The worse the recession gets, the more desperate many people and families become. And the more desperation people feel about their finances, the more urgent it is for legislators to find a way to crack down on the perennial problem of predatory lending.
Predatory lending is nothing new. Lawmakers in various states and in Congress have tried for years to rein in the unscrupulous lenders who take advantage of poor people who typically have little or no savings.
Sometimes, lobbyists manage to make sure that any so-called reform is essentially toothless. Other times, potentially good reforms have barely taken effect when the lenders discover a loophole or come up with a new scam. At times, even the dual efforts to control predatory lending have caused problems as state and federal agencies have engaged in turf wars as to which should be making and enforcing the rules.
Predatory lending isn't a legal term, but rather a descriptive one used by officials, activists and the media to describe a range of practices that they consider unfair. In essence, it is lenders granting loans to people who they know are unlikely to be able to pay them back. The goal usually is to profit from high fees, interest rates and repeat loans. The term is often applied to "payday lenders" who give cash to people who don't want to wait for their paycheck, welfare benefit or other source of income. In exchange for the cash, the borrower usually gives the lender a postdated check or authorization for an automatic bank-account withdrawal. A hefty fee is usually involved, so that the low-income person starts off by giving up a significant chunk of the anticipated income.
Making matters worse, by the time the check arrives, the borrower often has gone through the advance and cannot afford to repay the lender. Then the lender offers a renewal of the loan or a new loan, and the cycle of high interest and/or fees continues. Borrowers often deal with several payday lenders, taking money from one to pay off another.
Borrowers typically don't understand the level of interest they are paying. Some loans, for example, cite an interest rate of 30 percent, but that's for a month--in annual terms, that's an outrageous 360 percent. The Center for Responsible Lending in Washington says that borrowers usually pay at least $15 for every $100 in a two-week payday cash advance. At that rate, the center says, the loan fees are roughly the equivalent of a 400 percent annual rate. Those who renew their loans repeatedly may end up paying more in fees than the amount of money they borrowed. That can be devastating to families living paycheck to paycheck.
Military families, many of whom deal with low pay, frequent moves and the effects of repeated deployments, have been favorite targets of payday lenders. Congress passed a law in 2006 to cap the annual interest rate that lenders can charge military families at 36 percent. That's better than the 400 percent trap that some other people fall into, but even 36 percent can quickly eat into a family's resources.
This time of year, even some generally well-respected companies get in on what some people call predatory lending, in the form of income-tax refund-anticipation loans. People who don't want to wait for their refunds take out loans--in some cases from tax-preparation companies--that will be repaid from their refund. The interest rates sometimes are as high as 100 percent; the Center for Responsible Lending says that the annual rates can go as high as 700 percent.
State and federal officials are trying to get the word out that the availability of electronic filing and direct-deposit should have made refund-anticipation loans obsolete. Most people can get their refund within a few days of their return being accepted by the Internal Revenue Service. Many low-income people can qualify for free e-filing through the IRS Web site. Also, in many communities, volunteers are available at libraries, churches and other places to help people file their taxes.
Many mortgage deals also might qualify for the predatory-lending label. Subprime mortgages, whose collapse started the economic downturn, are examples of loans given to people who are unlikely to be able to repay them. In many cases, borrowers did not understand how much their interest rates would go up after an initial affordable period. Officials in several states have filed or threatened lawsuits, some of them alleging racial as well as economic bias. The attorney general of Tennessee, for example, Bob Cooper, announced a settlement with the mortgage lender Countrywide earlier this year designed to help thousands of families avoid foreclosure.
Efforts to rein in payday lenders have not been as successful in many states. In Ohio, for example, the legislature last year rescinded a law that had exempted payday lenders from the state's usury laws and capped the annual percentage rate at 28 percent. Voters upheld the change in a referendum in November. But as the Cleveland Plain Dealer has reported, many lenders simply stopped calling what they offered "payday loans" and changed their licenses so that they were operating under two other laws regulating loans. Then they started adding loan-origination fees to the 28 percent APR on two-week loans. The result in effect is a return to the triple-digit interest rates the state thought it had outlawed. And the legislature is being urged to close this latest loophole.
Virginia is another state where legislators are scrambling to fix a problem they thought they dealt with last year. New laws went into effect Jan. 1, but lenders quickly started making short-term loans secured with car titles that have one-month interest rates as high as 30 percent--or 360 percent APR. Some lenders also have started extending open-end lines of credit.
A debate has been raging in South Carolina, where critics say that a payday-lending bill recently passed by the state House is much too weak, with no cap on interest rates. It also doubles the amount that a person can borrow from one lender from $300 to $600. Last year, the state Senate passed a much tougher bill, but it never made it onto the floor of the House for consideration.
At least 16 states have managed essentially to ban predatory lending, but it can be a constant struggle. North Carolina, for example, started its crackdown in earnest in 1999, but legislators have had to shore up the laws more than once. The payoff is not always evident--it can be hard to quantify how many families did not get into trouble that might have. But North Carolina's housing market has not suffered nearly as much as those in states such as Florida and Nevada.
Those who make payday and similar loans say that they provide a needed service for low-income people who often lack other sources of credit. The Center for Responsible Lending points out that there are other options that are better than sinking into never-ending debt and uxorious interest rates. Among them are small savings accounts; no-fee paycheck advances from employers; working out payment plans with creditors; borrowing from friends or relatives; and getting help, sometimes including loans, from social-service agencies and churches. There are also responsible banks and credit unions, including some that deal specifically with military families, that offer short-term loans with better terms than payday lenders.
Linda Brinson retired in November as the editorial page editor of the Winston-Salem Journal. She is a member of First Baptist Church in Madison, N.C.