Payday Loan Regulation May Leave Some in the Lurch
Stacy Cowley, © 2016 New York Times News Service
CANTON, Ohio — This city of 73,000 is known for a few things — the Pro Football Hall of Fame, the presidential library of William McKinley, a lively downtown arts scene.
But in banking circles, it has gained a more distinct reputation: Canton is a nexus of the payday lending industry, in which people who have trouble making ends meet from one paycheck to the next take out high-interest loans from specialty lenders.
On 30th Street, a half-dozen payday lending outlets surround a popular shopping center, and at lunchtime they draw a steady crowd of customers. At the Advance America shop, Martin Munn stopped in recently with his young daughter to do his biweekly banking: Nearly every payday, he cashes his check, pays off his last loan in full and takes out a new one against his next paycheck. The amount he borrows varies, but it is typically around $500, for which he pays a fee of $73 — a 380% annual interest rate.
The woman who manages the store, Tanya Alazaus, greeted Munn with a smile. The shop looks like a small bank branch, with clerks waiting behind counters to handle transactions and chat with their regulars. Alazaus sees herself as a local family merchant.
But federal regulators view her and businesses like Advance America quite differently: as part of a predatory industry that is ripe for reform and a crackdown.
The Consumer Financial Protection Bureau, the watchdog agency set up after the last financial crisis, is poised to adopt strict new national rules that will curtail payday lending. These will limit the number of loans that can be taken in quick succession and will force companies like Advance America to check that their borrowers have the means to repay them.
But lenders like Alazaus — and even some consumer advocates who favor stronger regulation — are grappling with the uncomfortable question of what will happen to customers like Munn if a financial lifeline that they rely on is cut off.
“My customers look forward to being able to walk in here for their short-term needs,” Alazaus said. “They would rather use us than things like credit cards, and most don’t even have the ability to use those.”
Ohio has some of the highest per-capita payday loan use in the nation — the state has more loan storefronts than McDonald’s outlets — and the rates that its lenders charge are also among the highest. According to research from Pew Charitable Trusts, borrowing $300 for two weeks typically costs $68 in Ohio, compared with $54 in Kentucky, $44 in Indiana or $42 in Michigan, three neighboring states.
At least 14 states have banned high-interest payday lending, and for a time, it looked as if Ohio would join them. In a 2008 referendum, voters overwhelmingly backed a law limiting interest rates.
But lenders found loopholes, and their loan volume grew: To skirt the rate caps, payday lenders register as mortgage lenders or as credit service organizations, which are allowed to charge fees for finding loans for their customers.
Advance America operates under a credit services license. It complies with Ohio’s rules by charging just $5.43 in interest, paid to a third-party bank, on a two-week loan of $500 — but it adds to that $67.50 in fees, most of which it keeps.
“Because the Legislature has been unwilling to take action, it’s been a Wild West for consumers,” said Kalitha Williams, a policy coordinator for Policy Matters Ohio, a group that has pushed for stricter rules.
Ohioans now spend $500 million a year on fees for short-term loans, up from $230 million a decade ago, according to an analysis by the Center for Responsible Lending, a nonprofit group.
Many of these borrowers find themselves on a path to financial ruin. Denise Cook-Brooks, a teacher and home health care worker in Springfield, Ohio, calls the payday loan she took out several years ago “the worst mistake of my life.”
Short on cash to make a car insurance payment, she borrowed $400, but two weeks later she still did not have enough to pay it back — so she borrowed more. For nine months, she continued the cycle, incurring around $150 a month in fees.
Cook-Brooks bitterly recalls the stress of her payday routine: On her lunch break, she hurried to the bank to cash her check, then to the lender to pay off her existing loan and take out a new one, then back to the bank to deposit her borrowed cash.
“I’m a single mother, and I was living paycheck to paycheck,” she said. “It’s a wonder I didn’t have a nervous breakdown.” The cycle finally stopped when, to save money, she gave up her rented apartment and moved in with her brother.
The most obvious way to reduce short-term loan costs would be to cap how much lenders can charge, but the 2010 law that created the Consumer Financial Protection Bureau prohibited the agency from setting rate limits. So instead it devised a complex set of underwriting rules that will make it harder for these lenders to stay in business.
Right now, few payday lenders run formal credit checks on their borrowers — a plus for customers who know their scores are too low for them to qualify for credit cards or bank loans. At Advance America, customers need to bring in a pay stub, a government-issued ID, a Social Security card and a bank account statement. With that, the company uses its own algorithms and data sources to determine creditworthiness and make a decision in minutes.
The consumer bureau’s guidelines, which can be enacted by the agency without outside approval and could take effect as soon as next year, will require more inquiry.
Storefront lenders and the growing number of companies that make loans online will generally need to verify a borrower’s income and debts, estimate living expenses, and ensure that the borrower can afford the required payments.
Lenders will be able to issue loans of up to $500 without those checks, but only to people who have not repeatedly reborrowed, taking out one loan after another. Many borrowers will face a mandatory 30-day “cooling off” period before they can take out another loan.
The requirements are a messy compromise that both sides hate: The lenders predict that they will not be able to make enough money to survive, while consumer advocates say that lenders will be able to continue making some loans that their borrowers cannot repay.
“Even a single unaffordable loan can create a cascade of financial consequences,” the Center for Responsible Lending wrote in its analysis of the rules.
Loan volume will drop significantly under the new rules, but the industry says that high volume and prices are needed to cover its operating costs. Some research backs that claim: A Federal Deposit Insurance Corp. study of payday lending’s profitability concluded that high delinquency rates and the overhead of running retail stores justified the industry’s interest rates.
“We’re very concerned that if this goes through, it will put a lot of people out of business,” said Pat Crowley, a spokesman for the Ohio Consumer Lenders Association. “There will be less credit available, and those who find a resource will pay more.”
Many economists fear that he is correct — and that low-income consumers will be the ones who are hurt.
In 2004, Georgia made most short-term, high-interest loans illegal. In the wake of that law, Georgia residents paid more bounced-check overdraft fees and became more likely to file for bankruptcy, according to a report by the Federal Reserve Bank of New York.
A sweeping study of bans on payday lending, scheduled to be published soon in The Journal of Law and Economics, found similar patterns in other states. When short-term loans disappear, the need that drives demand for them does not; many customers simply shift to other expensive forms of credit like pawn shops, or pay late fees on overdue bills, the study’s authors concluded.
Munn, who works as a site geologist on oil wells, first borrowed from Advance America eight months ago when his car broke down. He had some money saved, but he needed a few hundred more to pay the $1,200 repair bill. Then his employer, reacting to falling oil prices, cut wages 30%. Munn became a regular at the loan shop.
He likes the store’s neighborhood vibe and friendly staff, and he views payday loans as a way to avoid debt traps he considers more insidious.
“I don’t like credit cards,” said Munn, who is wary of the high balances that they make it too easy to run up. “I could borrow from my IRA, but the penalties are huge.”
At Advance America, he said, “I come in here, pay back what I’ve taken, and get a little bit more for rent and bills. I keep the funds to an extent that I can pay back with the next check. I don’t want to get into more trouble or debt.”
Advance America, which is based in Spartanburg, South Carolina, operates offices in 29 states, including 220 in Ohio. The company is studying the proposed rules and says it does not yet know what changes it would make to comply with them.
“It’s a draconian scenario,” said Jamie Fulmer, an Advance America spokesman. “We think we’d have an ability to figure out how to stay in business, but the rules as written would put many lenders out. The bureau knows this.”
The agency is accepting public comments on its proposal until September, and hundreds of parties plan to weigh in. Major revisions are unlikely, but some details are still being worked out.
The rules would radically reshape, and in some places eliminate, payday borrowing in the 36 states where lenders still operate, according to Richard P. Hackett, a former assistant director at the Consumer Financial Protection Bureau. He left the agency three years ago and now works privately on policy research, much of it sponsored by companies in the industry.
Using data from five large lenders, Hackett calculated that the new rules would reduce their loan volume about 70% and their revenue by 80%.
Critics often compare attempts to regulate payday lending to a game of Whac-A-Mole: When one approach is smacked down, the lenders shift a few inches and pop back up.
The path the consumer bureau took, Hackett said, “appears to solve that problem by unplugging the game.”
To Learn More:
As States Ban Payday Loans, Big Banks Move in to Help Lenders (by Noel Brinkerhoff, AllGov)
Payday Lender Sues South Dakota, Claiming 36% Interest Rate is too Low (by Steve Straehley, AllGov)
Predatory Loan Companies Use Loopholes to Suck High Interest Rates from Military Families (by Noel Brinkerhoff, AllGov)
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