In the News

Easy money: Should the state tighten regulations on 'payday' lenders?

July 18, 2010

Derrick Johnson, President of the Mississippi NAACP
Clarion Ledger Guest Columnist

Currently, both chambers of Congress have passed a comprehensive financial reform bill. While a final bill has been sent to the president, how the proposed Consumer Protection Agency will exercise its authority against non-bank lenders, such as payday lenders, is unclear.

Whatever federal regulations come about, Mississippi should no longer allow payday lenders an exemption from the 36 percent interest rate cap that applies to other financial institutions. The state should not allow any business to charge 572 percent interest - the amount payday lenders are currently allowed to charge in Mississippi.

The growth and popularity of payday lending is partially a consequence of the financial squeeze of the middle class that has occurred over the last few decades. Most middle-income wages have been stagnant compared to inflation. This has left the middle class with less money to afford the rising prices of goods and services, decreased the savings rate, and increased the reliance on credit.

During this same time, many businesses have found new ways to make money from this squeeze. Rent-to-own centers offer appliances and electronics on installment plans for a high cost. Tax preparation businesses offer "rapid anticipation loans" for expected income tax returns for a hefty fee. Perhaps no business has taken advantage of the middle-class squeeze as much as payday lenders.

Modern payday lending was created in the 1990s when check-cashers realized they could advance customers money based on a post-dated check and charge a fee for the loan. The check cashers would often allow the check to be post-dated for the customer's next payday, which meant the borrower had to pay back the loan plus the fee before that time or the check could be presented to the bank.

The only requirements for these loans are a checking account and a regular source of income. Payday lenders will underwrite loans with social security checks, disability checks, and some have even started accepting unemployment benefit checks as collateral in this current economic recession.

When payday loans are translated into an annual percentage rate, they often far exceed the interest rate caps allowed by state laws.

For instance, in Mississippi, to avoid the usury law on small loans, the payday lenders convinced the state to create a new statute. This statute allows payday lenders in Mississippi to charge one of the highest interest rates in the country - 572 percent.

Payday lenders have presented an assortment of arguments to justify their interest rates. First, they claim it's unfair to translate their loans into APR, since they are intended to be for a short period of time.

While that's what they say publicly, privately they express different intentions. As Dan Feehan, the CEO of Cash America, was caught saying in 2008, "[y]ou've got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that's really where the profitability is."

And that's exactly the system the payday lenders have set up. A borrower who needs an emergency loan is not going to be able to pay back the loan and a fee in 2-4 weeks, especially because payday lenders don't accept partial repayment.

This is why the Center for Responsible Lending ("CRL") reports that the average payday borrower takes 8 to 9 loans annually, with over 90 percent of loans going to borrowers with another loan within the previous month. Only two percent take out just one loan a year.

This reliance on payday loans often causes financial disasters for the most financially vulnerable communities in Mississippi.

A study by Paige Skiba of Vanderbilt University and Jeremy Tobacman of the University of Pennsylvania found that bankruptcy rates doubled among payday borrowers compared to people who were in similar circumstances but were denied payday loans.

CRL also reports that people with payday loans are more likely to incur overdraft fees, usually from the lender presenting a check (at least twice) he or she knows won't be covered.

Cities like Jackson, Starkville, Byram and others have recognized the dangers of a high concentration of payday lenders and passed moratoria on them. Recently, Rankin County also decided to enact a moratorium on payday lending.

Payday lenders also argue that they provide choice for consumers and that the free market should not be regulated.

They suggest that other financial institutions do not offer short term, small dollar loans. That's simply untrue. BankPlus offers loans of less than $1,000 at an interest rate less than 6 percent.

This program also provides financial literacy and encourages savings for borrowers. Hope Credit Union also offers an alternative to payday lending for less than 36 percent interest.

After North Carolina stopped payday lending, the University of North Carolina did a study and found "more than twice as many former payday borrowers reported that the absence of payday lending has had a positive rather than a negative effect on their household," that "nearly nine out of 10 households surveyed think that payday lending is a bad thing," and that "[h]ouseholds reported using an array of options to manage financial shortfalls, and few are impacted by the loss of a single option."

Most importantly, payday lenders are actually undermining the free market, not strengthening it. The free market requires businesses to compete by the same rules.

It is not fair to other financial institutions for payday lenders to get a statutory exemption from the interest rate cap; that exemption is an example of a government intervention to favor a particular type of business.

Payday lenders should not get a competitive advantage, regardless of the millions they have spent on lobbying and campaign donations. The state should no longer allow payday lenders to avoid this rate cap.

The statute allowing payday lending is set to sunset in a few years - the state Legislature should not reauthorize it.