By Jesse Herman, contributing editor
Consumer advocates, who have been debating payday loan lending practices, claim Washington D.C. politicians have been bought out by the cash advance industry. Once distant voices from those in financial ruin are now loudly resonating in the U.S. capital.
Payday lender casualties often share similar experiences. Usually somebody in an emergency situation borrowed more money than could be paid back. This causes a domino effect, where a borrowing cycle develops resulting in substantial debt accumulation.
The ethical debate surrounding payday lending is simple. To illustrate this point, let’s play a quick game of “devils advocate.”
In November, HDNET ran a show titled “The Best Congress Money Can Buy.” In it they relayed some of the many payday “victim” stories:
Mary Ann Olson, who lives in Portland, Oregon, was short the money she needed to buy a pair of orthopedic shoes. She thought a payday loan sounded like a good idea.
"I needed $140 for the shoes, and I needed to get it 'cause of my feet, I went ahead to Pay Day Loan. And that's when I borrowed $150.”
Olson, who has multiple sclerosis, lives in an assisted living home and qualified for a loan because of her steady social security checks.
“I remarked about the interest and they said, "Well, you'll only be paying 5 or 10 percent interest." And I believed them.”
When it came time to repay the loan, Olson was short a few dollars and so she solved the problem by taking out another loan.
“I just went to another Pay Day Loan and got more money to pay them off. And then a third Pay Day Loan to pay off the second one because it was every two weeks. It became a compulsion for me. I was sitting at the bus stop and across the street was another Pay Day Loan. And I just went right across the street and borrowed the money. It was that easy. Only takes about 20 minutes. They're nice. They have candy.”
In a short time, she owed money to nine different payday loan shops and was carrying a service charge that swallowed most of her social security check. Olson began bouncing checks and running up bank fees. Before she knew it, those $150 orthopedic shoes had cost her more than $2,000.
"They were calling me 12 times a day. I had changed my telephone number. They overdrew my bank account knowing there was no money in there. It was devastating. I was a nervous wreck. I really was. You know, I had trouble sleeping, eating. I was out every day, trying to find money. And yet, you know what; it was partly my fault for not being a wiser consumer."
Devils Advocate:
Mary Ann Olson’s story is tragic and the payday lending industry is doing all it can to eliminate these types of situations. Still, some fundamental questions have to be asked in order to reach a compromise when considering personal liability, free markets and quick loan needs of many financially responsible Americans.
Are Mary Olson’s feet comfortable?
She needed a pair of orthopedic shoes and got them. This is exactly why payday loans are beneficial; they help those who need it most. The problem lies in the fact that she did not know what her signed contract stipulated. If they told her she would only pay 5% or 10% interest, this was most likely assuming everything would be on time. Furthermore, what was the stated interest rate? It is not as if 5% or 10% interest rates are decided by a flip of a coin when a borrower returns to pay off a loan.
Ms. Olsen needed to know when to stop. Did she not have other alternatives? If not, then that shows payday lending is a needed service. Maybe she needs a larger social security check. If she received an extra $50 dollars a month, would that have helped? The harsh reality is probably not. She has demonstrated a lack of financial planning. Even with more Social Security money, odds are she would have still not managed it properly. Her debt may not have caught up with her as quickly but this behavior indicates a reckless pattern.
GAME OVER
On the surface both sides have valid points. Digging a little deeper, though, indicates lenders are sticking their hand too far into the cookie jar.
Those targeted: African-American and Latino borrowers in low-income neighborhoods.
Time for a new game called “word association.” I hear poor and think:
- Uneducated
- Financial distress
- Poor financial planners
- Desperate
It is interesting that many of the thoughts that come to mind when hearing the word “poor” are what Mary Ann Olson was accused of being by the devils advocate. It is hard to blame her when she fits perfectly within the “should not be loaned money” demographic.
Responsibility does fall into the hands of lending agencies when considering the majority of payday lenders located in poor areas. In fact, there are twice as many payday lending stores than Starbucks because banks stay away from the same neighborhoods payday lenders thrive on.
What is being done?
Payday lending is a $40 billion industry that thrives in California and other states with huge markets. They have recently spent $10 million on a media advertising campaign on BET, Telemundo and Univision if an effort to target African American and Latino audiences. Under the new reform plan agencies seek to educate customers about the use of payday cash advance loans and offer a once-a-year break to borrowers who don’t pay back loans quickly.
The emphasis is that payday loans are meant to be a form of short-term relief, not long-term solutions.
The Community Financial Services Association of America (CFSA), a group that represents 60% of the payday loan industry, says it will ban frivolous loans for purposes such as gambling, entertainment or vacations. President Darrin Anderson said, “"My hope is these reforms really do solve a problem for the small percentage of our customers who have trouble meeting their obligations to us."
Critics are not buying it. According to HDNET, 5 million dollars have been spent on lobbyists in the last five years. This is to ensure they will continue making money.
According to the Dan Rather report:
“Their chief advocate is Tim Rupli, who under Republican rule was considered one of the most influential lobbyists in town. He happens to be the one that the payday lenders went to and said, "We need influence to prevent Congress from passing a bill that will make our loans illegal and we're gonna pay you a lot of money to do that." Rupli has earned more than $2 million from payday lenders in the past three years. He is a renowned fundraiser. In the past five years, Rupli and his wife have donated more than $250,000 to lawmakers. All together, payday lenders, their lobbyists and spouses donated more than $3 million to members of Congress since 2001. For a long time, the investment paid off, as Congress looked the other way when cases of people destroyed by predatory lending came to light.”
It is a sordid game with many players, where the bottom line is money and the winner is the one who has the biggest payoff.
