Boost or burden? Proposed law to control payday lending
March 18, 2007 - Concord, New Hampshire
Negative perceptions about payday loans really aggravate Megan Tracy, a 42-year-old Concord woman who lives on $700 a month in Social Security and disability benefits. The way she sees it, a $240 payday loan once a month gives her the boost she needs to make ends meet, allows her to rely less on church meals and gives her a chance to take her kids to the movies once in a while. It gives her a little extra cash while she's waiting for her checks to arrive and once they do, she pays back the loans to avoid slipping further into debt. "It works," said Tracy, who testified last week against a proposed law to ban payday lending in New Hampshire. "My quality of life has gone up because of those loans." The problem, consumer advocates say, is that people like Tracy often fall into a vicious debt trap. Once they have taken out the first high-interest payday loan, they have to keep taking out more to continue making ends meet, and eventually they can't repay the loans as the cost adds up. Payday lenders have launched a multimillion dollar campaign to try to change the perception of their industry. But consumer advocates and some state lawmakers say payday loans should be curbed because they are a form of predatory lending whose victims can least afford it. Opposing perspectives Payday lenders offer two-week loans for up to $500, but they do not require a credit check. A customer shows a pay stub and writes a check for the amount borrowed (plus a fee) that will be cashed when the person's next paycheck is issued. The small loans are controversial because of the interest rates. For every $100 borrowed, customers are charged a $20 fee -- which translates to an annual interest rate of 520 percent. Payday lenders say it is unfair to consider their fees interest rates and calculate them for a year since the loans are only two weeks in duration. A customer would have to take out a loan every two weeks for an entire year to actually pay that much interest in fees, and few, if any, customers do that, said Jamie Fulmer, a spokesman for payday lender Advance America. But consumer advocates say the charges are outrageous and should not be allowed. New Hampshire lawmakers are considering a bill this session that would cap annual interest rates on payday and title loans at 36 percent. Title loans, like payday advances, are a two-week cash loan but consumers must hand over the title of their vehicle instead of a check. Consumer advocates say a 36 percent cap is reasonable for those kinds of loans and anything higher is predatory. Payday and title lenders say a 36 percent cap will drive them out of business, leaving people like Tracy with nowhere to go for emergency cash. The debate comes down to opposing perspectives of who is using the product and why. A "financial tool" Critics who claim the payday lending industry preys on low-income people who aren't financially savvy do not paint an accurate picture, Fulmer said. His company is the largest payday lender in the country, with more than 2,900 stores in 36 states, including 20 stores in New Hampshire. Contrary to what some believe, he said, most Advance America customers are not poor or uneducated. The average household income of Advance America customers is roughly $41,000 a year, all of its customers are employed, 90 percent have at least a high school education, and a little less than half own a home, he said. "They're your teachers, your bus drivers, your policemen," he said. "The true middle-income folks." And they're using payday advances the way they're supposed to -- as a one-time fix when an unexpected expense or circumstance leaves them with a gap between paychecks, he said. Ninety-seven percent of customers ultimately pay back their loans; 95 percent pay them back "on or about" when they're due, he said. People who have an unexpected child-care issue, health problem or some other emergency expense most likely do not have a better option, he said. The cost to bounce a check, make a late payment on a credit card, miss a mortgage payment or use bank overdraft protection all cost more than a payday advance, and those options have the added negative impact on a consumer's credit record, he said. "When you look at the cost of those alternatives and compare it to the $20 per $100 cost of a payday advance in the state of New Hampshire, you can clearly see why that's viewed by many as a rational, cost competitive alternative," Fulmer said. But if New Hampshire lawmakers pass a 36 percent interest rate cap and drive payday lenders out of business, customers stuck in those situations will have one less option to choose from, lenders warned House Commerce Committee members last week. Or worse, Fulmer said, consumers will turn to internet payday lenders who charge even higher fees and are mainly unregulated, off-shore operations. "We think customers, especially in this demographic, are savvy enough to make decisions that are right for their families," he said. "It's one of the many tools folks ought to have in their financial tool belt." To help make sure customers are using payday advances for a short-term fix only, the industry's trade group has launched an advertising campaign to address concerns, Fulmer said. All members of the trade group, called the Community Financial Services Association of America, must follow a set of best practices to remain a member in good standing, Fulmer said. Those practices include: discontinuing any advertising that promotes payday advances to cover frivolous expenses; offering an extended repayment plan to give people struggling to pay back loans extra time without extra fees; and encouraging customers to take out payday advances only from companies that post the association seal. The association adopted those standards in February, and they go into effect in July. As part of the campaign, the association is spending $10 million in national advertising. "We have listened to the concerns raised about our industry and have developed innovative solutions to address them," said Darrin Andersen, association president. "These new initiatives will ensure that . . . members hold themselves to a higher standard of responsible service." "The crack cocaine of lenders" Democratic Rep. David Smith of Nashua, sponsor of the state's bill to cap payday and title lending, doesn't believe the industry is responsible or concerned about the damage it is doing to its customers. A call for help from his 23-year-old son a year ago opened his eyes to what he sees as a problem growing too rapidly. "I don't think we need these (lenders) in New Hampshire," he told the Commerce Committee. His son almost lost his car to a title loan he could not repay while he was serving in the military at Fort Benning, Ga. When Smith went to visit, he said he was appalled to see payday and title loan shops lining the entrance to the base. When he returned home, he noticed the same shops popping up on nearly every Main Street in New Hampshire. Smith, a former banker, believes the interest rates are ridiculous and that lenders prey on people who don't know where else to turn. Since his son ran into trouble, the federal government has curbed payday and title lending to active-duty military. Congress adopted a 36 percent cap this year. "What is fair for our military is certainly fair for the good citizens of New Hampshire," Smith said. Gordon Allen, an economist and board member for the Citizens Alliance of New Hampshire, said payday lenders trap unsuspecting consumers on a "debt treadmill." Credit unions, social service centers, churches and family members can help, he said. "To a certain extent, the payday lending industry is like the LSD or the crack cocaine industry of lenders," Allen said. "You're desperate for money, and it feels pretty good once you get it, but the long-run effects -- and once you get on the debt treadmill they aren't too long run -- are very, very destructive." Despite the industry ad campaign and the demographics of its customer base the industry presents, New Hampshire social service providers say many of the people who rely on payday and title loans run into severe financial problems because of it. Sarah Mattson, an attorney with New Hampshire Legal Assistance, said her office started taking cases for the first time this year to help people facing debt from payday and title loans. She said she has already settled several cases and has five active ones now. In most of the cases she's seen, people took out a payday or title loan expecting it to be a one-time thing. But they got hooked, racked up significant debt in a short amount of time and ultimately could not keep up with repayments. "Most people cannot manage the additional drain on their already limited income," Mattson said. "For some people, losing $20 every two weeks when their income is in the $600- or $700-a-month range -- that's a good chunk of their income . . . It can really add up very, very fast." She is urging New Hampshire lawmakers to put an end to this lending. Industry best practices are not going to help, she said. "The reality is that this is a product that depends on being able to charge triple-digit interest and on people borrowing again and again," she said. "It's just a defective product."
News Source
The Concord Monitor, Lisa Arsenault, Monitor Staff
Related Stories - New Hampshire
Return
See: Recent News | Archived News | RSS Newsfeeds | News by State
Go to PLIWatch.org home.
|
