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.





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.





Bank On Louisville Launched

6 07 2010

Program to help citizens achieve financial stability

LOUISVILLE (July 1, 2010) – Mayor Jerry Abramson launched a new program this morning to help unbanked citizens—those who do not have a checking or savings account—gain better access to the mainstream banking system, saving themselves and their families thousands of dollars.

Bank On Louisville encourages people to sign up for traditional checking and savings accounts, rather than relying on fringe financial services, such as check cashing companies and payday loan providers. It’s estimated that fees from those services add up to more than $40,000 over the working lifetime of one individual.

“Bank On Louisville can help change the financial future for hundreds of families citywide,” Abramson said. “By simply opening a checking account citizens can eliminate high fees for payday loans and other services that will save them thousands of dollars.”

Local community organizations, banks and credit unions, and government agencies, including Metro Louisville’s Economic Development Department and Metro Human Services, are working together to reach the unbanked and underbanked citizens of Louisville.
 
Eleven banks, more than 40 community organizations and eight government partners, including Metro Government, FDIC and the Federal Reserve, have committed to Bank On Louisville. More partners are expected to sign on as the program continues to grow.

An important component of Bank On Louisville is the financial education opportunities it provides. In addition to classes and support through many of the banking and community organization partners, Bank On Louisville also offers the Start Fresh program. It assists citizens who have had a less than positive experience or history with banks in the past.

The Start Fresh program offers basic financial education classes that will guide participants through the banking process and help them avoid the pitfalls of overdrafts and mismanagement.

The public is invited to learn more during two upcoming Bank On Louisville informational sessions. A variety of financial institutions and community organizations will be on hand to provide information, education and answer questions. Refreshments will be provided.

•  July 13th, 3pm-7pm, Northwest Neighborhood Place, 4018 W. Market St.
•  July 14th, 3pm-7pm, TBA

You can also learn more about Bank On Louisville by visiting Bank On Louisville www.bankonlouisville.com or calling Metro Call 311.

Louisville was one of eight cities selected to receive a technical assistance grant from the National League of Cities. The year-long grant provided the expertise of the NLC as well as other cities that have launched Bank On programs to develop Bank On Louisville.

San Francisco was the first city to launch a Bank On program in 2005. Since then, 70 cities nationwide have launched their own program or are currently developing one. For information, please visit www.joinbankon.org

Bank On Louisville sponsors, bank partners and community partners include:

SPONSORS
Louisville Metro Government      PNC Bank
Metro United Way                             Park Community Federal Credit Union
First Capital Bank of Kentucky      BB&T
Fifth Third Bank                                 Doe Anderson
Clear Channel Radio                         Federal Reserve Bank of St. Louis
FDIC                                                 National League of Cities
Old National Bank

BANK PARTNERS
BB&T                                                      Chase                                                   
Commonwealth Bank & Trust         Fifth Third Bank                                
First Capital Bank of Kentucky       L&N Federal Credit Union
Old National Bank                              Park Community Federal Credit Union
PNC Bank                                               Republic Bank
Your Community Bank

COMMUNITY PARTNERS
Louisville Asset Building Coalition            National League of Cities
Louisville Urban League                               Family and Children’s Place
CLOUT                                                         Women 4 Women
Dare to Care                                             Jewish Family and Career Services
Americana Community Center        Volunteers of America
Society of St. Vincent de Paul           Community Coordinated Child Care
Goodwill Industries                               Family Scholar House
Shively Area Ministries                        Neighborhood Place
Legal Aid Society                                     Center for Women and Families
Eastern Area Community Ministries        ElderServe Inc.
Bellarmine University        Making Connections Network                        
New Directions Housing Corp.           Catholic Charities                           
Salvation Army                                         Junior Achievement of KY                
Tree of Life Aftercare Program           Center for Accessible Living             
Center for Nonprofit Excellence         Wesley House Community Services        
The Housing Partnership, Inc.             YMCA of Greater Louisville
Boys/Girls Clubs of Kentuckiana          Louisville Central Community Center       
Cathedral of the Assumption                  East Louisville Community Ministry     
Highlands Community Ministries          So. Louisville Community Ministries
St. Matthews Area Ministries                   St. Peters United Church of Christ
Metro United Way                                        West Louisville Business Association
Doe Anderson                                                Clear Channel Radio
American Red Cross Louisville Area Chpt.     Habitat for Humanity of Metro Louisville
Plymouth Community Renewal Center
 

GOVERNMENT PARTNERS
Ky Dept. of Community Based Services     Office of Congressman John Yarmuth
Federal Reserve Bank of St. Louis         Metro Call 311
FDIC                                                                  Internal Revenue Service
Louisville Metro Human Services        Louisville Metro Economic Development