What It Is, How It Harms People, Why We Don’t Need It Back
Payday lending, sadly, could be coming back to North Carolina. It was banned by the General Assembly in 2001, and strong enforcement by Attorney General Roy Cooper has led to its disappearance from NC. If payday lending returns, it will be because the current General Assembly and Governor want it back.
For those of us with no direct experience with payday lending, let’s start with what it is. Two basic points: 1) It really is related to paydays. People of relatively low income who run short of money between paychecks go to a payday lender for a short-term loan, basically a cash advance, with the plan of paying back the loan out of their next check. Or it might be an elderly person with a financial emergency between Social Security checks. 2) The payday loan industry thrives on repeat customers, those who roll over their loans or immediately take out another one. Borrowers pay exorbitant rates.
Here are the mechanics of it. Let’s say I’m a low-wage worker, without a lot of financial reserves to draw on for any unexpected expenses. My car breaks down, and I have to have repairs done on it. Under the payday loan scheme, I’d go to a payday lender, write a personal check payable to the lender for – as an example — $300. I’d date the check on the day I wrote it, but I’d sign an agreement with the lender that he not deposit my check until some agreed-upon future date, typically the date of my next paycheck. I’d receive the $300 minus a 15% fee, so I’d leave with $255 in cash. Then I’d either be sure there was $300 in my bank account by the agreed-upon date or I’d bring the lender $300 in cash out of my paycheck by the agreed-upon date, at which point the lender would tear up the check I had written to him.
The problem arises if I don’t have $300 available by the due date or if, having given the lender $300, I don’t have money to live on (food, rent, gas, etc.) until my next paycheck. In other words, the financial situation which sent me looking for a short-term loan has not been resolved in one paycheck cycle. So I either get a rollover loan from the lender, paying another 15% fee, or I come back in a day or so and get a new payday loan, again with a 15% fee. The pattern in NC when we had payday loans and in other states now is that customers have multiple loans each year and in some cases get so far behind that they can never catch up. It’s a debt trap, and some never get out of it.
Even if they do catch up, what they are paying for this loan is exorbitant. How exorbitant is it? Payday loans don’t have “interest”. Under the bill introduced in the General Assembly last week, they have a “fee” of 15% of the amount loaned. This flat fee applies whether the loan is for 7 days, 15 days, or 30 days. So the annualized rate (the APR we are accustomed to on other loans) varies with the length of the loan. If it is for 14 days, the APR is 391%. (YES, 391%.) If the loan is for 30 days, it’s a mere 182%. Regardless, borrowers can end up spending more on interest than they got in the original loan. And lenders are making tons of money at the expense of low-income and vulnerable borrowers.
Data from multiple states with payday lending say that the average payday borrower gets eight payday loans per year. Data also show that over 60% of payday loan business is generated by borrowers with 12 or more loans a year. Dan Feehan, CEO of Cash America, a national payday lending chain, openly admitted that: “The theory in the business is you’ve got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that’s really where the profitability is.” For an article about a brand-new report from the Pew Charitable Trusts, click here.
Enter SB 89, Deferred Presentment Services, introduced by Sens. Tillman, Apodaca, and Jenkins. Even the bill’s title is misleading; those great payday loan people are just providing a “service”. The payday lending industry has at least 10 lobbyists registered in NC, including a former Speaker of the House and a former chair of the state Republican Party.
SB 89 would reinstate payday loans in North Carolina. The fee per loan would be 15%. The maximum term of loans would be 35 days, thus guaranteeing that workers who are paid on a monthly basis can also be sucked into this debt trap. The maximum loan would be $500.
The bill has some factors being portrayed as consumer protections, but they aren’t really.
1) Those getting a loan must sign a statement that they have no other similar outstanding payday loans. Borrowers who lie about this would be subject to perjury charges. Lenders are prohibited from “knowingly” lending to people with other outstanding payday loans, but there is no penalty imposed on them for a violation.
2) The bill contains a roll-over prohibition and a 24-hour cooling off period between loans. So you can’t automatically or immediately roll over a payday loan. But, as outlined above, you can come back the next day. The only real difference is that you have to travel to the payday loan office twice.
3) Because of how badly payday lenders had been preying on the military, President George W. Bush signed a federal law prohibiting payday lending to military personnel or their families. SB 89 requires lenders to ask potential customers if they are military and, if they are, to follow federal law in not making loans. The way lenders are reportedly getting around this in other states is by warning a prospective new customer that they can’t lend to military personnel before they ask the question, thus encouraging the potential borrower to lie. SB 89 contains no prohibition or penalty for this conduct.
Given the heavyweight supporters of SB 89, it could be another bill that’s being fast-tracked by legislative leaders. So you should not delay in communicating with your Senator, your Representative, and the Governor. (For contact info, click here.) Ask them to protect vulnerable working North Carolinians and elderly people from interest rates of 400% and from the debt trap that results.
[Thanks to our colleagues at the Center for Responsible Lending, the NC Justice Center, and the NC Housing Coalition for information contained in this report.]