Debt Trap Continues – KY Youth Advocates Testimony Before Consumers’ Advisory Council

12 12 2010

Testimony before the Kentucky Consumers’ Advisory Council

Testimony submitted and presented by: Brigitte Blom Ramsey, Kentucky Youth Advocates

Data prepared by: Melissa Fry Konty, Ph.D.,Research and Policy Associate, MACED

 Good Afternoon:

 Thank you all for being here and for taking the time to hear from a range of voices about the impacts of payday lending on Kentucky’s hardworking families. My name is Brigitte Ramsey. I live in Northern Kentucky and work for Kentucky Youth Advocates.   Kentucky Youth Advocates is a statewide nonprofit organization working to increase the well-being of children and families in the Commonwealth. We are part of the Kentucky Coalition for Responsible Lending because we see how payday loans can devastate the financial security of Kentucky households.

 In February, the Coalition released a report entitled, “The Debt Trap in the Commonwealth: The Impact of Payday Lending on Kentucky Counties,” which you should have already received as part of your packets.  Our research is based on 2008 data from the Department of Financial Institutions and uses models constructed by the Center for Responsible Lending in North Carolina based on data from databases, much like our new one, in 19 other states. In the couple of minutes that I have, I will highlight the findings from our study, and briefly address preliminary findings from current data generated by Kentucky’s new payday lending database, with particular attention to Northern Kentucky counties.

In 2008, 95 of Kentucky’s 120 counties were home to 781 payday lenders. To put this in perspective, there are approximately 250 McDonald’s in the state. Kentuckians paid upwards of 400 percent interest on nearly 3 million loans, totaling approximately $158 million in predatory loan fees – in one year.

When we say “predatory fees” we refer to the fees paid by borrowers who take out five or more loans in a year: those borrowers are stuck in a debt trap. The fees associated with these repeat loans are considered predatory, because they are collected as the result of a business model built on people’s inability to repay a loan with such a short term. According to the Commonwealth’s new database, 83 percent of Kentucky’s payday loans from May thru September went to consumers who took out 5 or more loans during that 5 month period.

Northern Kentucky is not immune from the ills caused by the harmful payday product.  There are currently 49 payday lending establishments scattered across six of the eight counties that make up the northern Kentucky region.  Combined these lenders have charged more than $7.4 million in fees in the first nine months of 2010.[1] This represents a loss of scarce resources for families and individuals who are already struggling to make ends meet. 

 (Verbally – Here you can see the counties where payday lenders are in operation.  You can see that Kenton County is home to the largest number of payday lenders in the northern Kentucky region with 17 operations where borrowers paid nearly $2.4 million in fees – again representing a drain of resources families need to be self-sufficient and make ends meet.)

 Northern Kentucky Counties

Licensee County Deferred Deposit Licenses as of October 2010 Total All Transactions Estimated Loan Volume Based on Average Loan Size Estimated Total Fees (based on average fees per transaction)
Boone 13  $         38,439  $ 11,949,006  $    1,968,030
Campbell 12  $         36,581  $ 11,371,435  $    1,872,903
Kenton 17  $         46,411  $ 14,427,152  $    2,376,187
Carroll 3  $           9,557  $   2,970,854  $       489,307
Grant 3  $         13,550  $   4,212,103  $       693,743
Pendleton 1  $           1,400  $     435,199  $         71,678
Total 49  $       145,938  $ 45,365,749  $    7,471,848

This is not simply a problem for urban families. (As you can see Carroll, Grant, and Pendleton – rural counties in northern Kentucky all have payday lenders.  Carroll and Grant each have three and borrowers paid nearly $500,000 – $700,000 in fees.)  We found the highest concentration of payday lenders in rural Mason County, (adjacent to northern Kentucky, and) home to roughly 17,000 people. Today, Mason County has nine payday lenders in operation and the highest per capita debt load in the Commonwealth.  (Per capita debt load is defined as the amount of loans and fees if spread across the adult and child population in the geography.)

Select Eastern Kentucky Counties

Licensee County Deferred Deposit Licenses as of October 2010 Total All Transactions Estimated Loan Volume Based on Average Loan Size Estimated Total Fees (based on average fees per transaction)
Boyd 18 40,341 $12,540,254 $2,065,410
Floyd 6 13,344 $4,148,067 $683,197
Perry 9 19,230 $5,977,767 $984,553
Whitely 12 24,108 $7,494,124 $1,234,300
Total 45 97,023 $30,160,212 $4,967,459

A large portion of the money paid in fees to payday lenders leaves our communities. The majority of payday lenders in Kentucky are nationally owned and their profits leave the state. As shown, payday lending has contributed to a wealth drain of nearly $7.4 million in northern Kentucky counties alone in 2010.

Payday lenders locate in low- to moderate-income neighborhoods where people are most likely to need access to small-dollar credit—but the families in these neighborhoods are also least likely to be able to repay the loans within the two-week term while still meeting their financial obligations – creating a cycle of need that leads to a debt trap – (and a threat to a families financial stability).

Payday loans threaten the economic security of Kentucky’s families – particularly single mothers with children.  The payday lending industry’s own research shows that 60 percent of borrower’s are women; 49 percent of payday borrowers have a dependent child; and that borrowers are less likely to be married compared to the national average.[2] 

Since 2008, the number of payday lenders in the state of Kentucky has declined from 781 to 667, but this is still 2 and half times more than the number of McDonalds in our state. Some might argue that the database is responsible for this decline. Rather, we submit that the moratorium on new licenses is responsible for the slowed growth as no new licenses could be issued this year.  Further, continued job loss and broad economic decline both associated with the national recession are likely responsible for the closure of some stores.  Finally, the database likely made business less profitable for some lenders, causing them to close their doors. However, the data show that those still in business continue to trap borrowers in the debt cycle produced by a product with high fees and a short repayment period.] 

In the first nine months of 2010, payday lenders made nearly 1.6 million loans totaling more than $486 million in paycheck advances and more than $80 million in fees.[3] These 1.6 million loans went to 182,159 people – an average 8.6 loans per borrower. As previously stated, 83 percent of payday revenue in the first five months of the database came from borrowers with five or more loans.

These figures demonstrate that the debt trap continues in Kentucky, and illustrates a direct contradiction to the claim that the payday loan industry business model is to provide quick loans for short-term use only. Rather, these numbers confirm that borrowers find themselves stuck in a chronic situation resulting from high borrowing fees that drain families’ resources and a short repayment period that does not allow a families budget to recover before the loan must be repaid.   The data from the new database clearly shows that the industry derives the bulk of their revenue from borrowers stuck in this cycle of debt.

The database indicates a low 2.25 percent default rate. This may lead some to conclude that we do not have a problem. However, the structure of these loans means that borrowers pay them back on time straight out of their paycheck on payday. This tells us nothing about how many of them follow up their repayment with a new loan as soon as possible. Again, the ratio of number of loans to number of borrowers is indicative of the repeat borrowing debt trap that hardworking families in the Commonwealth continue to experience, even with the database in place. 

In May of 2010, 51.5 percent of requests for payday loan transactions were declined. By September the decline rate had dropped to 8.8 percent. Declines resulting from the implementation of the database would be those loans requested by people with two or more loans already out. While some may say the reduction in the decline rate suggests improvements as fewer people appear to be trying to take out more than two loans at a time, this misses the point. Reducing the number of borrowers that have more than two loans out at a time reduces the risk to the lender, but it does not significantly reduce the risk to borrowers. Borrowers are still able to carry two loans at a time, which carry the same 400% interest rates just like they always have.  Thus, borrowers are unable to pay them off and still meet all of their obligations, and open new loans as soon as they pay off prior loans. As previously stated, the ratio of total loans to number of borrowers clearly reflects this pattern with an average 8.6 loans per customer in 2010.

(During the first months the database was operational – ) borrowers across Kentucky paid an estimated $35.7 million in fees from May to September of this year. During the same 5 month period, just 2.5 percent of payday lending revenue was generated by customers who took out only one loan

Though the database provides useful information, it has not curbed the debt trap (nor has it protected financially vulnerable families from predatory practices). Only a return to a 36% rate cap can spring Kentuckians from the payday lending debt trap.


[1] These estimates are likely to be low. The Department of Financial Institutions indicated that not all lenders provided data for January through April. We can only be sure we have full data from May 2010 thru September 2010.

[2] Payday Advance Customer Satisfaction Survey conducted by the Cypress Research Group, 2004.

[3] These estimates are likely to be low. The Department of Financial Institutions indicated that not all lenders provided data for January through April. We can only be sure we have full data from May 2010 thru September 2010.

Advertisements




Final Public Payday Lending Hearing Shows Troubling Trends

10 11 2010
 
Consumers’ Advisory Council Completes Final Public Hearing
    
 New payday loan database shows disturbing trends for N. Kentucky.
 
In the northern Kentucky counties of Boone, Campbell, Kenton, Carroll, Grant, and Pendleton 49 payday lending operations have charged families more than $7.4 million in fees in the first nine months of 2010. A large portion of the fees paid to payday lenders leaves local communities as the majority of payday lenders in Kentucky are nationally owned and take their profits with them.

“While Kentucky’s database is an important tool in understanding the impact of payday lending on Northern Kentucky and the state, it does nothing to stop the debt trap,” said Pendleton County resident Brigitte Blom Ramsey, Director of Special Projects at Kentucky Youth Advocates“Rather, the data shows disturbing trends for consumers’ cycle of debt, directly contradicting claims that payday loans are for short-term quick cash.”

The new state data confirms the consumers’ stories shared at the series of hearings are the rule not the exception. One Kenton county resident, a single mother from Covington, whose testimony was shared at the hearing showed how just two small payday loans totaling just $500 resulted in months of indebtedness, hundreds of dollars in payday loan fees and overdraft fees charge by the bank, abusive debt collection practices, and eventually bankruptcy. The current state law does not curb these types of abuses.

Following passage of new state law in 2009 (HB 444), the Department of Financial Institutions launched a statewide payday loan database tracking consumer usage and ensuring users did not take out more than two loans at one time.

In the first nine months of 2010, the data show that borrowers are still stuck in long term debt, and the payday lenders generate the bulk of their revenue from trapped borrowers. Kentucky borrowers on average already had 8.6 loan transactions and have paid $439.50 in fees alone to borrow an average of $310. The new data also shows that at least 83% of payday revenue has been generated by borrowers with five or more transactions this year. In contrast, just 2% of payday revenue is generated by customers who only used one loan.

“The successful implementation of the state’s new database has provided accurate Kentucky data about the pervasive debt trap, but it does not protect consumers from exploitative high-interest payday loans,” said Anne Marie Regan, senior staff attorney for Kentucky Equal Justice Center. “State lawmakers have the power to move forward with proven reforms to spring the debt trap.”

“There is broad statewide support for lowering abusive 400% rates in favor of a common sense 36% cap for payday loans, just like Congress did for the military and 17 other states have done,” said Regan, who also serves as co-chair for the statewide Kentucky Coalition for Responsible Lending.

On November 2, Montana became the 17th state to cap the rate at 36% when 72% of voters approved a ballot measure to lower 400% interest rates on payday loans to 36%.

The Consumers’ Advisory Council is now expected to consider its findings and future recommendations over the coming weeks.





Final CAC Public Hearing Next Week in N.KY

6 11 2010

Consumers’ Advisory Council Holding Final Public Hearing Looking at Payday Loans

Council members will hear testimony and details on state’s payday lending business, economic impact and consumer protection. The hearing is open to the public and consumers are encouraged to attend and discuss their expereince with payday lending.

The Council’s final regional hearing on payday lending is being held in Newport. Testimony and comments will be heard from consumers, representatives from the Department of Financial Institutions, consumer advocates and deferred deposit industry representatives have been invited.

Who: Consumers’ Advisory Council, Consumers, Department of Financial Institutions, representatives of the Deferred Deposit Industry, CLOUT (Citizens of Louisville Organized & United Together), Kentucky Coalition for Responsible Lending.
What:   Public forum
Where: Brighton Center’s Family Room 799 Ann Street Newport, Ky 41071
When:  Tuesday, November 9, 2010   1:00 p.m. to 3:00 p.m.

Why: Payday lending in Kentucky is a multi-million dollar industry with operations in every county. KCRL welcomes the Council’s interest in this important consumer issue. The Council agreed to conduct these hearings on behalf of consumers. The sixteen member Council’s statutory function is to aid in the development of preventive and remedial consumer protection programs.





Q&A: What is a payday loan?

28 10 2010

According to the KY Deptarment of Financial Institutions:
“A payday loan, also called a deferred deposit, is issued when a financial institution (a payday lender or check casher) agrees to provide cash in the amount of the customer’s next expected payroll check for a fee. These short-term loans are required by state law to be paid in full before another one can be issued, and customers may not have more than two payday loans totaling $500 at a time. Internet payday lenders are not regulated in the state of Kentucky and are therefore illegal.”

Learn more at the Consumers’ Advisory Council’s  final public hearing in N.KY on Tuesday, Nov. 9 from 1:00 – 3:00 pm at the Brighton Center ~ 799 Ann St. in Newport.





Lawmakers Hear Success of New Payday Loans Database

28 10 2010

State’s New Payday Loan Database is Functioning but Revealing Troubling Trends

Earlier this month, the Interim Joint Committee on Banking and Insurance saw their first glimpse into the workings of the deferred deposit database enacted following the 2009 General Assembly (House Bill 444).  KCRL testified and outlined troubling trends before the Consumers’ Advisory Council second public hearing in Lexington.

Kentucky’s real-time payday lending database is an important tool for state regulators and was a needed first step in gathering facts about the state’s payday lending. Legislators and the Department of Financial Institutions are to be commended on the successful implementation and operation of the database (live in April 2010).

Data presented by the DFI before the B&I Committee, however, also shows disturbing trends for consumers’ cycle of debt contradicting claims that payday loans are for short-term quick cash.

In the first nine months of 2010 alone, KY borrowers on average already had 8.6 loan transactions and have paid $439.50 in fees alone to borrow an average of $310. The new data also shows that at least 83% of payday revenue has been generated by borrowers with five or more transactions this year.  In contrast, just 2% of payday revenue is generated by customers who only used one loan. Further, some 182,000 borrowers have paid over $80 million in fees to mostly out of state payday lenders in 2010.  This means that on average a borrower has paid over $400 in fees in 2010.

The data reveals that the debt trap persists in Kentucky and parallels patterns of long term borrowing found in other states and industry data. These patterns show that repeat borrowing in rule, not the exception, for the payday industry nationally and here in Kentucky.

Even with the successful implementation of the state’s new database, state law is not protecting consumers from exploitive, high-interest (400% APR) payday loans and the cycle of debt. Now that the database has provided accurate Kentucky data about the pervasive debt trap, state lawmakers have the power to move forward with proven reforms to spring the debt trap.

There is broad statewide support for lowering abusive 400% rates in favor of a common sense 36% cap for payday loans, just like Congress did for the military and 16 other states have done. 
 

The state’s Consumers’ Advisory Council is holding its final public hearing in N.KY on Tuesday, Nov. 9  from 1:00 – 3:00 pm at the Brighton Center ~ 799 Ann St. in Newport.





State’s New Database Shows Payday Debt Trap Continues

21 10 2010

New Data and Personal Stories Show Continued Cycle of Debt

Kentucky’s Consumers’ Advisory Council hears testimony from state regulators, consumer advocates and personal stories from consumers on payday lending practices.

The first of three public hearings (Oct. 14) on payday loans by the state Consumers’ Advisory Council drew a crowd of some 100 persons and local media in Louisville’s St. Michael Catholic Church. The testimony from representatives with the Department of Financial Institutions, CLOUT (Citizens of Louisville Organized & United Together), Kentucky Coalition For Responsible Lending and local consumers outlined the case that the payday lending debt trap continues.

Although invited, deferred deposit industry representatives declined to attend the hearing. Wednesday’s public hearing provided the first glimpse into the findings of the database enacted following the 2009 General Assembly (House Bill 444). Kentucky’s real-time payday lending database went online in April 2010. It’s intended to ensure lenders are complying with state law by limiting the number and amount of payday loans to consumers.

The newly released data shows that the debt trap is alive and well in the Commonwealth. Data presented by the Department of Financial Institutions, the government agency charged oversight of the database, revealed two key findings among the information presented:

1) 1.5 million payday transactions were made in 2010, but to only 182,000 borrowers. This means there have been more than 8 transactions per borrower in this year alone.

2) These 182,000 borrowers paid over $80 million in fees to mostly out of state payday lenders in 2010. This means that on average a borrower has paid over $400 in fees in 2010. This data reveals that the debt traps persist in Kentucky and parallels patterns of long term borrowing found in other states and industry data. These patterns show that repeated borrowing is rule, not the exception, for the payday industry nationally and here in Kentucky.

 The Council heard compelling stories of four mothers who have endured devastating experiences with payday loans, some of which occurred even now with the database in place. One consumer, Tonia, a member of Louisville’s Making Connection network, “spoke from the heart” about how her family has been stuck in one single $500 loan since August, having to pay $88 in fees every two weeks with none of it being used to payday the actual loan. She noted that the interest is just driving her deeper and deeper into debt, with no clear break in the cycle in sight.

The new state database doesn’t provide Tonia that break; it simply will track her debt trap, but will do nothing to solve it. Even with the  database, state law does not protect consumers from exploitive, high-interest (400% APR) payday loans in Kentucky.

Consumers and local economies across every Kentucky County lose millions of dollars each year to out of state corporations. The General Assembly can change this, protect consumers and stop the loss of potential tax revenues by enacting a 36% interest rate cap in its 2011 Regular Session.

The Council’s two remaining public hearings are scheduled:

Lexington – October 27th  2:00-4:00 p.m.

Location: Shiloh Baptist Church, 237 East 5th Street ~ 40508

Newport – November 9th   1:00 -3:00 p.m.

Location: Brighton Center, 741 Central Avenue ~ 41071





Public Hearings Set to Talk about Payday Lending

6 10 2010

What’s the Real Cost of Payday Lending in Kentucky?

Public Invited to Speak, Listen & Learn at Local Hearings

Kentucky’s Consumers’ Advisory Council along with the Attorney General’s Office of Consumer Protection has scheduled three public hearings to gather facts and take public testimony on the issue of payday lending.  The hearings are free and open to the public.

KCRL expects Kentucky’s General Assembly to deal with payday lending practices again in it’s 2011 Regular Session.

Read more about the economic cost of payday lending in your county at http://bit.ly/bmwxyU

Louisville – October 13, 2010  2:00-4:00 p.m.

Location: St. Michael’s Catholic Church, 12709 Taylorsville Road ~ 40299

Lexington – October 27th  2:00-4:00 p.m.

Location: Shiloh Baptist Church, 237 East 5th Street ~ 40508

Newport – November 9   1:00 -3:00 p.m.

Location: Brighton Center, 741 Central Avenue ~ 41071

The Consumers’ Advisory Council has invited testimony from consumers, the Department of Financial Institutions, the Kentucky Coalition for Responsible Lending, and representatives from the payday loan industry.

The Kentucky Coalition for Responsible Lending is a diverse, statewide coalition of more than 60 organizations representing hundreds of thousands of Kentuckians.  KCRL supports new law capping payday loan interest rates at 36%  just as Congress passed for our nation’s military families.