Http:// Mississippians for Fair Lending Nuts and Bolts Webinar: Everything You Wanted to Know About Payday and Car-Title Lending

http://www.responsiblelending.org

Mississippians for Fair Lending Nuts and Bolts Webinar:

Everything You Wanted to Know About Payday and Car-Title Lending

Jennifer Johnson, Center for Responsible LendingLeah Plunkett, National Consumer Law Center

June 25, 2010


Self-Help & CRL

Self Help, 1980 Nonprofit community development financial institution Create ownership opportunities for rural residents & low-wealth

families $5.6 billion financing to over 63,000 low wealth families Home loans and small business loans

Center for Responsible Lending, 2002 Nonprofit, non-partisan policy organization Protect homeownership & wealth preservation Research and alert the public to abusive financial practices


State of Mississippi(per Census and BEA)

2008 MS Population 2,938,618 2008 MS Labor Force 1,363,567 2008 MS Median Household Income $37,404 2008 US Median Household Income $52,175 Counties > 100K population 5 Counties 50K – 100K population 8 Counties 25K – 50K population 26 Counties < 25K population 43


Who is impacted most?

Payday Communities of color Lower to middle income Median age in late 30s Women Households with children Renters HS grad, likely some college, but no 4 year degree Remember: all payday borrowers (by definition) are

BANKED!


What are Predatory Small Loans?

Wall Street Schemes With a

Main Street Twist

Big Industry demand for fast profits creates climate where

risky lending schemes flourish.


Wolves in Banks’ Clothing

Payday Loan/Cash Advance

Car-Title Loan/Title Pawn Loans

“Faux” Car-Title Loans/MV Equity LOC

Predatory Installment Loans

Credit Service Organizations/Credit Repair Organizations

Check Cashers Rent-to-Own Refund Anticipation

Loans Fee-based Overdraft

Protection Fee-harvester credit cards Predatory Open-End Lines

of Credit


The Wall Street Scheme:Small Dollar vs Short-Term

The Need is For Small Dollar Loans –

Borrowers may need small amounts of money, but no one needs to pay it back in two weeks.

The Industry is Selling Short-Term Loans - the

terms are so abusive that they can’t be paid back immediately and end up being long-term payoff for Industry.

ACH/Live Check is Key


The Predatory Loan “Recipe”

Small dollar loan secured by personal check or access to bank account.

Triple-digit APR (usually 391% and above) To qualify, borrowers only need:

personal identification a checking account income from a job or government benefits

Ability to re-pay is not considered Must pay back in full or renew by paying an additional fee.


Payday Loans

$40 billion/year industry; 22,000 locations in 35 states $350 average loan size; $400 loan maximum in MS $15-21.95 per $100 fee, 391% - 572% APR for a

two-week loan Operate through exemptions to small loan rate caps To qualify, borrowers only need:

personal identification a checking account an income from a job or government benefitsor government benefits

Typical: 9 loans per year, back-to-back


Payday by the Numbers

Nationally: The dirty secret of

payday lending 90% of loans are

debt trap loans Only 2% of the

volume goes to borrowers who pay off and walk away


Designed to Compel Consecutive Borrowing

Borrower earning $35,000 a year, taking out $350 payday loan @ $21.95 per $100 borrowed

Two-week salary $1346

Amount of paycheck (take home pay after taxes deducted) $1241

Payday loan due ($350 principal plus $77 fee) -$427

Paycheck remaining after payday loan repaid $814

Basic expenses due over pay period*

(housing, utilities, food, transportation, and healthcare) $895

Shortfall $(81)


Gotcha!You Couldn’t Afford These Terms Even

If The Loan Was Free

Two-week salary $1346

Amount of paycheck (take home pay after taxes deducted) $1241

Payday loan due ($350 principal plus NO fee) -$350

Paycheck remaining after payday loan repaid $891

Basic expenses due over pay period*

(housing, utilities, food, transportation, and healthcare) $895

Shortfall $(4)


Title Lending

Similar to payday, except secured by the title to your car (which you own free-and-clear)

30 day loan term with balloon payment ~300% APR Placing an important asset at risk, as well as means to get

to a job, health care, etc. 2008: 337 car title lenders made over 60,000 loans in MS Just like in the subprime mortgage context, asset-based

lending with no consideration of real ability to repay


$750 Loan at 25% Per MonthInterest Only Payments

Income and Taxes $25,000 $35,000 $45,000 $55,000

Income per month $2,083 $2,917 $3,750 $4,583

Taxes $15 $36 $77 $141

Social Security $128 $193 $271 $406

Income after tax $1,940 $2,688 $3,402 $4,037

Car title loan payment due (interest only) $188 $188 $188 $188

Income remaining after interest only payment $1,753 $2,501 $3,214 $3,849

Monthly Household Expenditures

Food $339 $387 $474 $531

Housing $916 $1,032 $1,166 $1,418

Utilities $229 $256 $274 $307

Transportation $278 $331 $404 $465

Healthcare $207 $208 $233 $256

Total Essential Expenditures $1,969 $2,214 $2,551 $2,976

Money from paycheck remaining (deficit) -$217 $287 $663 $873

Source: 2007 Consumer Expenditure Survey, Bureau of Labor Statistics


$750 Loan at 25% Per MonthP&I Payments

Income and Taxes $25,000 $35,000 $45,000 $55,000

Income per month $2,083 $2,917 $3,750 $4,583

Taxes $15 $36 $77 $141


Income after tax $1,940 $2,688 $3,402 $4,037

Car title loan payment due (interest plus 1/6th principal) $313 $313 $313 $313



Food $339 $387 $474 $531

Housing $916 $1,032 $1,166 $1,418

Utilities $229 $256 $274 $307


Healthcare $207 $208 $233 $256





$1000 Loan at 25% Per MonthInterest Only Payments

Income and Taxes $25,000 $35,000 $45,000 $55,000

Income per month $2,083 $2,917 $3,750 $4,583

Taxes $15 $36 $77 $141


Income after tax $1,940 $2,688 $3,402 $4,037

Car title loan payment due (interest only) $250 $250 $250 $250



Food $339 $387 $474 $531

Housing $916 $1,032 $1,166 $1,418

Utilities $229 $256 $274 $307


Healthcare $207 $208 $233 $256





$1000 Loan at 25% Per MonthP&I Payments

Income and Taxes $25,000 $35,000 $45,000 $55,000

Income per month $2,083 $2,917 $3,750 $4,583

Taxes $15 $36 $77 $141


Income after tax $1,940 $2,688 $3,402 $4,037

Car title loan payment due (interest plus 1/6th principal) $417 $417 $417 $417



Food $339 $387 $474 $531

Housing $916 $1,032 $1,166 $1,418

Utilities $229 $256 $274 $307


Healthcare $207 $208 $233 $256





What does “churning” look like?

Churned loans (76%)

Sporadic loans to repeat borrowers after two weeks (11%)

Initial loans to repeat borrowers (11%)

Loans to non-repeat borrowers (2%)


Mississippi’s Payday Experience

“Delayed Deposit Transaction” - Legalized in 1998 with sunset provision. MS Code

§75-67-501 et seq.,(1972), as amended.

572 stores in 2005 968 stores in 2010 Rollovers are prohibited

Maximum Fees Permitted by law: 18% of face value of the check (or $21.95 per $100 loaned)Loan Term APR

7 days1144%

14 days 572%

30 days 267%

No limit on number of loans per borrower


Why is it 572% APR?MS Department of Banking and Financial Institutions Explains

The typical payday borrower gets paid every two weeks, so the typical loan term is a two-week (14 day) loan.

Fee ÷ amount financed x 365 ÷ number of days = APR Borrower writes check for $100 and gets loan of $82 (fee has been

deducted) 18/82 x 365/14 = 572.26%APR


Payday Lenders Charge MORE in Mississippi

Than They Do In Other States

Nationally 391%APR ($15 per $100

borrowed) One loan at time industry-

wide Database for monitoring

and enforcement Cap on # of loans per year

Mississippi 572%APR ($21.95 per

$100 borrowed) Multiple loans permitted No database, no

monitoring, no enforcement

No limit on #of flips per year

Rollovers are prohibited


How Much Interest Do Mississippians Pay to Borrow $350

for 6 months? for a year?

Loan APR 6 Months 12 Months

Payday loan in MS 572% $921.90 $1843.80

Payday loan elsewhere 390% $1050 $1950

Credit card 28% $48.33 $126

Finance company loan 36% $62.14 $98

Credit union or bank loan 18% $31.07 $63

BankPlus Credit Plus 5% $8.63 $17.50


Mississippi Has 968 Payday Lenders - More Per Capita Than Any Other State


Why Should I care?

“One of the most saturated states is Mississippi…”

Morgan Stanley report on Advance America, January 25, 2005, p. 25


Not My Problem? Think Again. Predatory Lending Costs Everyone

High costs to neighbors and

community. Drain on Social Services Drain on community services,

churches. Storefronts attract crime. One store destroys 200

families per year. Loans lead to bankruptcy.


Virginia Family Foundation

“The more we looked at it, the more we saw the negative effects of payday lenders on families, and really on churches as well, because a lot of these families that were caught in the debt trap were having to go to churches for help.”

- Chris Freund, Virginia Family Foundation

Love, Inc. - Charlottesville, Virginia


It’s Good Marketing

How does the industry get away with this? How do they convince legislators to give them

special treament?


Payday Lenders in Public

“Since a payday advance is a short-term solution to an immediate need, it is not intended for repeated use in carrying an individual from payday to payday…we’re here to help. But a payday advance is not a long-term solution for ongoing budget management. Repeat for frequent use can create financial hardship”Community Financial Services Association, the FACTS about payday advance services, consumer information brochure, 2005:


“…we’re here to help”


Payday Lenders in Private

“And the theory in the business is 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.”

Dan Feehan, CEO of Cash America

"We can't live on five [loans]," Stewart replied"Carol Stewart, Vice

President of Governmental Affairs

Advance America


Don’t believe they’re designed to trap you?

Source: Cash America website, accessed Sept 17, 2008


Industry Trends

“Partnerships” with Churches, Schools Fee Increases Loan Amount Increases “Best Practices” – (Codification of Abusive

Practices) Rollover Bans, Databases, Cooling off Periods, Limits on Outstanding Loans, Payment Plans Internet Lending Federal Lobbying for State Preemption at 400%


Why Don’t Industry “Best Practices” Stop the Debt Trap?

Payment Plans are more expensive than taking a new loan

Debt Trap $350 loan = 426.75 due in 2 weeks ($76.75 fee and take out new loan)

Payment Plan

4 equal payments over 8 weeks

($106.68 every 2 weeks)

Databases only monitor the debt trap.

Rollovers already prohibited in Mississippi and still no effect on debt trap.

Cooling off periods need to be minimum 60 days between loans to ensure sufficient time to pay off loan.

Limits on outstanding loans are ineffective because one loan is enough to drive a borrower o bankruptcy.


Who are our potential allies?

Teachers, First Responders, police officers, firefighters, etc.

Community Organizations (Rotary, Kiwanis, Links, 100 Black Men, etc.)

College Alumni Associations, Fraternities and Sororities

Faith Groups Churches Food Banks/other

social services organizations.

Elderly Associations Women’s Associations Civil Rights groups Colleges and

Universities Bankers Finance Companies


What’s the Biblical model of lending? Scripture treats lending and debt seriously – So

should we.

Bible Lending should not

exploit the poor

Don’t take advantage of desperate circumstances

Lending should benefit the borrower

Payday Charge higher rates to the

poor

Exploit desperate circumstances

Lending create a debt trap


The Importance of Constituent Stories

One of the biggest pushback statements legislators will give is, “No one from my district has complained about this. They must like it.”

Borrower stories put a face on the debt trap. Legislators respond when their telephone

switchboards light up and constituents visit their offices.

Reporters like to tell a story when they can add a human element.


Patricia Nelson’s Story

Retired Nursing Home Aid

3 Payday loans for moving

expenses: $200, $200, and $150

Fees per month: $46.50, $45, and $33

Paid $2223 in fees over 18 mos

Still owed original $550!


It Takes Courage to Tell Your Story

But when you do, you will be speaking for many others and be strengthened.


Pro-Industry Arguments You Will Encounter

Free Market warrants payday lending. Over $1B in lending, there’s obviously a demand

for it. Personal Responsibility – people are well aware of

what they’re getting into. Individual Rights – government shouldn’t tell

people how to spend their money.


APR Protects the Free Market

Truth in Lending - requires interest be expressed in terms of Annual Percentage Rate.

APR allows consumers to compare the cost of credit across products of varying terms and other features.

Protects free market competition. Consumers can comparison shop and choose the best form of credit for their budget.


What will people do without payday lending and car-title lending?

A loan (more debt) is not necessarily the answer to everyone in financial need.

Work out plan with creditor Borrow from friends, family, churches, etc. Military Relief Societies Pay the Late Fee Consider a Consumer Loan Consider a Credit Card Advance


Alternatives to Payday Loans

Core criteria for affordable, safe alternatives: Annual Percentage Rate (APR), including fees, of 36%

or less.– Truth In Lending Act and Reg. Z allow for exclusion of some

fees from APR calculation, such as application fee charged to all applicants regardless of whether credit is extended.

Term of at least 90 days or one month per $100 borrowed.

Require multiple installment payments rather than single balloon payment.

Not require borrower to turn over post-dated check or electronic access to bank account.


Alternatives to Payday Loans

Taken together, core criteria force lenders to consider truly borrowers’ ability to re-pay.

Other features of good alternatives include: Saving component

– Required contributions to savings.

– Part of loan principal put in savings account.– Good habit but does make loan more expensive.

Financial education

These features not necessary or sufficient for genuine payday loan alternative.


CreditPlus Loan from BankPlus

5.083% interest No annual fee 12 or 24 month term APR with fees is 5% (rounded down) Installment payments No required security or electronic payment Must take financial literacy course


Other Good MS Alternatives??

Continuing to analyze other good payday loan alternatives in Mississippi.

Please contact Leah Plunkett, [email protected], (617) 542-8010 with suggestions.


NCLC Report

Stopping the Payday Loan Trap: Alternatives That Work, Ones That Don’t (released June 2010) Available at

http://www.nclc.org/images/pdf/high_cost_small_loans/payday_loans/report-stopping-payday-trap.pdf.

Can also go to www.nclc.org– Issues

– High Cost Small Dollar Loans

– Payday Loans

– Press Releases & Reports


Don’t Be Afraid of Goliath

“If we bring Public Opinion to bear, it will beat money.”

Chairman Barney Frank, U.S. House Financial Services Committee, June 24, 2010


Building a Grassroots Movement

Educate the Public Identify Allies and Get Commitment Collect Borrower Stories and Encourage Them to

Contact Elected Officials Municipality/County Moratoria Municipality/County Resolutions Educate the Media


Local Government Action Across Country

See in states where payday lending is legal under state law.

Municipal ordinances- binding, in roughly 20 states. Temporary moratorium

– No new lenders for specified period of time pending more permanent measure, such as comprehensive city plan.

– Grandfather existing lenders.

Permanent moratorium or ban– No new lenders EVER.

– Grandfather existing lenders.



Zoning measures– Dividing region into different districts with different

regulations for land use, building size, and similar considerations.

– Hours of operation and location/density restrictions.

– Special or conditional use categorization.

Substantive consumer protections– 36% APR cap

– This and other measures struck down by court when passed by City of Jacksonville, Florida.



Resolutions- non-binding statements of principle, used to influence state legislatures. Virginia, 36% annual interest rate cap

– “senses from the citizens significant concern over what are perceived to be exploitative payday lending practices”

– “it is vital that the General Assembly and the Governor of Virginia give their earnest attention to these matters”

– VA now has 36% interest rate cap but with fees very high APR, so fight isn’t over.

Texas, complying with general small loan laws


Local Government Action in MS

Cities include: Starkville

– Temporary moratorium in place.– Might be made permanent.

Jackson– Temporary moratorium in place.

West Point – MCJ looking to put temporary moratorium in place.

Vicksburg– MCJ looking to put temporary moratorium in place.


Municipal Action Resources

2-pager from NCLC and MCJ forthcoming. Controlling the Growth of Payday Lending

Through Local Ordinances and Resolutions: A Guide for Advocacy Groups and Government Officials (updated March 2010), available at http://www.paydayloaninfo.org/elements/www.paydayloaninfo.org/File/Local_Ord_master_3_10.pdf.


Remember the Predatory Characteristics

1. Triple-Digit APR/High Fees

2. Access to Bank Account/Live Check

3. Single Balloon Payment Due Very Quickly


How Much Can Be Saved?

FY 2010 MS Budget Deficit - $655Million

Payday Fees Paid Annually - $300 Million


Sunset and Return to 36% is Real Reform

Remember, It’s the Recipe, not the Product Level the Playing Field for Responsible Lenders End Wall Street Schemes that Drain Needed

Income from Families Save Mississippians over $300M dollars with NO

increase in taxes Stop Businesses That Refuse to Practice Moral

Restraint


SOLUTION:

Together, we can end modern day usury, and free Mississippi families from the

payday debt trap.


Questions for Jennifer or Leah


For more information:

Visit: www.responsiblelending.org

www.nclc.org

Contact: Jennifer Johnson [email protected]

Leah Plunkett

[email protected]

Documents

Http:// Mississippians for Fair Lending Nuts and Bolts Webinar: Everything You Wanted to Know About Payday and Car-Title Lending