KY Voices for Springing the Debt Trap

15 12 2010

Ky. voices: Spring payday loan debt trap
Lexington Herald-Leader
December 15, 2010

 
By Anne Marie Regan and Lisa Gabbard

Kentucky’s new payday lending database is proving that too many consumers are caught in an endless cycle of debt and that a 36 percent rate cap is long overdue. The Herald-Leader’s recent editorial got it right that payday loans create “a perpetual debt machine that grabs borrowers and sucks them in.”

What’s new: Information from the database supports the push for a common sense 36 percent cap. Lawmakers told consumers and their advocates, in 2009 and again in 2010, to “wait and see how the database works.” All the while, payday lenders have continued making loans at up to 400 percent annual interest to consumers desperate for cash to make ends meet.

Kentucky’s database went live in April and has been quietly gathering hard data and adding up the millions of dollars borrowed and fees paid at the 600-plus payday lending storefronts across the state. What the new database confirms is a disturbing and persistent debt trap for consumers that parallels patterns of long-term borrowing in other states. These patterns show that repeat borrowing is the rule, rather than the exception for the payday industry.

The average borrower in Kentucky has taken out 8.6 transactions since January, and 83 percent of payday loan revenues have been generated by borrowers with five or more transactions. Borrowers typically cannot repay in 14 days and end up taking out loan after loan. As a result, the typical borrower will pay $439.50 in fees alone on the average loan amount of $310. The database also confirms how much Kentucky consumers are paying in fees (more than $80 million this year so far), with much of it leaving our local economies and going to out-of- state companies.

While the database is a useful tool for regulators and a first step in enforcing existing state law, it does nothing to help consumers escape the debt trap or lower the 400 percent interest rates. Other states have taken action to do this, and Kentucky should, too. Seventeen other states (most recently Montana) have capped interest at around 36 percent or never legalized payday lending. In 2006, the Department of Defense pushed Congress to pass a law limiting annual interest on payday loans made to military families to 36 percent.

One recent bright spot in this long debate is the Attorney General’s Consumer Advisory Council. It held a series of public hearings this fall and gathered comment on payday loans. What it heard from consumers and their advocates was clear: Waiting for a 36 percent cap on payday loans is costing consumers, their families, local economies and Kentucky too much.

After deliberating, the Council has recommended that the 2011 General Assembly impose a 36 percent interest rate cap on payday lending.

Even with Kentucky’s new database, state law is not protecting consumers from exploitative, high-interest (400 percent APR) loans and the cycle of debt. Now that the database is capturing data about the harmful effects of payday loans, it’s up to the legislature to use this information to spring consumers from this debt trap. The only proven solution is to cap these loans at 36 percent.

Anne Marie Regan and Lisa Gabbard are co-chairs of the Kentucky Coalition for Responsible Lending.

Click here to read the Consumers’ Advisory Council’s Letter to House and Senate Leadership recommending a 36% APR to help consumers.CAC Letter_Sen_Williams_Rep_Stumbo_12-09-10

See the Herald-Leader online version: http://www.kentucky.com/2010/12/15/1567162/ky-voices-spring-payday-loan-debt.html#more#ixzz18BzzwdqX





State’s Consumers’ Avisory Council Votes to Approve 36% Payday Lending Cap

12 12 2010

Consumers’ Advisory Council Calls on Lawmakers for 36% Cap on Payday Loans

Capping interest rates at 36% in best interest of Kentucky.

The Consumers’ Advisory Council (CAC) voted Dec. 9th to officially recommend legislation capping interest rates on payday loans at 36% APR. In a letter to House and Senate leaders, the Council concluded that a rate cap is “in the best interest of Kentucky.” The Council’s recommendations are expected to boost consumer groups’ and lawmakers’ continued push for a 36% cap in the 2011 General Assembly.

“We applaud the Council’s work and for recognizing the harm of a loan product that carries 400% interest rates – and the urgent need to protect consumers,” said CLOUT Board Member, Jimmy Mills.  “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 Anne Marie Regan, senior staff attorney for Kentucky Equal Justice Center and co-chair of the Kentucky Coalition for Responsible Lending (KCRL).

At a series of three public hearings called for by CLOUT (Citizens of Louisville Organized and United Together) in Newport, Lexington, and Louisville, Council members heard personal accounts of consumers being caught in payday lending’s cycle of debt.  Consumer advocates, using data from the state’s new payday loan database, testified that both the numbers and stories show that the typical payday loan results in long term debt, not a quick financial fix.

“Data from the state’s database shows that the average borrower in Kentucky has already taken out 8.6 loans this year, translating into more than $80 million in fees alone” said Pendleton County resident Brigitte Blom Ramsey, Director of Special Projects at Kentucky Youth Advocates.  “These fees represent a loss of valuable financial resources to Kentucky families and communities, with the vast majority of the money going to out of state payday lenders.” 

The new Kentucky data also showed 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 Council’s letter also noted additional measures, such as, a cooling off period between loans, extended payment plans, and enhanced consumer disclosure. However, at the same time the Council recognized other states’ experience showing these same measures “appear to be ineffective” to address consumers’ needs once caught in the cycle of debt created by payday loan’s high interest rates.

In other states where 400% interest payday loans are is still allowed, repayment plans and cooling off periods fail to lower the costs of loans or change patterns of repeat borrowing.

KCRL with some 65 other organizations and supporting legislators will seek a 36 percent cap in the 2011 General Assembly. 

 “Payday loans are not an answer to the financial emergencies that are hitting Kentucky families. When families get sucked into the debt trap and are forced to pay excessive fees every two weeks it directly affects their ability to meet their monthly obligations such as rent or mortgage payments, utilities, and essential needs of their family,” said Penny Young, Executive Director of the Homeless and Housing Coalition. “These loans are predatory and take advantage of our most vulnerable populations. It’s time for our legislators to take action and follow the consumer advisory council’s recommendation for a 36% cap.”





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.





KCRL Guest Op-Ed, Courier-Journal

13 02 2010

Op-Ed | The debt trap of payday loans

By Amy Shir • Special to The Courier-Journal • January 31, 2010

Karen Young from Lawrenceburg borrowed less than $200 from a payday lender to cover her musician husband’s transportation expenses. She repaid it in two weeks but it didn’t stop there. She still needed cash. She wrote a new check to take out a new loan. She got caught in a cycle. The cycle went on for 18 months. Payday loans didn’t help Karen hold off a crisis. They added to her debts. In the end, Karen refinanced her home to pay off what she owed. Along the way, she paid almost 10 times the original payday loan in fees. Karen’s story is common. Loans are taken out back to back, over and over.

The result is a “debt trap.” This isn’t an aberration. It is the intentional business model on which the payday loan industry flourishes. “You’ve got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that’s really where the profitability is,” said Dan Feehan, CEO of Cash America, a major payday lender. The numbers nationally: $25 billion of $29 billion earned by the payday loan industry annually comes from loans taken out back to back. Kentuckians paid an estimated $158 million in fees in 2008. Kentucky payday loan borrowers use an average of nine loans per year and thereby pay an estimated $822 on a $350 loan — a whopping $472 in fees!

Solution

The Kentucky Coalition for Responsible Lending was formed to help Kentuckians like Karen. Our 64 member groups include faith-based and senior citizens groups, domestic violence programs helping women re-establish economic stability, youth advocates and more. The solution we propose is the same as Congress already enacted for military families. Call the fees what they are — interest on a loan — and cap the annual interest rate at 36 percent. Fifteen states and the District of Columbia cap payday loan rates — usually at 36 percent APR or less — or never allowed payday lending. (Ohio recently capped rates at 28 percent. West Virginia never allowed payday loans at all.) There’s no reason that Kentucky families shouldn’t have the same protection. This year they might get it. Gov. Steve Beshear has endorsed the rate cap and Rep. Jim Glenn, D- Owensboro, has agreed to sponsor a bill.

Faith-based and senior groups Payday Lending

Why do our members care? The Bible is full of verses that prohibit taking advantage of the poor, and it specifically forbids usury (Exodus 22: 25). Those teachings matter to our faith-based members. When it comes to seniors, AARP reports that payday lenders increasingly target the elderly and people with disabilities. (The monthly cycle of Social Security and SSI disability checks fits the “business model” of repeat loans.)

A study commissioned by The Wall Street Journal found that payday loan stores cluster around government-subsidized housing for seniors and people with disabilities. Our coalition soon will publish a study with maps showing where the stores are located, with ounty data on the burden of debt.

Obstacles

Payday lenders lobbied vigorously in 1998 for the Kentucky law that lets them operate here — and exempts them from interest rate imits of other lenders. We expect they will oppose the 36 percent cap. They may also point to last year’s bill to establish a “database” of payday loans as a reason not to do more.

We disagree. The database is simply a tool to enforce the current limits of two loans totaling $500 at a time. It will not cut the costs of loans. Studies from other states show it will not break the cycle of debt.

Now is the time

Thousands of Kentuckians are losing jobs, filing for bankruptcy or facing foreclosure on their homes. One toxic product shows up amidst much of this suffering: payday loans. The General Assembly can make a real difference by enacting a proven solution. We encourage all Kentuckians to call your state legislators today at 1-800-372-7181. Ask them to enact the 36 percent rate cap on payday loans.

Amy Shir is chairwoman of the Kentucky
Coalition for Responsible Lending. Learn more on the Web

www.facebook.com/kyresponsiblelending.

[House Bill 381 is awaiting a hearing in the House Banking and Insurance Committee.]





KCRL Supports House Bill 381-A Proven Solution

9 02 2010

Payday Lending Bill Introduced in 2010 General Assembly

Rep. Darryl Owens joins with Co-sponsors and KCRL to introduce House Bill 381 seeking 36 percent interest cap on payday loans.

FRANKFORT, Ky. – The Kentucky Coalition for Responsible Lending (KCRL) joined with Rep. Darryl Owens (D – 43) and his Co-sponsors to introduce  House Bill 381. The bill seeks to protect consumers from being snared in a spiraling debt trap by enacting a new 36 percent interest rate cap on payday loans.

Marketed as short-term relief in a cash crunch, payday loans in Kentucky carry annual interest rates of 400 percent and regularly catch working people – or those with a steady source of income such as Social Security or a disability check – in a long-term debt trap. Over 40 % of borrowers believe payday loan interest rates are less than 30% APR, when in fact rates in Kentucky are at least 391% APR—and often exceed 400%. Nationwide, 9 out of 10 payday loans are made to repeat borrowers who take out nine or more payday loans in a year—a “cycle of debt”

“We believe this is a needed step to protect Kentucky consumers from a predatory product that costs hard working families approximately $150 million a year,” said Kip Bowmar, Executive Director of Community Action Kentucky and KCRL member organization. “We salute Rep. Owens and the 19 co-sponsors on this important legislation,” added Bowmar.

 

According to KCRL Chair Amy Shir,“We are in the middle of the worst recession since the Great Depression and we don’t want see working Kentucky families’ hard earned money stripped away by a predatory financial product.” KCRL consists of 64 organizations statewide representing hundreds of thousands of Kentuckians. “And, during tough budget times for the state, this bill doesn’t cost a thing and it protects Kentucky consumers. This is a win-win bill,” said Shir.

Support House Bill 381





Deferred Deposits, Delayed Justice?

24 11 2009

2010 General Assembly Facing Tough Issues

From the KY Gazette  (November 2009)

 by Laura Cullen Glasscock at glasscock@kentuckygazette.com

Deferred Deposits [ 2010 General Assembly]

The provisions of the check-cashing and deferred deposit statutes are currently contained in Subtitle 9 of KRS Chapter 286 that authorizes licensed deferred deposit businesses to charge a service fee not to exceed $15 per $100 borrowed. The service fee is for a period of 14 days. Borrowers may obtain one loan not to exceed $500 at any one time, and rollovers are prohibited. The deferred deposit transaction statutes were amended in 2009, effective July 1, 2010, by House Bill 444 to expand regulation of the industry. The legislation also provides for a 10-year moratorium on licensure of new businesses after July 1, 2009. A review by staff of the Kentucky Office of Financial Institutions annual reports found the number of licensed payday locations in Kentucky increased from 214 in 1998 to 754 currently.

On its face, a $15 fee per $100 borrowed appears to be interest in the amount of 15 percent. However, because of the 14-day loan term, a new loan can be obtained 26 times per year, which results in an annual percentage rate of 391 percent. Reportedly, most borrowers are unable to repay the loan with their next paycheck. As a result, borrowers often take out a new loan before their next paycheck, resulting in an additional fee. Several sources report that 87 percent of new loans are opened within two weeks or before the borrower’s next payday, indicating they are unable to repay the original or previous loan and sustain the cost of living expenses without taking out a new loan. This common practice is referred to as “rollover” Making multiple rollovers, referred to as “churning,” results in an annual percentage rate of 391 percent in Kentucky. Nationwide, churning accounts for 76 percent of the deferred deposit total loan volume.

There are alternative methods of providing small, short-term loans up to $1,000. In an effort to reach the unbanked population, the Federal Deposit Insurance Corporation is currently conducting a two-year pilot program for banks to provide small loans up to $1,000 to borrowers, even if they have poor credit. Thirty-one banks in 15 states are enrolled in the project, including two banks in Kentucky, Citizens Union Bank in Shelbyville and Kentucky Bank in Paris.





Editorial – Gov. Beshear should stick to interest cap pledge

6 10 2009
  
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