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Episode #2020
Payday Lending: Who's Responsible?
Lewis: Mitchell Lewis, host
McGill: Yolanda McGill, Senior Policy Counsel, Center for Responsible Lending
Fulbright: Ed Fulbright
Voiceover: A report released by the Center for Responsible Lending indicates payday loan institutions target black neighborhoods. We'll talk about responsible practices in lending and in borrowing next on Black Issues Forum.
Voiceover: Funding for this program is made possible in part by UNC-TV members.
Lewis: Good evening everyone and welcome to Black Issues Forum. I am Mitchell Lewis. These days consumers tend to get excited when they can make a major purchase like a car or a home at the low interest rate of 6 or 7%. So why are so many consumers apparently excited about taking out loans at periodic interest rates of 30% and annual rates of up to 400%? That is pretty much the loan rate you are looking at when you choose to obtain a payday loan. According to a study by the Center for Responsible Lending there are 385 payday loan shops in the state. Where are they located? The study shows neighborhoods that were at least 42% African American had seven to eight payday lending stores for every 100,000 residents. Neighborhoods that were less than 4% African American had one to two stores per 100,000 residents. Despite efforts in 2001 to shut down these loan institutions, they still thrive in the name of serving the needs of consumers. The question tonight is, are they helping or hurting? Tonight we are going to talk about the study and address some of the facts around the benefits and hidden dangers of payday loans. I'd like to welcome tonight's guests; Yolanda D. McGill. She is the Senior Policy Counsel for the Center for Responsible Lending. And Ed Fulbright, a 21-year veteran of the financial services industry and host of the weekly radio program Mastering Your Money which airs locally on WNCU radio 90.7 FM. And to both of you, welcome.
Fulbright: Thank you.
McGill: Thank you.
Lewis: Yolanda, I will start off with you. Could you give us a working definition of payday lending?
McGill: Sure. A payday loan is a short-term cash advance, basically. They are called deferred deposit of cash advance. They are generally for a small dollar amount somewhere in the neighborhood of $3-500. They are secured by a check that has been filled out by the borrower or by a debit authorization-direct access to the borrower's bank account. And they are invariably due on the next payday so they usually come due either in two weeks from the time it is borrowed or if you are paid monthly, the next time you get paid a month later.
Lewis: In your study Race Matters you say that African American neighborhoods are being targeted even regardless of income. Is this really true?
McGill: This is true. CRL actually-we focused on this issue. We saw the report that came out from North Carolina A&T in September of 2004 that found that in North Carolina there was disproportionate amount of payday lending shops in African American neighborhoods and we piggybacked on that research and we expanded it and we have mapped it. And we indeed have seen that even when you control for some of the factors that the payday lending industry says makes up their customer base, income and education level and gender, we still found, taking all those factors into account, that race was the thing that predicted the location of payday lending stores in a neighborhood.
Lewis: Payday lending was banned in 2001 in North Carolina. How were they still able to operate? Is it perhaps under a new name?
McGill: No, the Commissioner of Banks has indeed taken the position that these people are operating illegally in our state because they are lending in excess of our usury limit-our interest rate cap-these are unauthorized loans and they need specific authorization to make them otherwise they are in violation of the law. What these lenders have done-the ones that we focused on in our report-they have partnered with out of state banks. They are state regulated banks that are also governed by the Federal Deposit Insurance Corporation and because of these partnerships it makes it more ambiguous as to whether or not our state law governs these transactions.
Lewis: Ed, let's get you in the conversation here now. People in the industry say that they are doing a favor for those who are in need of that type of loan. Now, with today's economy, the situation that the state is in; layoffs, unemployment that sort of thing, is this really helping?
Fulbright: Well, you know, the drug dealer says that he is helping people too but that is not true. So what I think is that they are giving people an opportunity to basically be able to not address certain needs that they have or to address certain things they need to make changes in their life because most of the people who are doing payday lending or are taking out these loans are having problems with credit or they have no other way to get debt. And they probably need to figure out how to cut back on things in their life.
Lewis: Well, is the question really the problem lies with the institutions or is it just that there are problems with consumers perhaps controlling their spending?
Fulbright: Well, it is both because, you know, America is made of people that want a lot of stuff. You know, you see people having, you want to keep up with the Joneses. So what happens is that because payday lenders make it very easy for you, you decide to take advantage of something when you really can't afford to do it because most of the people-the way the loans are set up-is that the period is so short that you really aren't going to be able to pay it beck because you know most people spend almost every dollar that they have unless it is allocated to some special project.
McGill: Indeed, we would agree with that. The Center for Responsible Lending, our main problem with this product is what we call the debt trap. It is a cycle of debt; the fact that the loan is structured so that it is not repayable. We have a study that came out last year and in our quantification of the costs of payday lending we know that only 1% of these borrowers are able to actually walk in, get a payday loan, come back two weeks later, pay it off, and never have to come back and renew or refinance the loan. It is a loan that is very easy to get into but very difficult to pay off.
Lewis: And I will address this to both of you. Besides getting that quick cash, is there any other advantage to getting this type of payday loan?
Fulbright: The only advantage that I would say other than it being easy and quick is that if you have a real time of need such as a death in the family and you have no other way to get to the family funeral or if somebody is extremely sick, that is the only major benefit that I would see but that probably falls into that 1% category.
McGill: That's exactly right. I mean, really for the vast majority of people this loan is going to make your financial situation worse. It is not going to make it better. We found that in North Carolina the average borrower is flipped. When we say flipped-the average borrower has to go back and get another transaction from a payday lender 13 times. And that means that they are in a payday loan transaction for seven months out of a year. Those fees while they are driving payday lending profits, those fees could actually be used in the household budget to some greater use. They could be going to food. They could be going to utilities. They could e going to local merchants and instead what we are seeing here is that this money is flowing to these lenders, for the most part even out of state lenders.
Lewis: And you sort of touched on this but there are some claims out there that payday loans, payday lending, helps improve one's credit.
[LAUGHTER]
Fulbright: I doubt that.
McGill: No, we have yet to see a situation where these loans are actually reported to credit agencies so you can pay for months and years at a time and really it is just being money being thrown out the window. It is comparable to paying rent versus paying a mortgage. You are paying. You are renting that cash advance and you are paying rent on it steadily but they're not reporting. If anything it puts your financial record at risk because they've got a live check. And so if there is a problem with that check, if they are running that check through your account and accumulating bounced check fees, which payday lenders do even though they say that they are an alternative to the bounced check fees, they take bounced check fees, too. And we have borrowers come to us because they have run into problems with their financial institution and lost their checking privileges.
Lewis: We have talked about some of the pitfalls but are there any, say, good payday lending institutions out there? Are there any options?
McGill: Well, our problem, the way we look at the payday lending product, the payday lending product as it is currently being marketed and sold is flawed. It is flawed at the core. Now we have in our activities around the nation seen some payday lending operators who actually offer these small loans under their current state loan laws so they offer them at lower rates; a double digit interest rate for instance rate instead of a triple digit interest rate. They offer them for 45-day terms instead of for 15-day terms. So we have seen better operators out there but really the product that is being marketed right now is indeed flawed. It does have fundamental problems with it and that is the source of the debt trap.
Fulbright: I would also add to that that some of the credit unions are not payday lenders but some of the credit unions will offer the payday type loans as an interim step. However, the problem is that if you have to pull on it after three times they usually want you to have some type of counsel and I would suspect that most of these people need some type of debt counseling.
McGill: Right. So there are option s for accessible cash. I mean, there are small loan lenders here on the ground in North Carolina that make tens and thousands of loans every year. There are salary advance options with some community credit unions and the State Employees Credit Union. If you are in the military, that is another population that has a large concentration of payday lending shops in their communities. No enlisted military person need go to a payday lender. They all have access to money through their credit unions or through relief societies. So there really is access out there to quick cash and a lot of times, economically speaking, it really is better to pay that fee for the late utilities or to pay that one time bounced check fee rather than to get into months and months of payments with a payday lender.
Lewis: Now we mentioned earlier about sometimes these rates rising up to like 400%. How does that happen because I don't think that people who would sign off on these loans would realize that it would get that high. How does that work?
Fulbright: I don't think people actually know what they are really paying because if you have to borrow $100 and you have to pay back $115 within a couple of weeks, people don't realize that. The problem is that they don't do the math. And that is why I think if people were really educated on what was going on, they probably wouldn't want to use that. In fact I remember you had a story about somebody who was using payday lenders instead of their credit cards and credit cards for the most part, if you have good credit, you can get a cheaper loan than what you can get from payday lenders.
McGill: Even if you have bad credit. An onerous rate on a credit card is 29% or 36% on a credit card and people think that is outrageous. What we are seeing actually is that when people go in, they understand that it's a fee of $15 for $100 but they don't understand that they will not be able to pay that loan off in two weeks and hen get out of their financial emergency and still be able to cover their monthly expenses. The payday loan is a big chunk of your take-home income. So when you pay that to your payday lender and you go back and you are trying to cover the rest of your expenses for the rest of the month, you can't do it and you have to go back and borrow again. And that is because of the way the loan is structured.
Lewis: Yolanda, is there any type of legislation that is out now to try and combat payday lending.
McGill: Actually it is very interesting. You mentioned that these loans were banned in 2001 and technically what happened there is that payday loans were authorized in the state until 2001; from 1997 to 2001, and that authorization expired and the industry has been trying to get reauthorized since then. So there is a bill right now in the senate in North Carolina and it is scheduled to be in he commerce committee this coming Tuesday to reauthorize payday lending. The industry describes it as a regulation bill but in fact it is an authorization because right now they are on shaky legal ground and they want to be able to have legitimacy and so that is what we are dealing with right now. We would like to see an authorization in place that would put together a responsible loan product. Something that would get rid of the abuses that are inherent in the product and that have been reported by our Commissioner of Banks and that are currently being investigated by our Attorney General and the Commissioner of Banks as well.
Lewis: Now of course some of the institutions are not too keen about this legislation and there are several claims that have been, made about the importance of payday lending. And one of the claims is that payday lenders serve the working middle class. Do you see that happening?
McGill: Payday loan customers do tend to be towards the middle class edge of things. Whether or not they are being served is another part of the question. But indeed payday lending stores do not tend to focus on the poorest of the poor because you do need to have a steady income and you do need to have a relationship with a financial institution. You have to have a checking account in order to qualify for a payday loan. We do see a lot of seniors on SSI though getting into payday lending predicaments and we do see a lot of low wage earners but really we are talking about middle class. We really are.
Lewis: Ed, another.
Fulbright: Yes.
Lewis: Go ahead. I thought you were about to say something. Another claim is that customers understand the cost of the service.
Fulbright: I really don't think people do because most people would not, if they understood that they were going to be in a weekly or a monthly type of situation where they were going to have to continuously have to go back to this lender and pay this fee several times-I mean, I have heard, if seven months is your average I am sure there are a few people that it takes them a year or two to get out of this. And imagine the fees that they would have paid. They could have surely gotten out of debt in certain ways because I remember reading an article where somebody had paid $4,000 in fees before they could even get out of it. And if you really go to a payday lender and you do it more than twice you really need some help and I would encourage people to go to some type of debt counseling or to some organization that can help them get their debts or help them make hard decisions.
Lewis: Yolanda, another claim is fees are high because these loans are risky.
McGill: And that is absolutely not true and if you look at the level of losses that these companies report, their losses are lower than some bank losses right around the 1-2%. They are able to secure these loans because they take a check. They take a live check. They have access to your bank account. They can reach right in and get that money any time they want. In the event that you default on your obligation they can process that check through and recover with fee income. They can also sue on the check. There is actually a study that was put out by the Monsignor Egan campaign based on some Illinois lenders and in Illinois a payday lender can get triple damages on a check. So they can leave the loan contract aside, they can take your check, go to civil court, sue you, get three times the amount of the check, plus attorney's fees.
Fulbright: They also, here in North Carolina, I think they can put you in jail regarding the payday lending. Is that correct?
McGill: No, I don't think so. A criminal prosecution is something that actually the industry itself has said, "You know what? We eschew pursuing people criminally." But that still exposed what people don't understand is that they are still exposed to civil penalty just based on the check.
Lewis: And another claim is most consumers use payday loans responsibly.
Fulbright: I am laughing because it is sort of like somebody trying to deal with an addiction that they have and they have to make a decision that they are not going to use it and until they do and it is just like they use credit cards and people overuse credit cards-usually they have been cut out of the credit card market. So one of the things that they have to understand is that they are in a trap and they need some help to get out of that trap.
McGill: Yes, exactly. To that I would add that what we have seen is that borrowers do need to be told, really, by a third party-a parent, a counselor, a bankruptcy attorney-the borrowers that we have had contact with at CRL that this is indeed a trap and they are not getting new money every time they go back to this payday lender. The perception actually is that you are getting a new loan. You paid off that last loan and you are short again and so you go back and you get a new loan. There is not an understanding that in fact you are really just getting the same money over and over again and paying another fee and so that lack of understanding is part of what the trap really is. The borrower thinks they are getting new money but that is not the case. And a really big problem with this with the African American community is that all this is doing is exacerbating wealth gap that has been documented in several studies. The Pew Hispanic Center put out a study months back that noted that the median net worth for white families is about $88,000. The median net worth for black families is about $6,000. And these types of lending transactions, going back to your claim about serving a community, they don't serve a community. They can't. They strip wealth. They strip assets. They don't help build wealth. They don't help build assets.
Lewis: If you had to actually mention a profile of some of the people you see who have been caught into payday lending situations; what would that profile be?
McGill: The borrowers that we have come in contact with at the Center and I'd say normally people contact us either through our website-www.responsiblelending.org-and we also are in contact with bankruptcy attorneys and with credit counseling agencies who refer people to us because we want to hear people's stories and we want to see kind of what is going on a the ground level, we see a disproportionate amount of African American females. I would say about two-thirds of the people we have seen have been female. About three-quarters of them have been African American. We have seen some seniors but for the most part they are African American head of household, around 30ish, one or two kids. And they usually have good jobs. Some of them have two jobs, generally clerical, administrative assistants, that type of thing. And the reasons for getting into payday lending transactions are across the board; everything from wanting to buy gifts to repairing cars. But to a person none of them realized when they got into it that they would still be in it months or in one case with one borrower that we had, years later. And there is no recognition that this was going to be a long term financial situation with payday loans and that is the problem with payday loans and that is what is not disclosed.
Lewis: Ed, you talked earlier about emergencies. And one of the claims is that payday loans provide needed emergency credit; what would you see as a true emergency where someone would have to go to a payday lender?
Fulbright: It may be a death in the family. It may be a car repair and you don't have any other way to get to work. It could be illness n the family. Those I would consider to be true emergencies. It is not because, "Oh, I need some money to meet a bill that I know is coming due by creating another bill." That is not an emergency. You need to work out something with that vendor or with that creditor so that you don't-it's a snowball effect.
Lewis: And I will address this to both of you; for the folks who are in this situation, what can they do to get out of it, Yolanda?
McGill: Absolutely. Get help from a third party; an advocate, really. Someone to go in. We have had differing levels of success when borrowers try to approach their payday lender for a repayment plan, for instance, or some kind of an installment plan. Payday loans are never offered on installments. And payday lenders tend to not want to offer that to you because that decreases their fee income because it increases the likelihood that you will actually pay them off. So go to a counselor or talk to a parent. Talk to your employer about getting a cash advance; a real cash advance on your salary to get some extra funds. We also have a relief societies and credit unions and even your bank because every payday lending borrower has a banking relationship. It makes sense to approach your financial institution especially if you have a good relation ship with them and see if you can get some type of advance; a small advance. But as far as getting out of the payday lending situation you need an advocate. And there are some legal aid attorneys and some bankruptcy attorneys and some credit counselors who will help you approach that payday lender so that you can try to get in some kind of installment plan but I have to say with that caveat, payday lenders tend to resist repayment plans, installment plans. They want their money.
Fulbright: I would also encourage people to be willing to make change. Now one organization that we haven't talked about is sometimes you can get help from churches which that could be covered in relief organizations. But you have to be willing to make change. You can't let your pride stop you because that is usually what happens with most people is that their pride costs them tons of money that doesn't allow them to make the changes that are necessary in their life in order to get out of this bind. And sometimes they wait until they have a financial stroke in order to feel enough pain to make the changes that are necessary.
McGill: We would definitely, people definitely need to understand that they're continuing to pay fees and the payday lender is not going to solve the problem. They need to find a way to stop the cycle of debt in however they can do that.
Lewis: Well, final question. Is there a way to prevent yourself from going to a payday lender and we have got about 30 seconds left.
McGill: Don't walk in. Don't do it. Just don't go in.
Fulbright: I would say don't do it and look to change your situation before it happens.
Lewis: Thank you so very much for your information. I'd like to thank Yolanda McGill and Ed Fulbright for coming out and sharing the good, bad, and ugly of lending and borrowing tonight. If you would like more information about our guest or a transcript of tonight's' program, visit us online at www.unctv.org/bif or call us with your comments at 919-5459-7167. Be sure to join us each and every Friday night at 9:30 p.m. for more on the people and issues that matter. For Black Issues Forum, I am Mitchell Lewis.
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