In the past six years, more than two dozen so-called “payday lending” storefronts have opened in Rhode Island, with Advance America operating the lion’s share. (Check ‘n Go is the other). Advance America is open in both Warren and East Providence, and many more storefronts of both lenders have opened in adjacent communities like Middletown and Pawtucket.
Their business model is simple: they provide instant, short-term cash loans, secured by the borrower’s check, in amounts under $500, at a flat rate of $10 per $100 borrowed. Marketed as a straightforward and simple way to close an occasional gap in your cash flow, proponents and industry insiders claim it is a credit product that has a niche in the pantheon of credit products, and that a 10% interest rate is a bargain, compared to the penalties associated with bounced checks and unpaid credit card bills.
Opponents argue that while $10 on every $100 borrowed may seem like a fair deal when you are in a tight and temporary spot, when you consider that payday loans are structured to be repaid within two weeks (by your next payday, ostensibly), suddenly $10 looks like something very different indeed. They have formed the Rhode Island Coalition for Payday Lending Reform (ripayday.org), a broad-based, grassroots effort to reform payday lending in Rhode Island. It’s comprised of individuals and organizations including the United Way of Rhode Island, AARP, the RI Council of Churches, the NAACP, and the City of Providence.
Is 260 percent a fair number?
Through the filter of the government’s Truth in Lending Act, which requires all credit providers to clearly disclose interest rates expressed as an annualized percentage, payday lenders literature reveals a stated APR of 260 percent. That is a number that, according to the industry, is unfairly skewed, as it does not reflect the intended use of their product. For their opponents , that number shines a light on the truth behind the practice of payday lending and they are very clear: it’s usury.
Ursury, or charging excessively high interest rates, is not only not a new practice, it’s very, very old. Nearly 2000 years before Jesus, in the Christian tradition, found himself in hot water for objecting to the practice of money lending in the temple in Jerusalem, Hammurabi’s code attempted to regulate the practice. U.S. federal and state laws have done a fair job enacting laws to prevent it in the United States in 2013. But laws have loopholes, and since 2001, payday lenders have effectively been regulated as licensed check-cashing businesses, affording them a special exemption from the state’s usury laws that enables them to make payday loans at the aforementioned 260 percent rate. That, opponents claim, is usury by any measure, resulting in toxic loans that trap borrowers in a long-term cycle of debt.
Early signs of trouble
Margaux Morisseau is on the front line of payday lending reform in Rhode Island, both by day in her position as the Director of Community Building for Neighborworks Blackstone River Valley, a nonprofit community development organization, and in her role as co-chairman of the Payday Lending Reform effort. She remembers clearly when payday lending outlets popped up in the Woonsocket neighborhood where her organization administers two affordable housing facilities. “Suddenly there were more of these stores than there are McDonald’s. They were targeting our families with fliers and savvy marketing campaigns. And then overnight, our clients were having trouble making their rent payments. Why would the emergence of a lender that supposedly helps clients fill a financial need, directly result in more financial hardship?” Ms. Morriseau says. So she took action. “I saw a clear injustice in the community, and I wanted to get to the bottom of it.”
She enlisted the help of Representative Frank Ferri, who was beginning to hear about payday lending from a source close to home: his own employees. “I was surprised to find an employee caught up in this cycle. They usually come to me first. But this one employee was going through a particularly difficult time, his wife was out of work, and before he knew it he was caught up in a cycle of debt and unable to get out from under. By the time I heard about it, he had been in it for seven or eight months — and owed more on interest than the initial amount of the loan.” Pirri said. “The loan companies would have you believe that it is a short-term thing, but if most of the people who took these loans could pay them off in 2 weeks, we wouldn’t be having this conversation.”
Proponents hope to see action on Smith Hill this year
Rep. Ferri introduced a bill, pending in the legislature, that will implement a 36 percent rate cap on payday loans. There is a similar bill in the Senate, sponsored by Senator Juan Pichardo. Fifty-two of the 75 members of the R.I. House have cosigned Rep. Ferri’s bill. Twenty-nine of 38 Senators have likewise endorsed Sen. Pichardo’s version. The public is behind reform as well, with some three out of four Rhode Islanders polled agreeing that the practice should be more tightly regulated.
General Treasurer Gina Raimondo agrees: “We owe it to one another to protect our families and neighbors from abusive lending practices, including payday lending. My office is committed to working with community partners to develop alternatives that allow for responsible borrowing in our state. Providing Rhode Islanders with access to fair, low cost financial products and financial education opportunities is critical to our state’s overall economic recovery,” she said in a statement. “The General Assembly should enact legislation that bans the sale of a financial product that traps so many consumers in a cycle of debt.”
Lenders claim product serves target clients well
Advance America Senior Vice President Jamie Fulmer agrees that it is important to have a discussion about ways to provide meaningful protections and allow access to credit, but he is concerned that critics are seeking to eliminate his company’s product altogether. “We do not pretend that our product is the right thing for everyone, but it is a solid credit option for some, some of the time. It’s simple, transparent, and straightforward. There are a lot of misconceptions about who is using payday loans. Our clients have a median household income of $55,000, they have active bank accounts, 90% of them have high school diplomas, and 50% of them have credit cards.”
According to Mr. Fulmer, for many middle-income American who may experience a temporary shortfall between paychecks, a payday loan with a fee of $10 on every $100 borrowed is far preferable to a bank fee. For example, Citizens Bank charges a $30 annual fee and a $10 daily overdraft fee, regardless the amount of the overdraft. Bank of America charges $35 for each overdrawn item, and fees are similar at People’s Credit Union ($30), Rhode Island Credit Union ($29) and banks and credit unions throughout the state—to say nothing of the costs to reinstate interrupted utility or cell phone service, or any of a number of things that could get disconnected for non-payment. And the 260 percent interest rate? “That’s hypothetical. Truth in Lending requires that we express our fee as an annual percentage rate. So $10 on $100, if the term was, in fact, 52 weeks, would be 260 percent. But it’s a two week term, not 52.”
Pew findings support reform proponents’ claims
If that was how it always worked, payday lending opponents argue, that would be true. But in practice, the typical payday borrower does not fit the profile of the client for whom the product is supposedly intended. According to a report released last Friday, February 22, by the Pew Charitable Trusts, the following characteristics are common among payday borrowers:
• Fifty-eight percent of payday loan borrowers have trouble meeting monthly expenses at least half the time.
• Only 14 percent of borrowers can afford enough out of their monthly budgets to repay an average payday loan.
• The choice to use payday loans is largely driven by unrealistic expectations and by desperation.
• Payday loans do not eliminate overdraft risk, and for 27 percent of borrowers, they directly cause checking account overdrafts.
• Forty-one percent of borrowers have needed a cash infusion to pay off a payday loan.
A social justice issue?
Ms. Morriseau is not surprised by these findings. “When you keep going back to the facts, you find time and again that people do not need these loans for emergencies, they are using them to cover ordinary expenses. It’s a debt trap. More than four out of five people surveyed after the fact said the could have gotten the money other ways, but it was easier to go to a storefront lender. “We are not trying to restrict access to credit for people who can use it the right way, what we want is a rate cap and/or a loan cap. The people that are getting targeted by these loans, time and again, are low income, single women with kids, on disability, members of minority groups. They are vulnerable, and payday lenders are taking advantage of them. It’s a civil rights issue, a social justice issue,” she says.
Mr. Fulmer would disagree with any perception that his company is somehow targeting vulnerable members of the community. “Critics seem to think we ignore the risks. We don’t. It is a credit product and it needs to be managed responsibly like any other credit product. This is a very appropriate discussion to be having, and we agree that we should help those who need it, but extreme rhetoric ignores the people in the middle who use our product responsibly.”