Loan Sharking is Illegal

...Usury is the legal term for the practice of “lending money at an exorbitant rate.”

An informal primer to the world of payday lending:

Imagine you’re broke. Worse still, you have pressing and immediate monetary needs. You have a paycheck coming in one week, but you need money by tomorrow. You do have your checkbook, but there are not enough funds in the bank to cover your concerns. You ask yourself, “What options do I have?” For some, payday lending (also called “cash advance”) is one way to “buy time” until the end of a pay period. In essence, it is simply writing a check to a cash lender for the amount of money needed, with a service fee added to the check’s amount. If you need $200, you write a check to the lender for around $225. The check is typically post-dated for two-weeks, and then the borrower takes on the responsibility of buying the check back from the lender so that the check is not deposited. According to Alan Mells of A.D.R. Financial Services, it is usually understood that there is not enough in the bank account to cover the check at the time of the loan. Mr. Mells went on to describe how selling small loans was a business built by demand for the service.

“In the three or four years that payday lending was legal here [in Georgia], we gave out hundreds of loans and almost never had any problems. Of course, you did have those [payday lenders] that were dirty. That’s why we wanted regulation.”

In ideal cash advance situations, at the end of the transaction the cash-rich lender and the cash-poor borrower both walk away happy and everybody wins. In less than ideal situations, there are rollover fees, a cycle of dependency and a swift downward spiral into financial ruin with embarrassing and harassing phone calls to employers and family all the way down.

As the nation’s financial heyday of the last two decades seems to be coming to an end, financial creativity and options are fast becoming the hip new obsession for people that like to eat and sleep under a roof at night. An unavoidable reality of the day is that American’s are becoming poorer. As the value of the dollars Americans are paid in falls, those that work for those dollars will continue to become poorer. This reality gives sweeping new relevance to the terms “low income” and “working-class poor.” In the coming decade, pawnshops may become the new Starbuck’s, and the stakes will only get higher in the “cash advance” industry.

Laws such as the federal Truth in Lending Act and the Industrial Loan Act of 1955 exist ostensibly to help protect the public from individuals and entities that would capitalize on the hard times and poor decision making choices of their fellow citizens. In 2004, the Georgia General Assembly passed what is commonly referred to as The Payday Lending Act, which exists to “Prohibit activities commonly referred to as payday lending, deferred presentment services, or advance cash services and other similar activities; to strengthen and increase the criminal and civil penalties therefore; to void payday lending loans.”

Payday lender advocacy groups such as the Community Financial Services Association (CFSA) reluctantly admit that this is a reality for (according to them) a small percentage of borrowers. Conversely, the voices united against payday lenders, like the Center For Responsible Lending (CFRL), offer up anecdote after anecdote that payday lenders are people who want nothing more than to trap everyone in the world in a cycle of debt.

Finding un-biased and untainted figures on the frequency and the severity of the problem is not an easy task, as is getting the two sides to agree on any source or statistic. The CFRL (anti-cash advance) and the CFSA and Cash Now (pro-cash advance) make a lot of noise and spend a lot of money in their efforts to “educate the people” on two sides of the same issue. Lobbyists like former Denver Bronco Willie A. Green spend obscene amounts of money and make questionable deals on behalf of the payday lenders. It doesn’t take an overly cynical mind to see what either side has to gain or lose as the debate rages on. Payday loans from American companies to American workers is a multi-billion dollar industry. Pro-payday lender groups accuse politicians of being everything from paternalistic or naïve, to being corrupt goons for the banks and credit card companies. Politicians accuse payday lenders of using misleading data and faulty premised arguments in order to continue using lucrative and unsavory practices. Stuck in the middle of these competing sides is the part of the general populace known as the great unwashed “us.” It is we that will have to think critically and work hard to educate ourselves while listening for the truths that may accidentally slip into the arguments between the two self-interested factions.

According to the CFSA, every word that the anti-payday lender groups say is a lie meant to mislead the public. Their website even has a handy-dandy Myth vs. Reality section that will show you that they don’t “Take advantage of poor people and minorities...use coercive collection practices …do not want to be regulated or money to people that can not afford to pay it back.” They are the heroes of the universe, here to protect you from other fees and fines that their 390% APRs would pale beside. Fees for bounced checks (with a typical $54.00 NSF charge = 1,409% APR), a $100 credit card balance (with a $37.00 late fee = 965% APR) or a $100 utility bill (with a $46.00 late/reconnect fee = 1,203% APR). Using such extreme numbers and interesting logic the cash advance lobby makes a strong point stronger. Other points that payday lenders like Douglas and Cheney Pruett of the Arkansas Financial Services Association often make are about the rights of the consumers who want their services and incidents of financial hardships that can (and do) arise when people are denied the loans that they offer. They claim that they allow folks a dignified way to deal with unforeseen expenses and have no desire to simply collect small fees on reneged loans. Of course, other credit industries (such as Citicorp) have made the same tactics a major pillar in their profit generating. It does seem unlikely that CFSA members are as vehemently opposed to such practices as they claim to be–publicly.

On the other side of the credibility gap are groups like the Center for Responsible Lending and the Georgia Governor’s Office of Consumer affairs. The Governor’s office shows all the compassion of a man that’s never known hunger, advocating pawnshops as a more sensible solution to dire financial straights, as well as offering no-brainer tips that amount to: spend less, plead with creditors. To further illustrate the level of disconnect of the Office of Consumer Affairs, be aware that their office actually encourages the use of credit cards to help make ends meet. Saying in essence, “Take a bad deal over a really really bad deal.” The CFRL meanwhile seems to use an inordinate amount of time telling you what lies their opponents are telling, and deconstructing (in minutia) every number that they don’t agree with.

Few want to talk about ways to secure low-interest, short-term loans for consumers with little, bad or no credit. More shocking still is the lack of dialog about the Internet payday lending boom and how to regulate (and enforce regulations) on lenders operating in jurisdictions outside of a state’s reach. Also there is the fact that now that there are more states where it is illegal to make short-term, high-interest loans, there are more states with groups or individuals making such loans illegally. Once again, the shadow economies of illegal business are being strengthened by well meaning legislation. The facts are as easy to understand as a War on Drugs. You can’t solve a problem of supply and demand with good intentions and bad laws. People who want to pay their bills on time and with dignity need freedom, choices and options.

Speculating with a former payday lender about where a slick machine like the CFRL gets funding, it was hinted that the parties with the most to gain from wiping out payday lenders were the more traditional financial institutions. Banks that won’t make small loans to working poor people see more economic power staying firmly in their hands. For them, a true free market of supply and demand is the enemy of their monopolization.