They promise ‘hassle-free cash’ and short term money to help you through a rough patch and a fast answer to all of your personal cashflow issues. What these predatory payday lenders don’t tell you is that they take advantage of low and low-to-middle income individuals by luring them with easy access to cash packaged with hidden interest rates that can exceed 400 (yes, 4-0-0) annual percentage rate (APR) interest on the loan.
Congress last week received a promise from the new Consumer Financial Protection Bureau director, Richard Corday to “use its power to wipe out illegal payday lending practices – such as unauthorized debits on a person’s checking account – while it works on a broader regulatory framework for the industry” to investigate and put an end to these predatory practices.
Who is funding these high-cost loans?
According to a report from National People’s Action entitled, Profiting from Poverty: How Payday Lenders Strip Wealth from the Working-Poor for Record Profits, by Nicholas Bianchi America’s biggest banks including Bank of America, JPMorgan Chase and Wells Fargo underwrite some 42% of the loans to payday lenders. There are big profits in funding payday vendors. “Earning a record $1.5 billion in combined annual revenues,” the article indicates, it’s very difficult to turn those kinds of profits away. A majority of the profits result from the $3.4 billion in annual exorbitant fees packaged in the short-term loans.
Here’s how it works:
Joe’s truck is in the shop and he needs it to commute to his job some 45 miles from his home. In order to keep his job, he visits a payday lender in his town and takes out a payday loan for $500 to cover the cost of his truck repairs. The payday lender is happy to provide the loan with no documentation other than electronic access to his checking account to withdraw the loan amount and required fees upon his elected payday twenty days from the date of the loan. The payday lender charges $20 per borrowed $100, equaling $100 additional on the $500 loan. While the initial loan’s interest rate seems to be at a reasonable rate of 20 percent for the 20 days use, the problem arises when Joe cannot repay the loan with his next paycheck. Twenty days later, he receives his paycheck but has needed other basic living expenses and cannot repay the loan. Joe repays the amout he borrowed and immediately takes out another loan, assuming another $20 fee and the borrowing cycle begins. The continuous re-borrowing puts Jos’s loan at an annual percentage rate of 346.67 percent on his single 20-day loan!
Borrowers, with an average annual income of only $35,000, take an average of nine payday loans each year, typically in quick succession. According to the report, “Only a small fraction of the 17 to 19 million payday loan borrowers take out one loan per year, while a majority of payday loan customers are in effect longer-term borrowers who pay triple-digit interest rates on repeat loans for months at a time” (Bianchi,13). The financial black hole that these individuals are creating is precarious and leaves them vulnerable to a cycle of poverty that often leads to default and ultimately, bankruptcy.
Of growing concern is the rising number of storefront payday lending locations and more recently, internet-based payday lending.
The Evolution of Payday Lending
In the early 1980’s payday lenders were virtually unknown. As a decline in real income occurred, especially among lower income workers, many Americans faced an inability to meet monthly expenses without the use of credit, mostly in the form of credit cards. As the subprime market continued to expand into the 1990’s, the banking industry started to take notice of record profits and the potential for even greater income from high-cost cash advance loans. One prolonged recession a decade later and the American economy is faced with a lending crisis. Americans demanding fair banking practices pushed banks to lower returned check fees and predatory credit card practices, leaving the most vulnerable segment of our population with little options for credit but the payday cash lender.
With the exception of seven states, a majority of these lenders are highly under-regulated. Payday lenders can charge exorbitant fees and interest charges for even the most short-term loans creating a financial black hole from which borrowers cannot recover. The good news is that New Hampshire has started to crack down on payday lenders by drastically limiting the interest rates from the industry high of 450% to a lower 17% to 45% APR. Six other states have followed suit including Arizona, Arkansas, Colorado, Montana, Ohio and Oregon. Much still needs to be done. With 33 other states still providing little or no legislation on payday lenders, the report goes on to say that “there are more payday loan stores in the United States than McDonald’s restaurants.”
Change is needed – NOW.
The power to stop these predatory lenders ultimately lies with you, the voting public. By bringing these predatory payday lenders practices to light with local, state and federal government in the form of grassroots campaigns and then to legislatures to create new laws to prevent small dollar, high-interest lending practices, we can tell our representatives that these practices will not stand in our states. Not only do these payday lenders need to be addressed on the state level, but the federal government needs to address the issue of nationally chartered banking institutions and Wall Street lobbyists who support these high-cost payday loans.
Stripping the Payday lenders of their loan-shark interest rates at a more reasonable 39% interest will rapidly reduce the number of storefronts and online providers. “Payday lenders typically cease operations in the state when significant interest rate limits on small loans become the law of the land” (Bianchi, 9). Yes, there is a definite need for short-term consumer borrowing, but there also needs to be restrictions placed upon the payday lenders to not fleece those citizens most vulnerable to the financial impact of such heinous practices.
New Hampshire Payday Lending Laws
Payday lenders must be licensed in New Hampshire in order to make payday lending loans to New Hampshire residents. Additionally, payday lenders making loans to New Hampshire residents cannot charge more than 36 percent per year.
- Payday lenders cannot file a criminal law suit against borrowers who cannot repay their loans to the lender unless the borrower signed the loans with some fraudulent intent or activities. Payday lenders can file a civil lawsuit against a borrower who is not paying off loans in time.
- There are no laws currently in place to cap the total amount of collection fees that can be charged on payday loan accounts that are in a collections process.
- An individual borrower cannot have more than one outstanding payday loan in his/her name at one time.
- Cooling-off period – Borrowers must wait 60-days from the date of last loan repayment before applying for another payday loan.
- The maximum cash advance loan amount in New Hampshire is $500.00 in principal.
- The payday lender cannot add interest owed to your outstanding balance for the purpose of adding interest on interest.
- The lender cannot require the borrower to set up automatic payments from his or her bank account. The Electronic Funds Transfer Act prohibits financial institutions from requiring customer payment via electronic fund transfer.
- Payday loans cannot be refinanced, renewed or extended.
- You may cancel a loan request within 24-hours or the end of the next business day by returning the money borrowed to the lender.
More information can be found at NH State Banking Department at (603) 271-3561. View our white paper on the subject for additional information and statistics.