Payday Loan Limits May Cut Abuse but Leave Some Borrowers Looking
Posted July 22, 2016 in Selected Press
CANTON, Ohio — This city of 73,000 is known for a few things — the Pro Football Hall of Fame, the presidential library of William McKinley, a lively downtown arts scene.
But in banking circles, it has gained a more distinct reputation: Canton is a nexus of the payday lending industry, in which people who have trouble making ends meet from one paycheck to the next take out high-interest loans from specialty lenders.
On 30th Street, a half-dozen payday lending outlets surround a popular shopping center, and at lunchtime they draw a steady crowd of customers. At the Advance America shop, Martin Munn stopped in recently with his young daughter to do his biweekly banking: Nearly every payday, he cashes his check, pays off his last loan in full and takes out a new one against his next paycheck. The amount he borrows varies, but it is typically around $500, for which he pays a fee of $73 — a 380 percent annual interest rate.
The woman who manages the store, Tanya Alazaus, greeted Mr. Munn with a smile. The shop looks like a small bank branch, with clerks waiting behind counters to handle transactions and chat with their regulars. Mrs. Alazaus sees herself as a local family merchant.
But federal regulators view her and businesses like Advance America quite differently: as part of a predatory industry that is ripe for reform and a crackdown.
The Consumer Financial Protection Bureau, the watchdog agency set up after the last financial crisis, is poised to adopt strict new national rules that will curtail payday lending. These will limit the number of loans that can be taken in quick succession and will force companies like Advance America to check that their borrowers have the means to repay them.
But lenders like Mrs. Alazaus — and even some consumer advocates who favor stronger regulation — are grappling with the uncomfortable question of what will happen to customers like Mr. Munn if a financial lifeline that they rely on is cut off.
“My customers look forward to being able to walk in here for their short-term needs,” Mrs. Alazaus said. “They would rather use us than things like credit cards, and most don’t even have the ability to use those.”
Ohio has some of the highest per-capita payday loan use in the nation — the state has more loan storefronts than McDonald’s outlets — and the rates that its lenders charge are also among the highest. According to research from Pew Charitable Trusts, borrowing $300 for two weeks typically costs $68 in Ohio, compared with $54 in Kentucky, $44 in Indiana or $42 in Michigan, three neighboring states.
At least 14 states have banned high-interest payday lending, and for a time, it looked as if Ohio would join them. In a 2008 referendum, voters overwhelmingly backed a law limiting interest rates.
But lenders found loopholes, and their loan volume grew: To skirt the rate caps, payday lenders register as mortgage lenders or as credit service organizations, which are allowed to charge fees for finding loans for their customers.
Advance America operates under a credit services license. It complies with Ohio’s rules by charging just $5.43 in interest, paid to a third-party bank, on a two-week loan of $500 — but it adds to that $67.50 in fees, most of which it keeps.
“Because the Legislature has been unwilling to take action, it’s been a Wild West for consumers,” said Kalitha Williams, a policy coordinator for Policy Matters Ohio, a group that has pushed for stricter rules.
Ohioans now spend $500 million a year on fees for short-term loans, up from $230 million a decade ago, according to an analysis by the Center for Responsible Lending, a nonprofit group.
Many of these borrowers find themselves on a path to financial ruin. Denise Cook-Brooks, a teacher and home health care worker in Springfield, Ohio, calls the payday loan she took out several years ago “the worst mistake of my life.”
Short on cash to make a car insurance payment, she borrowed $400, but two weeks later she still did not have enough to pay it back — so she borrowed more. For nine months, she continued the cycle, incurring around $150 a month in fees.
Ms. Cook-Brooks bitterly recalls the stress of her payday routine: On her lunch break, she hurried to the bank to cash her check, then to the lender to pay off her existing loan and take out a new one, then back to the bank to deposit her borrowed cash.
“I’m a single mother, and I was living paycheck to paycheck,” she said. “It’s a wonder I didn’t have a nervous breakdown.” The cycle finally stopped when, to save money, she gave up her rented apartment and moved in with her brother.
The most obvious way to reduce short-term loan costs would be to cap how much lenders can charge, but the 2010 law that created the Consumer Financial Protection Bureau prohibited the agency from setting rate limits. So instead it devised a complex set of underwriting rules that will make it harder for these lenders to stay in business.
Original Article: https://mobile.nytimes.com/2016/07/23/business/dea...