David vs. Goliath's Loan Shark (by Thomas J. Allio Jr.)
A modern-day version of the story of David and Goliath is quickly unfolding at Ohio's State House. The "Davids" of this story are the faith-based groups, housing advocates, consumer, community action, and other anti-poverty organizations around the state. "Goliath" is the powerful payday lending industry that has grown to more than 1,600 stores and has gross revenues of $2 billion annually. The issue in question is whether Ohio's 12-year-old law on payday lending should be changed to provide basic protections for some 500,000 borrowers. The current law is so weak that it could be best titled, "Ohio's Loan Shark Protection Act."
Ohio is ground zero in a battle for the industry's survival. The industry has a privileged position in the marketplace due to special-interest legislation passed in 1995. During that time, the industry received an exemption from Ohio's usury laws that permits them to charge 391% interest on a typical $300 two-week loan. They use a postdated check as security and are not interested in a borrower's ability to repay. When the loan comes due, borrowers are more often than not forced to seek another cash advance to pay off the first one. This starts them down the path of multiple loans, which places them into a debt trap by which they end up owing their soul to the neighborhood payday lending store. A report by the Ohio Coalition for Responsible Lending, titled "Trapped by Design: Ohio Payday Lending by the Numbers," found that the average Ohio payday borrower takes out 12.6 loans per year. More than 300,000 borrowers find themselves ensnared in a debt trap from which they cannot easily escape.
Three payday lending bills are currently pending in the Financial Institutions, Real Estate and Securities (FIRES) Committee of the Ohio House. Two bills, H.B. 333 and H.B. 358 represent real reform for Ohio consumers, while H.B. 338 is an industry-supported bill that would allow them to conduct business as usual. Early signs in the committee do not seem favorable for consumers. The vast majority of the committee seemed unimpressed when a "whistle-blower" who had worked four years in the industry testified on January 22, 2008. Terrence Jent told the committee how the business model involves preying on the financially uneducated customer and those in significant financial trouble. According to Jent, "Nearly one half of the payday loan customers at both of the companies I've worked for were individuals that were drawing some form of Social Security or other retirement benefit." He described harassing collection procedures and how employees were instructed to encourage customers to go to another payday store if they were unable to pay their loan. Jent also stated that the lender has the ability to electronically debit the borrower's bank account to collect the loan.
Many are closely watching whether the 127th Ohio General Assembly ends up standing with David or Goliath. After all, Goliath has a lot of muscle and consumers did not fare too well last year during the debacle of the consumer sales practice act.
The Ohio Coalition for Responsible Lending strongly supports H.B. 333, sponsored by Representatives Bill Batchelder (R-69) and Bob Hagan (D-60). Among other things, the bill would cap interest rates at 36%, limit to one the number of loans a borrower can have at any one time, and create a linked deposit program to provide an incentive to banks to make small loans. Advocates are also encouraged by the growth of alternatives to payday lending, such as those offered by the stretch loan program of many credit unions.
It is imperative, however, that the playing field in Ohio be leveled so that a viable small-loan industry can evolve. In this time of economic hardship and recession, payday loans are counterproductive to a healthy Ohio economy. They enrich the corporations who operate them while stripping wealth from low- and moderate-income borrowers who use them. Ohioans deserve better.
Thomas J. Allio Jr., is chair of the Ohio Coalition for Responsible Lending
Add to Del.icio.us
Add to Technorati
Add to Digg
Add to Newsvine
Comments
These legal loan sharks are indeed 'sharks'. During the last 30 years these lenders have popped up across the country in tune with the desperation experienced by our citizens who increasingly find themselves in poverty and subpoverty.
When gambling is encouraged (lottery) to support our school systems, this disease spreads to open gambling on a larger scale--filling the pockets of those who prey on people with hopes of easy financial gain. Many people are brought into the world of compulsive gambling.
Hence, we have seen a swelling of pawn shops, payday loan sharking, and a turning away of the banking industry--forcing low income individuals to turn to the sharks for financial needs.
Our banking industry is as much a part of the 'sharking' industry as is the pay day lenders. And these thieving practices are sanctioned by the law makers who refuse to protect the public from predatory credit companies.
God said we are to protect the citizens from thievery. Our citizens have no protection from industry and sharking. We are naked and bleeding.
Posted by: JeanR | March 14, 2008 12:30 PM
Adam Smith's "unseen hand" throttles more throats.
Posted by: Sojourner Truth | March 14, 2008 12:53 PM
36% still sounds like predatory lending. I wonder how many of the legilators who allowed the original bill claim to be Christians.
Posted by: jonabark | March 14, 2008 2:32 PM
I write this as I'm getting ready to go to the payday loan store to pay back the loan I took out on Monday. I am a responsible user of these services. This month, I was offered a scholarship to grad school, but I had to accept it and pay a tuition deposit by March 10. I also pay my rent out of the first paycheck of the month, plus a couple of other bills that are automatically deducted from my checking account. I thought I had enough to cover everything, but then an every-6-month-payment that I forgot about came through and left me with only a $13 cushion, and my rent check outstanding. So I went and borrowed $100 just to give myself a bigger cushion. Why? Because that $100 loan cost me less than $15. If my rent check bounced, my minimum cost would have been $120 ($35 returned check fee at the bank, $35 returned check fee from my landlord, and $50 late fee on my rent). It was worth it to me to spend the $15. Thankfully, as I get ready to pay it back (today was payday), I did not. But I'm glad I had the option.
I could sign up for automatic overdraft protection on my checking account, but the MINIMUM charge for each transaction is $25. And they cover overdrafts in $100 increments, so if I overdrafted by $100.01, they would transfer in $200 and I would pay $50. Payday loans at least leave ME in control and let me take out the amount I need.
Having crappy credit is no fun, but many people do. In my case my ex-husband (before he was my ex) made sure I would spend a long time paying for asking him to keep a job or leave. I'm working it off, but it still leaves me with few options. Many people lose their credit by getting themselves in over their heads with a mortgage (I'm sure you've all heard about the house mess), or because medical bills have sent them over the edge. And, of course, there are people who are just plain irresponsible.
My point is, while it sounds unreasonable to pay 391% interest on a short-term loan, often, it is the most reasonable thing in the world. Used responsibly, it can save someone who is trying to rebuild credit. It can save people from being kicked out of an apartment and getting into the spiral of homelessness because they don't have the first, last and damage deposit it takes to get into an apartment. Each time I’ve used payday lending services, it has SAVED me money.
I’m not saying that it’s a good thing. What I am saying is for some people it is the best option they have. And whenever people start talking about how evil it is, they don’t think about what happens to those who use/need the service. Most of the people who want to stop it have never used it—it’s an abstract concept that sounds bad as a concept—and don’t realize that it’s not always evil.
My goal here is not to defend the industry. My goal is to get people to think about it in a different way. RIGHT NOW, for many people it’s the only option to get through a tough time, and if you take the only option away, you leave them with no options. Are there people who misuse or abuse the industry? Yes, a lot. Are there people who are trapped in the debt? Of course! But before it’s just made illegal, consider the costs of bouncing a check (does it cost the bank $35 to process a back check? Is that abusive?). Consider what YOU would do when faced with a bad choice. Consider what alternatives exist for people before you take away the best one they have now.
Discuss.
Posted by: Karen | March 14, 2008 4:52 PM
"Karen" is certainly NOT the typical user of Payday lenders! While I applaud your steel reserve in managing your way to grad school most payday lenders face far more desparate situations. Such as eating. Payday lending in indeed evil--it takes advantage (everyone except Karen) of those who have the least and hands over the profits to greedy individuals who have no concept of right or wrong.
Posted by: Darrell | March 14, 2008 6:23 PM
Conservative economic policies, initiated by the Reagan administration and pushed relentlessly ever since, have brought on the misery presently being experienced by middle class America.
Supply side,'trickle down' economics, union busting, deregulation, privatization, the 'free market' global economy, Bush's 'ownership society', tax cuts for the wealthy - all this is just a cruel hoax perpetrated on the American people to facilitate the looting of America's wealth by the privileged elite class.
The corporate elite is selling off America.
Everything that isn't nailed down is being auctioned off to foreign investors at bargain basement prices.
This has nothing to do with religion.
Rampant greed has brought America to its knees.
It's class warfare, plain and simple.
And we're losing.
When will America wake up to this?
Posted by: justintime | March 15, 2008 1:54 PM
"Conservative economic policies, initiated by the Reagan administration and pushed relentlessly ever since, have brought on the misery presently being experienced by middle class America"
I just knew conservatives and Reagan was behind all of this .
Besides the typical finger pointing , thanks for this tip . these loan sharks are getting addresses by our legislature is Washington too .
And our legislature is a liberal bunch , good for them on this issue though .
They take advantage of the poor , it reminds me organized crime . We had this organization that would give people these stamps and say live on this miserable amount . Then just enough money to pay for poor housing , but not enough money or help to get out of their situation , the only thing they could do was wait till the first of the month to start the whole thing over again . The crime boss made them stay in a neigborhood where their kids could not get a good education , and so they saw no better future then what their parents had . Quite depressing . What really ticked me off was they had everyone convinced if they did not support their crime boss , they would be worse off then the miserable lives they led.
Right , it is Reagan's fault .
Posted by: Mick | March 15, 2008 2:33 PM
Deregulation has been the mantra of conservative economic policy makers for a long time - goes back to the Reagan administration and even further.
Deregulation of the mortgage industry effectively eliminated oversight, led to the massive abuses that brought on the collapse of the mortgage industry.
Deregulation of the energy sector brought us the great Enron swindle.
Deregulation of the Savings and Loan industry brought the Savings and Loan crisis.
Borrow and Spend deficit spending by the Reagan and Bush II administration has destroyed the value of the dollar.
I don't credit Reagan with all of this.
After all he was just a movie star following conservative economic policies.
In the end he couldn't even remember what happened on his watch.
Connect the dots, Mick.
It's not that difficult to understand.
Posted by: justintime | March 15, 2008 3:07 PM
I don't credit Reagan with all of this.
After all he was just a movie star following conservative economic policies.
Posted by: justintime
I don't condemn Karl Marx for all the poverty and millions who sarificed their lives for government regulations either . After all he meant well .
Connect the dots ? The way you do that is not jumping to the conclussion that the regulations and government have all the solutions .
Government is neccesary . But bringing in Reagan into a system that hurts poor people , well Karl is a prime example also .
The way the mortgage industry screwed up in my opinion is that all the folks made money that were in the process. The Real Estate Agent , the broker , the person who got the commission for OKing the loan got paid , the executives in the Loan industry , etc , So they promote a lousy system , but all got rich or paid . None of thos epeople are suffering the consequences .
Who lost out, the investors , and the greedy or foolish home buyers who bougth homes people like us knew we could not afford .
Regulation , I am not sure that is the answer . I would have to see it and read more about it .
One thing also , I think all this government control of lowering the interest rates has caused the prices of housing to become unreachable for the poor and first time home buyers. It madd prices of home to go up artificially by government with cheap interest rates , again another government Karl marx idea that came back and hurt the average working guy .
Connect the dots .
Posted by: Mick | March 15, 2008 5:44 PM
As a person who has sometimes worked directly in this policy area, I have to agree with Karen that taking out a payday loan is not necessarily always an irrational course of action. However, Justin is right: deregulation has made it easier for lenders to be less than forthcoming about the full costs of the loans and to charge exorbitant interest rates. But the excrement is about to hit the fan; around the country more and more advocates for the poor are pushing on this issue--ACORN, Economic Policy Institute, etc. This is going to be the next talk of the town issue for people who are concerned about the poor, in the same way minimum wage, living wage and sweatshop issues have been.
The solution? Asset building and financial literacy programs, credit union accounts, free tax preparation at VITA sites...there are community based programs out. Yes, this is a Goliath, and I'm all for making the regulations on these companies really tough, but there are also positive things that can be done and if any of you are retired or otherwise have time to get involved as a volunteer, I hope you will consider doing so.
Posted by: I and I | March 15, 2008 10:43 PM
At the top of the page when I read this I see adverts for Pay Day loans. Yes, really.
I'm not accusing this Blog of hypocrisy, just pointing out that it might like to look at alternative hosting arrangements.
Posted by: Alan Bright | March 16, 2008 1:52 PM
Does justintime = Rick Nowlin? All bad things are traced back to Reagan! Before Reagan the Great Society would not have been stopped. Everything would have been perfect but the socialist utopia was ended that day in 1980 when he was elected.
Federal government mandated collectivism stalled - Reagan's fault.
I took out a bad loan - Reagan did it.
I got in over my head on my mortgage - Reagan did it.
There's a homeless man down the street that I walk past every day - Reagan's fault.
AIDS - Reagan's fault.
My girlfriend is pregnant - Reagan did it.
My internet is too slow - Reagan did it.
My cat is sick - Reagan did it.
Posted by: Ross | March 16, 2008 2:41 PM
Another Australian perspective.
Payday loans are legal in all Australia states. Only one state has them unregulated (in terms of capped interest rates). The reasoning for this is that if regulated then it would encourage criminal loansharking for those who were more desperate.
Have to agree with Karen, that like all forms of borrowing at interest (credit cards, mortgage, personal loans) they are great and useful for people who can manage them, but they are a trap for many. And the exhorbitant interest rates (even when regulated) make payday loans more dangerous than your average mortgage.
However there is probably no good reason not to regulate these loans. They are not trying to outlaw this means of borrowing (which would surely encourage loansharking). Like all borrowing it could be made fairer.
(as an aside, micro-credit loans in 3rd world countries are often praised for bringing independence to communities, yet they also generally charge high interest rates in the vicinity of 40%. The big difference is that miro-credit loans are for people to create businesses and to create wealth, whereas payday credit is too often for unneeded luxuries, the shoes you just had to buy or the concert you just had to go to).
Be Blessed,
Posted by: Trent | March 16, 2008 7:11 PM
Post a Comment
Are you aware of our Rules of Conduct?