How Working Poor Borrow at 400% Interest

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Across this country – and across the globe for that matter – there have been countless news stories about the abuses of payday lending.  
While much attention has been raised, little appears to have been actually accomplished when it comes to enacting even the most basic regulation of this fast-growing industry.   What attempts have been made have often been ineffective or even undermined by the very people assigned responsibility for watching out for vulnerable consumers.
Payday lending is one of the financial world’s fastest growing businesses.   It operates pretty simply.  You walk into a payday loan shop—or if you’re really desperate, go on the internet.   You write a personal check to be cashed when your next paycheck is deposited, and you walk out with cash minus a hefty fee, often equal to an annual interest rate of around 400%.
Payday lenders defend their business as one of providing convenience for a fee, like paying $2 to get $20 of your own money out of an ATM.   They also argue some people actually save money by taking out a high-cost payday loan if those fees are lower than other fees they might have to pay if they are late on their credit card bills, utility bills, rent, etc. In some cases, that may be true and an argument can be made that under the right circumstances, payday loans are a perfectly legitimate, though expensive convenience – like ATM fees.
But it’s pretty easy to establish that people – and there are many – who take out multiple payday loans, or worse, take out a new payday loan to pay off an old one (called “rolling overâ€?) are simply desperate beyond reason.   After all, other than complete financial desperation, why would a sensible person take out multiple, revolving loans at interest rates around 400%?  It’s also easy to establish that the industry is wide-open to abusive behavior, not only in terms of exorbitant rates but in its collection practices.  In one state, for example, regulators were compelled to issue a public warning that payday lenders were falsely threatening delinquent customers with jail time for check-kiting if they didn’t pay up.
And it’s pretty easy to argue that these people need some help and some basic consumer protection. Unfortunately, while payday lending is much talked about, effective action has been harder to come by.   Even in some states that have been the most aggressive about providing some consumer protection, the very people charged with protecting consumers have let them down.
In Georgia, for example, lawmakers grew so angry about payday loan abuses, particularly involving payday lenders preying on families around military bases, they enacted an outright ban on the practice in April of this year.   Shortly after, Atlanta-based Suntrust Bank announced that it was getting out of the payday loan business altogether, even in its banks outside of Georgia.
But a recent story in the Macon Telegraph reports the practice continues and suggests authorities may not be able to give enforcement of the ban a high priority.  As one payday lending critic, former Georgia Governor Roy Barnes, who recently filed lawsuits against 60 payday lenders, told the Telegraph: "This business is so profitable and lucrative that people are going to try to evade the law," Barnes said. "And let's face it, police departments, they've got rapes, murders and mayhem, and you get a payday lending case, it's a lower priority."
The state of Oklahoma also enacted a modest payday law, only to see it rendered ineffective by those assigned responsibility for protecting consumers.  Under a law enacted in 2003, consumers who sought to take out more than five payday loans in a three month period were required to receive a certificate from a credit counseling agency in order to receive additional payday loans.  
The intent of the law was to guarantee that consumers receive at least receive some basic financial counseling before agreeing to repeatedly sign away a big chunk of their desperately needed earnings. But the state’s principle NFCC credit counseling service, the Consumer Credit Counseling Service of Oklahoma City, refused to meet its responsibility to payday consumers.  While the law required consumers to at least speak to a credit counselor in person or over the phone, CCCS simply allowed consumers to fax a request for a certificate and to decline counseling.  Some consumers reportedly called in their certificate requests directly from the offices of payday lenders.
When state regulators declared the practice of “fax counselingâ€? did not meet the state’s legal requirements, Oklahoma City CCCS responded by denying service to payday consumers altogether.   With the state’s principle credit counseling service refusing to serve payday loan consumers, lawmakers succumbed by rewriting the law to remove the counseling requirement altogether, leaving consumers without even that modest protection.  Several additional states are working on passing or administering new payday lending laws.  And many will doubtless find the same problems.   With payday lenders operating across state and even international lines, it may ultimately require national legislation to start adequately protecting consumers.
Regulating any practice involving desperate people and big, fast money isn’t easy.   But in light of the staggering and growing numbers of people who feel compelled to sign over their modest paychecks to borrow money at loan-shark rates to cover basic living expenses or “save moneyâ€? on other creditor imposed fees, it’s clear something must be done.   Instead of giving up, lawmakers should push forward and hold the industry, regulators and credit counselors all accountable for how they treat consumers.
McKigney is Executive Director of Consumers for Responsible Credit Solutions, a national advocacy group for consumers seeking help with financial issues.  More information is available at


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