Guest Op-ed: Caught in the payday lending trap

28 07 2009

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

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