Multinational Monitor

OCT 2001
VOL 22 No. 10


Payday Profiteers: Payday Lenders Target the Working Poor
by Kari Lydersen

Renting to Owe: Rent-to-Own Companies Prey on Low-Income Consumers
by Jake Lewis


The View from Below
How the U.S. Working Poor Don’t Get By
an interview with
Barbara Ehrenreich

Migrating from
Exploitation to Dignity
Immigrant Women Workers and the Struggle for Justice
an interview with
Miriam Ching Yoon Louie

The Community Development Credit Union Alternative
an interview with
Clifford Rosenthal


Behind the Lines

Wartime Opportunism

The Front
Easy on Sunday Morning - Poverty and Mental Health

The Lawrence Summers Memorial Award

Names In the News


Payday Profiteers: Payday Lenders Target the Working Poor

by Kari Lydersen

With gaudy neon signs and hand-lettered posters promising money that seems too quick and easy to be true, payday loan outfits have sprung up like mushrooms on corners and in strip malls in low-income neighborhoods in the United States over the last few years. While payday lenders were relatively rare just a decade ago, today an estimated 8,000 to 10,000 ply their trade around the country, recording a profit of over $9 billion a year.

Payday loans are supposed to be quick, relatively small (average $200 to $300) infusions of cash for emergencies such as car repairs or medical bills. The loans are usually payable in two weeks, presumably after the borrower’s next paycheck, and usually at an interest rate of around 15 to 20 percent over the two-week period. Come payday, the majority of borrowers are unable to repay the loan, so it is refinanced again at an additional 20 percent. This process, called a “rollover,” is often repeated many times before the borrower is finally able to pay back the loan — or declares bankruptcy. Over a year-long period, that means a borrower may pay as much as 2,000 percent in interest — $4,000 on a $200 loan.

For those living paycheck to paycheck, with little or no ability to secure credit from banks for loans large or small, payday loans may appear the only alternative for quick cash, irrespective of the interest rate. The lenders are able to reap a bonanza on the borrower’s misery, so it is no surprise that payday loan operations seem to multiply by the day. Most of the time, these outfits also offer other services, which can also include high service fees, such as check cashing, notary public services, license plate distribution and money orders. Most also offer high interest loans on car titles, where defaulting borrowers lose their car.

“It appears not every company is reporting missed sales expectations, slashed payrolls and poor earnings,” trumpets a recent newsletter put out by the payday consulting firm Affordable Payday Consulting. “As all of us are aware, our industry is recording record growth throughout the U.S. and in several foreign countries! Here is a company based in Texas with pawnshops, payday loan stores, and more, doing very well, thank you!”

The company is First Cash Financial Services, Inc. It reported a 54 percent rise in profits in the first six months of 2001.

“Payday loans are really a new phenomena,” says Rob Dixon of the Coalition for Consumer Rights, a national non-profit. “When the usury caps were lifted during periods of inflation in the ‘80s, the payday lending people saw a loophole and they crawled in. The growth since 1997 has been exponential.”

Industry spokespeople and business owners tend to give the impression that payday loan operations are “mom and pop” businesses, and many of them are. Many have a fly-by-night air. Of about 20 Chicago area payday operations listed in a current phone book, for example, many have already changed names or have disconnected numbers, and most refuse to give out the number for corporate headquarters. But increasingly, these operations are run by large corporations with branches in many cities and states. And large banks, which have traditionally avoided any association with payday lenders because of their seedy reputations, are finding payday loan operations’ profitability hard to resist. These banks, which don’t offer small short-term loans as part of their services, have been increasingly partnering with payday loan companies.

“That is the deeper story,” says Dixon. “They don’t want you to hear about it, but it’s happening. Some are much more blatant than others.” For example, Eagle National Bank in Philadelphia funds, processes and profits from the loans obtained by Dollar Financial Group, a payday loan operation that has over 200 locations in 15 states.

“We provide the loans and they find the customers,” says Eagle President Murray Gorson, noting that this partnership has been going on for six years.

“We wouldn’t do this if it wasn’t profitable. A few years ago there were only a couple banks doing this, but now more and more are. I keep hearing from national banks who want to get into this.”

Rolling Over Consumers

Payday lenders say they provide a valuable service.

Rick Lyke, spokesman of the New Jersey-based FiSCA (Financial Service Centers of America), the national industry group for check cashers, payday lenders and other storefront financial services, says consumers are happy with payday loans.

He points to a May study by Georgetown University Professor Gregory Elliehausen, which found that 94 percent of payday borrowers report having other financial options but choose payday loans instead, and that 92 percent of customers had favorable attitudes toward the experience.

“Lots of critics try to portray our customers as financially illiterate, but we think it’s the opposite,” says Lyke. “People choose to come here because it’s a more convenient location, it’s open late, the staff are friendly and might speak their native tongue and they have considered other options and found that this is the best one for their needs.”

Gorson adds that with interest rates in the 20 percent range, payday loans can cost less than the charge for bouncing a check or not meeting a minimum payment on a credit card.

“Payday loans are designed to be used in emergencies with only one extension,” says Gorson, adding that Dollar tries to keep people from refinancing their loan more than four times or from taking out more than one loan. “There are some operators out there who try to extend the loan as much as possible, but for the vast majority of customers they get the loan and repay it with only one extension.”

While Gorson, Lyke and other industry leaders say the majority of payday lenders avoid repeated rollovers and provide a positive financial service for customers, consumer groups say that good experiences with payday loans are outweighed by disastrous ones.

A national study by the Chicago-based Woodstock Institute shows that “despite industry claims to the contrary, the average payday loan is rolled over 13 times” in six months.

“This has had a devastating effect on many consumers,” says Marva Williams, vice president of the Woodstock Institute. “Even though you’re starting with a small amount of money, after six months you’re talking about a large amount of money that the person has to pay without even paying the principal back.”

The Regulatory Challenge

Payday loans are regulated by states through usury laws that limit payday lending and legislation or regulations that specifically curb payday lending. Nineteen states, including New York and Pennsylvania, ban payday lending and 21 impose interest rate (APR) ceilings.

Regulatory legislation went into effect in Illinois in August after an extended battle between industry leaders and consumer advocates. The rules limit payday loan amounts to $400 and car title loans to $2,000; limit rollovers to two times, and only when the principal is reduced by 20 percent; and initiate a 15-day cooling off period between loans. The rules went into effect only after extended delays required by the state legislature.

But payday outfits are able to circumvent existing regulations by locating in unregulated jurisdictions and making loans by phone or Internet. Consumers can find a host of companies willing to offer fast money by doing an Internet search, and the companies, which are often located out of the country, wire the money into their bank accounts. As with most Internet-based businesses, the government has scant ability to regulate.

“Pennsylvania didn’t help its citizens at all with [its] regulations,” says Jerry Ayles, founder and owner of Affordable Pay Day Consulting, which does consulting for other payday lenders.

“It just forced them to do business on the Internet. You could have someone sitting in the Bahamas with their laptop making payday loans to people in Texas. That is definitely growing already. Costa Rica is very popular. And there you also have the privacy issue. People are giving these companies all their personal information, including their employer and their personal references. Then that information is out there for anyone to use.”

Many industry leaders have now joined consumer advocates in calling for federal legislation to regulate payday lenders.

“Without a doubt there are lenders out there who are abusing people,” says Ayles. “That’s why we need some legislation from the feds. This has to be made a win-win process.”

Illinois Congressman Bobby Rush, among others, has drafted legislation to combat payday lending on a federal level, but the legislation has not gained much steam.

But industry and consumer support for regulation in general rarely translates into agreement on the terms of legislation.

Industry groups typically advocate much weaker legislation, which frequently includes loopholes that enable lenders to avoid restrictions. For example, rules limiting rollovers may be circumvented by disguising a rollover as a new loan, especially if there is no mandated cooling off period between loans.

Consumer groups usually find themselves at a decided disadvantage in legislative fights. A state senate bill in California that would have placed moderate limits on the industry was defeated after payday lenders spent $528,000 in lobbying and donations, according to the Los Angeles Times.

Race and Lending

Industry representatives contend that payday lenders serve communities, particularly in low-income and minority neighborhoods, that are neglected by banks and other financial institutions.

“We have really good relationships with people in minority communities, where banks aren’t offering services,” says Lyke, noting that NAACP head Kwesi Mfume is slated to be the keynote speaker at FiSCA’s national conference in San Diego this fall.

Industry representatives also contend that payday loan customers have higher incomes and higher education levels than most people expect, and that the majority of them pay off their loans without excessive rollovers. Over half of payday loan customers make between $25,000 and $50,000 a year, Georgetown’s Ellihausen found in his study, and three quarters have a high school diploma.

Critics counter that poor working people, disproportionately people of color, are the primary users of payday loans. The Woodstock study found that 19 percent of payday loan customers make less than $15,000 a year, and another 38 percent make between $15,000 and $25,000. The Woodstock study also says that borrowers in predominantly minority neighborhoods had an average of 13.8 rollovers, 37 percent higher than in predominantly white neighborhoods.

One thing consumer advocates and payday lenders agree on is the fact that the industry is likely to continue its rapid growth.

“This is like raging bulls,” says Ayles. “No one is going to be able to stop this.”

The Woodstock Institute’s report notes that debt is steadily increasing while personal savings are decreasing for low-income households. Poor households possess more credit cards than ever before, the report says, and 40 percent of households in 1995 had less than $1,000 in liquid assets, a figure that is also worsening. This spiral of more debt and less cash makes payday loans more attractive than ever.

The Credit Union Option

One alternative to payday lending is localized credit unions that offer members short term loans at affordable interest rates.

The Woodstock Institute study examined a number of viable credit unions around the country, including the ASI Federal Credit Union in Louisiana and the Faith Community United Credit Union in Cleveland. With these credit unions, members have direct deposit of their paychecks, and, after a certain number of months they are able to access credit at affordable annual interest rates.

At ASI, for example, members can get up to $500 on credit with an annual interest rate of only 18 percent. Members also have access to free financial counseling, a free 10 minute phone card and travelers checks, free checking and ATM usage and 25 cent money orders. The credit union runs at a profit and has been around since 1961 with 56,913 members, proving that offering affordable small loans and other services to moderate-income people is feasible.

Credit unions and other programs that serve and empower low-income people are vital, says the Woodstock Institute’s Marva Williams, to fight the exploitation of the poor by payday lenders and others.

But she emphasizes that it is poverty that makes such exploitative lending possible to begin with. “The thing we can’t forget here is that what we’re really talking about is plain old poverty,” says Williams. “The fact is that in our economy too many people just don’t have enough money to live on.”

Kari Lydersen is a reporter at the Wahington Post Midwest Bureau and associate editor of StreetWise, a Chicago-based newspaper.

When the Predators Come Knocking

Ninety-year-old Jessie Montano has owned her house on Chicago’s South Side for 26 years. She had fully paid off the mortgage years ago. Now, she is losing her home because of the practices of a predatory lender called Regional Mortgage Lending.

The term “predatory lending” is used to describe subprime mortgage loans — high interest loans for people with bad credit who cannot get standard loans — accompanied by a host of deceptive or unethical practices. These practices include slapping customers with hidden, exorbitant fees and taxes; selling properties at prices far higher than they are worth; repeated unnecessary refinancing of loans (known as “flipping”); and persuading customers to take out loans they have no realistic ability to repay. Predatory lenders often work with realtors who sell houses that are structurally unsound. When the need for drastic repairs on the house becomes obvious, the predatory lender will conveniently show up with a tempting loan offer.

Predatory lending frequently leads to foreclosure on homes, since borrowers are often unable to make the high payments they have been tricked into making.

Low-income, elderly people are frequent targets of predatory lenders. African-Americans and Latinos are disproportionate victims, as are Native Americans. A recent survey by the National American Indian Housing Council showed that 68 percent of Native Americans surveyed have been victims of predatory practices, including interest rates as high as 25 percent on home improvement loans and mobile home loans. Racial discrimination and an extreme lack of mainstream banking services on reservations makes Native Americans particularly vulnerable to predatory lending, as noted in hearings before the Senate Banking Committee on the issue in late July.

Much of the time, victims are talked into loans for holiday shopping, home renovations or other non-essential costs.

Montano was hoping to buy her grandson a car before he went off to the University of Illinois at Champaign, partly so he could more easily make the trek back to Chicago and visit her and other family members. Several years ago, she did a $60,000 reverse mortgage on her house for money for repairs and expenses. A reverse mortgage is a program tailored for seniors in which they are able to collect the equity on their property while they are alive; the loan is paid back through the sale of the house after they die.

In 1998, Montano says, she started getting calls from Regional asking if she wanted more cash.

“I wanted money to give to family members and to buy my grandson a car,” she says. “He is such a wonderful kid.”

The broker, whose full name Montano does not know, convinced her to get a $76,000 conventional loan on her reverse mortgage. Basically, the policy meant buying out the reverse mortgage and supposedly providing her with $16,000 or so in cash. But as is typical with predatory lenders, the various complicated taxes and fees involved in the transaction were not revealed to Montano, and she ended up with only $2,300 in cash. She used the money to buy her grandson a used car, and ended up with debts of $737 a month to pay off the loan and interest. Her income, from Social Security, is only $875 a month. With Montano unable to pay the loan off, Regional moved to foreclose on the loan.

"I didn’t understand what I was getting into," says Montano, noting that predatory lenders from numerous companies are still calling her. “I listened to the wrong people.”

“This has really grown astronomically over the past seven or eight years,” said Gale Cincotta, a long time community activist and leader of the National Training and Information Center (NTIC), who recently passed away. “People are being scammed all over. In 1993, we were dealing with a few hundred foreclosures (in the Chicago area) from predatory lending. Now we’re dealing with over 5,000.”

As with payday loans, predatory lending companies change names and locations and seemingly go out of business frequently. But they are increasingly being bought up by major financial institutions drawn by the tempting potential profits.

In November, Citigroup, co-chaired by former U.S. Secretary of the Treasury Robert Rubin, won approval to purchase The Associates First Capital Corp., in a $31 billion merger. The Federal Trade Commission says The Associates is notorious for making predatory loans, charging in a March 2001 federal suit that The Associates has engaged in “systematic and widespread abusive lending practices, commonly known as predatory lending.” As of last fall, The Associates was facing more than 700 lawsuits regarding predatory lending, involving a total of $19 million.

Despite outcry from countless community groups and statements of concern or opposition from the Federal Deposit Insurance Corp. (FDIC) and the New York State Banking Department, federal authorities permitted the merger. Consumer advocates say this sets a dangerous precedent of mainstream investment in predatory lending. Many believe the Citigroup-Associates merger set the stage for ChaseManhattan Bank’s purchase of Advanta, another company with a history of alleged predatory lending.

Lending industry representatives point out that not all subprime lending is predatory, and complain that the whole industry is being stigmatized because of the actions of a few.

At hearings regarding proposed anti-predatory legislation in Illinois this spring, Jeffrey Setzler of the National Home Equity Mortgage Association says that he is “highly offended” at being lumped in with unethical lenders. “Rather than being predators, our lenders have made loans available to millions of Americans who wouldn’t otherwise have gotten them,” he says.

Illinois’s anti-predatory legislation, which was passed this spring, includes requirements that lenders verify a client’s ability to repay the loan; prohibit fraudulent and deceptive practices; ban loan flipping; provide for independent review of loans; provide counseling to loanees before any loan is made; and other measures.

North Carolina, South Carolina, New York, Philadelphia and at least 20 other states and major cities recently have passed or are in the process of considering strong city or state anti-predatory lending regulations or legislation.

But in every case industry lobbying groups strongly oppose proposed anti-predatory lending regulations.

Al Wood, president of the Illinois Association of Mortgage Bankers, says that low-income people will actually suffer because of anti-predatory regulations that impede even honest subprime lenders.

“Unfortunately, if these [Illinois] rules pass, people would not be able to enjoy the same benefits they enjoyed when [subprime] loans allowed them to buy their homes,” he says. “These regulations would strangle a vital segment of the industry.”

— K.L.



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