Payday loan perils
July 26, 2006 - Baton Rouge, Louisiana
One elderly Acadiana area woman calls into the local Better Business Bureau office because she doesn't understand why her Social Security check is being deposited directly into her local payday loan company's bank account. Another older couple living in Crowley comes into the office after realizing they put their house up as collateral for a loan they've fallen behind on.
"The vast majority of people do not ask the right questions," says Sharane Gott, president of the Better Business Bureau of Acadiana. "A lot of people don't even understand the contract, but there is not much we can do about that. We feel powerless. I have heard some horribly sad stories, and I think in a lot of cases, the companies do prey on the low income, low educated and the desperate. They know they don't have the capability to read the contract fully. That's the calls we get -- 'help me understand' -- so we hold their hand and try to help them."
Louisiana law prohibits using homes or direct-deposit Social Security checks in payday loans, but the elderly woman and the Crowley couple got entangled in multiple loans with payday loan companies and had clearly not read the fine print on their paperwork. "They weren't aware of the repercussions of the documents they were signing," says Gott. "The business knows what to do, what's legal, what's not, but it is the feeling of the bureau they do a real fast shuffle."
The companies have seemingly innocuous names like Mr. Check, Money Mart and Cash Cow, but critics of payday loan stores say the high-interest products they peddle are anything but harmless and should be outlawed.
"Payday loan companies say their growth indicates there is a big demand for their services," says Jordan Ash, director of financial issues for the national consumer group ACORN, which has Louisiana offices in New Orleans, Baton Rouge and Lake Charles. "The same could be said for people buying crack cocaine. Lots of folks buy crack, but that doesn't mean there's a legitimate need for it." ACORN claims a vast majority of stores are placed in minority communities, preying on the poor and elderly and dragging low-income wage earners and people who rely on monthly government assistance into deeper debt cycles.
A typical example, ACORN says, follows this scenario: Someone on a fixed income takes out a payday loan to cover an extra expense -- an unexpected medical bill, perhaps. Two weeks later, the borrower is forced to pay back the loan, usually less than $500, in its entirety and with substantial interest. But because of fixed expenses, another fast loan may be needed as soon as the first one is paid off, and the borrower becomes entrapped in the payday-loan game.
Steven Schlein, spokesman for the Virginia-based industry group Consumer Financial Services Association, describes ACORN's position and statements as unfounded and inflammatory. "We go where the business is," he says. "We try to reach the middle class. We're simply looking for customers who need short-term loans and can pay them back."
Lafayette -- and every urban market in Louisiana -- provides a safe haven for the quick-cash companies, which have mushroomed statewide from a handful of authorized payday lenders six years ago to nearly 1,000 today. The state Office of Financial Institutions, which licenses and regulates the stores, says those figures represent any company allowed to make a payday loan, even if its vast majority of business lies elsewhere.
In what it calls the Lafayette District, which encompasses more than just Lafayette Parish, there are likely a couple hundred payday outlets, says John Braud, deputy chief examiner for the OFI. Several have opened since Hurricane Katrina sent thousands of New Orleanians to the area. Though Katrina knocked many Crescent City locations out of business, OFI says the growth trend continues, with 50 new stores having been licensed statewide since Jan. 1. At the end of 2004, there were 715 licensed locations for payday lending, which means the industry realized a 38 percent increase over the last 17 months in Louisiana.
Nationwide from 2001 to 2005, the payday-loan industry has grown from 10,000 to 22,000 stores, Schlein estimates. The group says the industry lends more than $40 billion in payday loans and similar types of products in the United States each year, earning about $6 billion in revenue.
Payday lenders are largely banned in 12 states, according to the Center for Responsible Lending in North Carolina, a consistent opponent of the high-interest loan business. But Louisiana is considered friendly to the industry. "Louisiana is not a hotly contested state," says Schlein, who describes the industry's critics as elitists. "They don't have any need for the loans, but they want to tell other people what to do."
But Gott wants them to know there are other options. Citing OFI's stats, she says fees and rates on payday loans sometimes exceed 1,000 percent, depending on terms, length of contract and amount borrowed. She advises consumers to consider a small loan from their credit union or small loan company, an advance on pay from their employer or a loan from family and friends. "Ask your creditor for more time to pay your bills," she says. "Find out what they would charge; these fees may not be as excessive as a payday loan."
Braud says there has been no serious legislative push in recent years to ban, limit or further regulate payday lenders. "There wouldn't be so many of them, if people didn't want the product," Braud says. Nor has his office suggested any new laws that could possibly affect the business. However, an amendment to state law passed in the recent legislative session will broaden the OFI's power to make online postings of companies that have had their licenses denied or revoked -- a measure Gott says will do little good because many payday companies' customers don't have access to a computer.
Beth Butler, an ACORN community organizer in Louisiana, recently attended a meeting of the group's national officials where payday lending was a hot topic. ACORN has supported legislation at the local, state and national levels with the goal of limiting the growth of what she calls "predatory lenders."
"They fight us tooth and nail," Butler says. Because of the industry's massive profits, it's become a powerful lobbying institution. Butler also believes the payday loan industry's rise is directly connected to discriminatory practices by mainstream financial institutions. Because major banks tend to turn down a loan applicant with less-than-stellar credit or meager means, people in need are forced to go to payday loan stores where they are charged a high interest rate in return for fast service.
"The mainstream banker is not making these products available to people on fixed or low incomes," Butler says. "These are people under duress, and they need the cash fast."
Ash says ACORN plans to go after payday lender Money Mart, which counts nine locations in Lafayette, some previous American Check Cashers stores sold by former Lafayette banker Jerry Brents in early 2005. Money Mart is owned and operated by Pennsylvania-based Dollar Financial Group Inc., which has more than 1,000 payday-loan stores in the United States, Canada and Great Britain. Ash says payday lenders such as Money Mart tend to pop up near low-income communities within large urban markets.
"It's predatory in the way that it's set up," Ash says. "Very few people are able to pay the loan back right away. The payday lenders know that. That's how they make their money, by keeping the loan going."
There are no current efforts to limit the rapid growth of payday lending in Louisiana; in fact, one recent push would have expanded it. State Senate Bill 743 was designed to allow companies in the payday loan business to also offer short-term loans with the borrower's vehicle as collateral, but it died when the House voted overwhelmingly to lower the monthly finance charge from 25 percent to 2 percent. "The bill was gutted," says Amy Quester, a Center for Responsible Lending representative in Washington, D.C., which fought the legislation. "And that was basically the death knell."
Under the proposed legislation, the high-interest title loans could not have been offered at the same stores as payday loans. Consumer groups fighting the bill claimed car title loans marketed as small, short-term emergency loans were in reality loans designed to trap low-income borrowers in a cycle of debt. With payday lenders still expanding into the landscape of Louisiana's newest strip-shopping centers, Quester fears the issue may not be dead and is vowing to keep a close eye on it.
"Car-title loans are similar to payday loans," adds Quester. "The major difference is that the borrower's car is at stake. The car secures the loan. But it may be the borrower's only way of getting to work -- or evacuating from a hurricane."
The Independent Weekly, Andre Salvail and Leslie Turk, Contributing Writers
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