He said defining payday loan centers as legal loan sharks is “an insult to our employees who are good honest hardworking folks” and “degrading to our customers.”

In Rhode Island, payday centers are able to charge 260 percent annual interest.  So a two-week $100 loan would cost an additional $10 in interest. 

Patrick O’Shaughnessy, the CEO of Advance America, said in a conference call with investors discussing 2011 Quarter 1 earnings that, “It is important to remember that our customers have a clear rationale for selecting the cash advance option.  They do so because it makes personal and economic sense for them.  The demand for short-term credit options is undeniable.”

Advance America, which is a publicly traded company, has 20 locations throughout RI.

The advocacy organization for payday centers claims that 90 percent of payday loans are repaid when due. The 90 percent figure is used to prove that customers are not locked into a “cycle of debt” after taking out payday loans. 

However, that number doesn’t tell the full picture according to research done by the National Consumer Law Center (NCLC.)

“Even a borrower who is able to repay the loan when it is due may be left with inadequate funds to cover other expenses and may wind up taking out another payday loan immediately or shortly after repaying the prior one,” wrote Leah Plunkett and Ana Lucia Hurtado in their study for the NCLC titled “Small-Dollar Loans, Big Problems.”

CRL estimates that $3 million per year is being sucked out of the Rhode Island economy by nationally run payday loan companies, such as Check ‘N Go of Ohio and Advance America of S.C.

“The original justification to give payday lenders a special deal and allow them to charge 260 percent annually was that payday loans were different; that they were short-term only,” said Nick Figueroa, chairman of the Univocal Legislative Minority Advisory Coalition, the RI-based group that originally approached Ferri about the need to address payday loans in the state. “According to new national research, it’s clear that this defective product no longer deserves a sweetheart deal bequeathed from the legislature.”

The coalition backing the bill is made of community organizations such as ULMAC, , the Housing Action Coalition of RI, AARP RI, LISC RI, The City of Providence, The Poverty Institute, Ocean State Action, Smith Hill Community Development Corporation, The Jewish Alliance of Greater RI, Olneyville Housing Corporation, The Housing Network of RI, CCRS, Ministry of Justice, Millions More Movement, Macremi, Community Works RI, The Capital Good Fund, and West Elmwood Housing Development Corporation.