Economic Security Later in Life, New Report on Short-term Loans

 Improving Economic Security Later in Life: Meeting the Credit and Financial Services Needs of Older Persons

The Woodstock Insititute’s new report examines financial products that take advantage of the economic vulnerability of older persons and highlights key features of some alternatives. It is based on extensive conversations with leading members of the policy and advocacy community, financialservices industry, and bank regulatory agencies. The report concludes with recommendations for both bank regulatory andfinancial institution policy to advance financial products that protect the economic security of older persons.

Checking accounts with high-cost overdraft fees are increasing older persons’ economic vulnerability, says a new report from Woodstock Institute, “Improving Economic Security Later in Life: Meeting the Credit and Financial Services Needs of Older Persons.” The controversial overdraft fees, recently under fire from Senator Chris Dodd (D-CT), particularly burden beneficiaries of Social Security payments and low-income older persons.

 

Automatic enrollment in overdraft programs means that many older persons are being charged high fees for products that do not want or need.  In fact, 75 percent of older persons would prefer to have a transaction declined than incur overdraft fees. Persons aged 55 and over pay $4.5 billion in overdraft fees each year. Over $513 million of these overdraft fees are levied on recipients of Social Security benefits.

The report, based on extensive conversations with leading members of the policy and advocacy community, financial services industry, and bank regulatory agencies, found that the availability of transparent checking and savings accounts is a key financial concern for many older people. 

As the national debate on consumer protections for financial products continues, this report lays out several key concerns of older persons that should be included in any reform efforts.

The full report is online at the Woodstock Institute – http://www.woodstockinst.org/publications/research-reports/

   Improving Economic Security Later in Life: Meeting the Credit and Financial Services Needs of Older Persons

Editorial – Gov. Beshear should stick to interest cap pledge

  

Beshear should stick to interest cap pledge

Editorial from the Owensboro Messenger-Inquirer

Published: Wednesday, September 30, 2009

Gov. Steve Beshear isn’t delaying his efforts at securing a second term in 2011.

Since announcing his running mate in July, Beshear has begun raising funds for his run for re-election. Those efforts included a fundraiser last week at the Tennessee home of the head of a national payday lending company.

Beshear’s relationship with the payday lending industry stretches back for years, but that familiarity and his desire for a second term shouldn’t stand in the way of further efforts to restrict payday lending in Kentucky.

Kentucky isn’t the first or the only state to look at addressing the exorbitant costs and predatory practices of many in the payday lending industry.

These short-term loans, which typically must be repaid within two weeks, are marketed as a bridge to payday, but instead can drag consumers into a cycle of debt. Loans are capped at $500, and the interest rate when annualized can be as high as 390 percent.

The payday lending industry markets the loans as a short-term solution to minor financial challenges, but instead the loans are often “flipped.” This practice has consumers taking out new payday loans to repay old, and they can quickly find themselves spiraling into deeper debt.

Beshear, as a lawyer in private practice, was a lobbyist for the payday lending industry in the 1990s. That connection is likely to raise some eyebrows given the fundraiser last week at the home of Garry McNabb, the chief executive officer of Cash Express, a payday lending outfit that has more than 100 outlets in Kentucky.

McNabb and the Beshear administration both downplayed the idea that the fundraiser was an attempt to gain access to the governor’s office.

“I can assure you there has not been the first hint that the fundraiser being tied to any kind of business,” McNabb told the Louisville Courier-Journal.

Chad Aull, the political director for the Beshear re-election campaign, also dismissed any impropriety, and said Beshear supports capping annualized interest rates for payday loans at 36 percent.

That cap is a goal of consumer advocates including the Kentucky Coalition for Responsible Lending, but one that was unrealized in legislative changes made this year. House Bill 444, a stripped down version of tighter restrictions offered in 2008, was passed and created a statewide database to help ensure lenders and consumers were abiding by limits on multiple loans.

With House Bill 444’s passage, Beshear said he would continue to work with the legislature to impose the 36 percent cap, and hopefully this fundraiser isn’t an indication he has other intentions. His actions once a legislative proposal is offered next year should bear out the assertions of McNabb and Aull.

“In the future, I believe we must take the next step of imposing caps on these lenders to afford consumers even stronger protections,” Beshear said in a statement about House Bill 444 in March.

More optimistically, Beshear’s connections to the payday lending industry could offer an advantage to Kentucky consumers. The governor should use his influence with his industry connections to ensure their acceptance of the cap rather than letting their influence sway him.

Copyright © 2009 – Messenger Inquirer

Personal Stories from the Payday Lending Trap

A Lawrenceburg wife and mother used a payday lender in 2001 to borrow less than $200 to cover her musician husband’s transportation expenses.  She wasn’t able to repay it within the two weeks and had to renew the loan.  She got caught in a cycle of paying minimum amounts and renewing the loan.  This went on for 18 months.  During that time, she was amassing other debts as well.  In the end, she had to refinance her home to pay off those debts as well as the payday loan.  In all, she paid back almost ten times the original loan in fees and interest.

 

A single mother of three in Owensboro borrowed about  $200 from a payday lender.  She wasn’t able to pay it off immediately; instead she made payments when she could.  The interest was adding up and over the course of 6 months, she paid back between $500 and $600, but still hadn’t paid the loan off.  Finally a relative paid the total in full for her, and she was able to repay him interest-free

Govenor Beshear Reaffirms Support for 36% Cap

Beshear Pledges Support for Payday Lender Cap Despite Fund-raiser

Governor Steve Beshear

Bluegrass Politics Oct. 2009 [FRANKFORT] — Gov. Steve Beshear said Wednesday (9-30-09) that he remains committed to stricter regulation of payday lenders even though his re-election campaign held a fund-raiser last week at the Tennessee home of a payday lending executive who does business in Kentucky. Beshear said he was not reluctant to hold the fund-raiser at the Cookeville, Tenn., home of Garry McNabb, chief executive officer of Cash Express, which has more than 100 outlets in Kentucky. It also is registered to lobby the executive and legislative branches in Kentucky.

The Democratic governor, who is seeking re-election in 2011, said McNabb was one of several hosts of the event. Several consumer advocates who have pushed for more restrictions on payday lenders — which can charge upward of 400 percent interest — have expressed concern about the fund-raiser.

Beshear, who was a lobbyist for the payday lending industry in 1998, said he still supports legislation to cap the annual interest rates payday lenders can charge at 36 percent — the amount Congress has implemented for military families. The industry claims a cap on payday advances would drive lenders from the state and deprive families of access to emergency credit, increasing bounced checks and bankruptcies. “We are going to move forward to creating further and stronger regulations, capping interest rates” in next year’s legislative session, Beshear said.

Read the story at:http://bluegrasspolitics.bloginky.com/2009/10/01/beshear-pledges-support-for-payday-lender-cap-despite-fund-raiser/

Eight Ways to Avoid the Payday Loan Debt Trap

 Thousands of Americas take out payday loans every week.  These small loans are often used to get the consumer out of a bind- perhaps by paying an overdue bill or helping with the cost of car repairs.  Even though many consumers have the intention of paying the loan back with their next pay check, many are unable to repay the loans on time.  The interest rates on these loans are huge and  thse loans end up costing consumers millions of dollars a year.  Click here to learn eight tips to avoid the trap of payday loans.  Source: WREX.com

KCRL Invites Organizations to Get Involved & Take Action

The Kentucky Coalition for Responsible Lending (KCRL) is a statewide coalition dedicated to protecting family assets by eliminating abusive financial practices.

Organizations are invited to join KCRL and take action to close the PayDay Lending Trap for Kentucky consumers.

Click here to download KCRL Membership form_09 the KCRL Coalition Application Form -   and take action for Kentucky consumers.

Click here to find your your state legislators.

Click here to find KCRL on Facebook – http://tinyurl.com/kpuoaq

Virginia’s Proposed Payday Regulations Aim to Keep Industry Honest

Center for Responsible Lending  Applauds Virginia’s Effort to Protect Consumers

August 6, 2009 – The proposed regulations issued Tuesday, August 4 by the Virginia Bureau of Financial Institutions (BFI) confirm that payday lenders continue at every turn to avoid regulation. The Center for Responsible Lending applauds BFI for providing guidance and oversight of this industry, particularly when the legislature has allowed so many loopholes. The proposed regulations will:

• Prevent the industry’s practice of avoiding state laws and regulation under cover of affiliate relationships.
• Prevent the industry from avoiding the 2008 and 2009 reforms by adding ancillary products such as life insurance to the cost of the loan.
• Prevent faux car title loans that have been pushed by the payday loan industry.
• Require that all companies making auto loans follow the same filing rules.
• Prevent check cashers from making payday loans.

Unsatisfied with the 300 percent APR that resulted from the General Assembly’s minor reforms of 2008, within months of the changes, payday lenders began steering customers away from the traditional payday product toward an open-end loan product, typically a $750 loan with interest rates even higher than a payday loan – and completely unregulated. The industry was able to introduce this new product because Virginia has no underlying small loan interest rate cap.

In 2009, the Virginia legislature sought to close this loophole by passing a law that prohibits payday loans and open-end loans from being made by payday lenders. However, in an effort to protect car-title lenders, the legislature created a carve-out for that industry, allowing predatory practices to continue in the Commonwealth. Within days, payday lenders began marketing these same open-end products as “car-title” loans.

Consumer lending issues will again return to the 2010 Virginia General Assembly. The Center for Responsible Lending strongly advocates the only reform that has proven effective against predatory small dollar lending is a 36 percent interest rate cap for all small dollar lending in the Commonwealth. Virginia will not need to continue its patchwork payday reforms or create a separate, car title authorization statute when it has a reasonable double-digit small loan interest rate cap in place.

Click here for more information: Charlene Crowell at (919) 313-8523 or charlene.crowell@responsiblelending.org.

Guest Op-ed: Caught in the payday lending trap

Caught in the payday lending trap

By Terry Brooks

At issue | July 20 column by Patrick Flannery: “Payday loans help Kentucky families.”

Payday lenders work hard at bringing up a range of issues to avoid talking about the foundation of their business, which is trapping customers in long-term debt at 400 percent annual interest.

The evidence is so clear, it’s hardly in debate anymore. Payday lenders can’t deny they live on the fees they collect from customers who cannot afford to pay off their small loans. They try to distract from it by attacking the messengers and by bringing up products they say are even worse than their own.

Once caught in the system, customers repeatedly pay fees of $50 for a $300 loan that must be paid back in two weeks’ time. As a result they find themselves needing to take out successive loans just to make ends meet. The debt trap deepens until the customer is bled dry or has some rare windfall to help escape the cycle of dependency.

This is not the exception to how payday lending works. It’s the rule.

The Center for Responsible Lending recently examined data from state regulators and found that over 75 percent of the total loan volume of payday lenders comes from what CRL calls “churned loans.”

Essentially, the structure of the loan creates the need for repeat loans to pay off the one before, allowing the lender to collect a sizable fee with each transaction. Unlike the payday lenders’ public relations effort to describe the enterprise as “emergency cash,” the real business model is based on repeat business.

The tide of public opinion has risen against these modern day money-lenders in state after state.

When our neighbors in Ohio were debating the issue, Ohio’s House Speaker Jon Husted said: “It became clear to us that we had a product in the marketplace that was harming consumers because its design by its very nature trapped people in a cycle of debt. That was the business model it was based on — return customers who couldn’t pay off their loans.”

Kentucky’s political leaders must show the same courage and stand up against an industry that preys on the financially vulnerable and erodes the financial security of families.

Gov. Steve Beshear has endorsed a cap of 36 percent on annual interest and pledged to work for its passage during the 2010 General Assembly. That 36 percent cap is modeled after the national standard that Congress has applied to protect military families from the scourge of unrestricted payday practices.

When the governor and legislative leaders make good on this commitment every Kentucky family — not just military ones — will be protected with that safeguard.

Kentucky will then join 15 other states, including Ohio, West Virginia and North Carolina, which control predatory payday lending by enforcing a two-digit cap. Arizona will also join the ranks in 2010. Their residents, like Ohio’s, upheld restrictions on payday lending interest rates with an overwhelming vote at the ballot box in favor of the interest-rate cap.

A two-digit cap does not ban small loans. It simply makes it impossible for lenders to market a product that traps their customers in debt by forcing lenders to either drastically lower their fees or give their customers more time to pay off their loans.

When payday lending is in the picture, low-income families have a harder time paying their bills, not an easier time.

They risk high-cost overdraft fees from bounced checks because the payday loan had to be paid back first. By simply having a payday loan, consumers are at a greater risk of going into bankruptcy than if they were denied the loan in the first place.

The harsh reality is that working people who need every dollar these days for essential goods and services lose many hours worth of labor from their paychecks when they have to hand over a chunk of it to their neighborhood payday lender every two weeks. This product hurts the very families its hawkers claim to help.

The commonwealth’s 36 percent cap can’t come soon enough. Kentucky’s families have suffered too long under the unbridled spirit of the payday industry.

Terry Brooks is the executive director of Kentucky Youth Advocates, a member of the Kentucky Coalition for Responsible Lending. Lexington’s Herald Leader, http://www.kentucky.com/589/story/875173.html#none

Virginia Governor is getting state into the emergency-loan business

Virginia Launches Innovative State Employee Loan Program

Gov. Timothy M. Kaine recently announced a program that will allow state employees to take out short-term, low-interest loans to meet emergency cash needs.

The Virginia State Employee Loan Program will be run through the Virginia Credit Union and allow state workers who are members to borrow up to $500 twice a year. The program is backed by the Commonwealth Virginia campaign, the non-profit organization that coordinates the charitable donations of state workers.

“This program will allow our state employees to receive small loans without having to go to predatory lenders,“ Kaine said at a news conference this morning at the state capitol in Richmond.

Click here to watch Governor Kaine’s  news conference video online

The interest rate for the loans is 24.99 percent APR—- substantially lower than the rates for loans obtained through payday lenders, where rates can exceed 300 percent for some products.

Under the state loan program, a borrower who takes six months to repay a $500 loan will end up paying a total of $540, including interest. There are no fees or pre-payment penalties attached to the loans.

The program is limited to current state employees, whose loans are repaid through automatic deductions from their accounts. But at a news conference this morning, Kaine said he hopes private employers and other government entities use the program as a model to extend short-term credit to their workforce.

To qualify for a loan, employees must first take a “Financial Fitness Education” course online—part of an attempt by officials to increase pass a financial literacy among the workforce.

Virginia is getting into the emergency-loan business.

Gov. Timothy M. Kaine today is expected to announce a short-term lending program for state employees that would allow workers to take out lowinterest loans of up to $500 to meet emergency needs.

Borrowers would have up to six months to satisfy the debt, which would be repaid through payroll deductions.

“It’s a way to help out people who need money in a hurry so they don’t have to go to outside lenders,“ said Kaine press secretary Gordon Hickey. The state has about 100,000 employees.

“The governor hopes this will be a model for private companies to use for their employees,“ Hickey said.

State workers who are members of the Virginia Credit Union will be eligible for the program, which officials said will cost no taxpayer dollars. The lending will be backed by the Commonwealth Virginia Campaign, the nonprofit, 501c organization that coordinates the charitable giving of state workers.

Details on the interest rate and the number of loans employees are eligible to take out per year will be released today at a Kaine news conference to roll out the program.

But Hickey said the borrowing would come at “a considerably lower rate than they could get anywhere else—a lot less than 36 percent,“ he added, referring to the payday-lending business.

Payday lenders have been criticized for charging exorbitant interest rates and offering complex lending options that enable borrowers to cycle deeper into debt. Reforms and restrictions imposed on the industry by the General Assembly during the past two years have sent a number of the lenders packing.

Under the assembly’s most recent crackdown on payday lending, which took effect July 1, lenders will be required to choose between offering payday loans, whose fees are fixed, and open-ended loans, which can carry sky’s-the-limit interest rates. Lenders that get out of the payday business lose their licenses to offer such loans in Virginia for a decade.

Meanwhile, as the national recession continues, banks and other traditional lending institutions have been reluctant to extend credit and typically do not provide the smaller, emergency loans available under the program.

---

Contact Jim Nolan at (804) 649-6061 or jnolan@timesdispatch.com .

Phantom Demand – New Report from Center for Responsible Lending

Phantom Demand

A new CRL report released today finds that payday lenders create demand for their 400% interest loans by setting loan terms that generate rapid re-borrowing. Download the complete report  (PDF, 31 pp.) Download the executive summary (PDF 4 pp.)

Watch our video press release. 

A full three quarters of payday lending loan volume is generated by churned loans from borrowers who take another loan before their next payday.

Phantom Demand documents for the first time how quickly most payday lending customers must turn around and re-borrow after paying off what was supposed to be short-term debt. Among the over 80 percent of borrowers who conduct multiple transactions:

• Half of new loans are opened as soon as possible.
• 87% of new loans are opened within two weeks.
• Only 6 percent of subsequent payday loans are taken out longer than a month after the previous loan was paid off.

The national payday lending industry originates $27 billion in loans per year. These 59 million churned loans account for $20 billion of that volume.

Americans pay $3.5 billion  every year in fees for churned loans, money that could go for essential needs, savings, or to pay off other debt.

CRL supports a 36% cap on annual interest rate to reform high-cost lending practices like payday lending. Tell your members of Congress to support federal proposals to cap annual interest rates at 36%.

About the Center for Responsible Lending The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation’s largest community development lenders. Copyright 2009 Center for Responsible Lending. All Rights Reserved.