Robbing the Working Poor: Unregulated, Widespread

It's the American Dream that if you work hard you get ahead. But with the high cost of living these days, that isn't always the case. Sometimes families run short of cash and turn to payday loans.

Millions of families use these loans when they are short of cash, but the high cost outweighs the convenience. Interest rates start at 400 percent APR and can surpass 1,000 percent, and it is typical for a worker to pay $180 in interest on a 10-day, $700 loan. More often than not, the individual is unable to repay the full amount within the short repayment period, and the debt balloons. In fact, most payday lending volume comes from individuals forced by the cost of the original loan to take out another and another. We’ve seen the devastating impact of subprime lending on the economy. (Center for Public Policy Priorities)

Not long ago I received a report from the Center for Public Policy Priorities in Austin, Texas. If you don't know CPPP, you need to, especially if you care about the challenges facing marginalized, low-income individuals and communities.

This particular report deals with predatory lenders and the impact of so-called "payday loans" on the poor in Texas. This is a case of our state needing to regulate an industry that is oppressing the already oppressed. People of faith should speak up clearly and often.

What do payday loans cost families and communities in Texas?

A recent study by the national Brookings Institution calculates the financial impact of payday lending on Austin, Dallas, El Paso, Houston, Fort Worth, and San Antonio. In these Texas cities alone, unregulated payday outfits lent $1.14 billion in 2006. Statewide, these outfits lent at least $2 billion.
To obtain these cash advances, working Texans paid at least $400 million in interest and fees, not to mention bank overdraft fees and credit costs ensuing from brutal collection practices. In other words, each year, payday loans cost Texas families nearly double what the state sets aside for financial aid so that aspiring students can attend higher education. To view fact sheets for the six Texas cities, visit CPPP here.

Responsible lenders offer better options than payday loans. Several credit unions and banks are now offering short-term loans at a fraction of the cost of a payday loan. The FDIC is also partnering with three Texas banks in a two-year pilot project to identify best practices in affordable small-dollar loan programs that can be replicated by other financial institutions. These banks include Main Street Bank (Kingswood), Amarillo National Bank (Amarillo), and Liberty National Bank (Paris).

Responsible lending needs to be encouraged.

To see CPPP's analysis of the problems with payday lending and our policy recommendations for standards and accountability, read As Payday Lending Spreads across Texas, Can It be Reformed or Regulated? (Dec. 2006) and Unregistered and Unregulated: Payday Lenders Put Consumers at Risk and Flout Texas Usury Laws (Aug. 2005).

Here's the Dallas fact sheet on the problem:

Number of non-bank check cashers 107
Number of payday lenders 98
Total value of checks cashed $246,742,765
Total value of payday loans $171,223,901
Total fees on checks cashed $6,168,569
Total fees on payday loans $27,823,884
Number of pawnshops 88
Number of banks and credit unions 366
Total value of pawn loans $21,157,915

What should be done? Any ideas?

Comments (3)

grant

"More often than not, the individual is unable to repay the full amount within the short repayment period, and the debt balloons."
If you are not able to pay back the loan when you say you will pay it back, then you shouldn't be borrowing money! This is the problem! We are blaming the lenders when it is the borrowers who are being irresponsible! If I borrowed 100 bucks from you, and I wasn't able to pay you back, can I blame you for lending me the money? We need to ... stop pointing the finger at the lenders.

[Note: parts of this comment edited out by website editor to remove 'namecalling'...]

Posted by grant | March 3, 2008 5:26 PM

Posted on March 3, 2008 17:26

Peter Tramel

Thinking about this from the last comment:

"If I borrowed 100 bucks from you, and I wasn't able to pay you back, can I blame you for lending me the money?"

Seems to me like the answer is probably not, UNLESS I suspected and hoped that you couldn't pay me back, so that I could take much more from you down the road than you lent me. Then it seems to me like the answer is yes. And isn't that the issue, here?

Posted by Peter Tramel | March 15, 2008 2:12 AM

Posted on March 15, 2008 02:12

Also, if you would accept the loan at 400 percent interest, that would mean that you were either incompetent or desperate. Either way, I would be a shameless exploiter of your weakness to charge you that much.

I think that we should cap the rates of interest, and the check cashing fees, that these places can charge. Of course they'll argue that they should get to charge more than banks, since they're dealing with higher risk clients. But they charge SO much more than banks. I wish that, since we won't handle their clients' level of desperation with direct government assistance, we would at least subsidize their borrowing and check cashing to the point where they don't have to pay more than the rest of us for it. That way these creditors could be responsible to us (rather than no one) to justify how much extra they charge.

Poverty is like quicksand in this country because it costs so much more at every turn to be poor.

Posted by Peter Tramel | March 15, 2008 2:40 AM

Posted on March 15, 2008 02:40

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