Predatory Payday Lending briefin

							PREDATORY PAYDAY LENDING AND THE
            MILITARY:
         A CLOSER LOOK

        IMCOM H3 Workshop
             Marriott Hotel
     Myrtle Beach, South Carolina

         September 26, 2008

           http://www.responsiblelending.org
              Center for Responsible Lending


Affiliated with Self-Help, a non-profit lender
founded in 1980 to increase and protect wealth
and ownership opportunities for minorities,
women, rural residents and low-wealth families
CRL is a national non-profit, nonpartisan research
and policy organization that promotes responsible
lending practices and access to fair terms of credit
for low-wealth families
Supported by a consortium of funders


               http://www.responsiblelending.org
                                   Outline


What is payday lending?
The dirty secret of payday lending
The payday lending debt trap
The costs of payday lending
Consequences of taking out payday loans
Military and payday lending
Alternatives to payday loans



            http://www.responsiblelending.org
                 TYPICAL SCENARIO


You are in need of cash immediately
Visit a local payday lending store
Write $300 check dated 2 weeks later
Walk out with $255
Loan due in two weeks
What happens if you can’t afford to repay
and still make it to your next payday?



            http://www.responsiblelending.org
                   A Victim of Payday Lending


Anita Monti, a 58 year old woman from Raleigh, NC
Wanted to buy Christmas presents for her grandchildren
Took out two payday loans, one from Advance America for
$345 ($300 + $45 fee) and another from Check ‘n Go for
$475 ($400 + $75 fee)
After 4 months of paying $120 in fees every two weeks, she
had paid almost $1,000 in fees, and still owed the original
$820
Finally found help at her church and got on a payment plan
to repay the loans
Expected repayment time—9 months
Amount paid=$1780 ($960 in fees + $820 in principal) for
$700 cash received


                 http://www.responsiblelending.org
                        THE DIRTY SECRET

“The financial success of payday lenders
  depends on their ability to convert
  occasional users into chronic borrowers.”
 Payday Lending: A Business Model That Encourages Chronic
 Borrowing
 January 2003, Center for Community Capitalism
 UNC-Chapel Hill



                 http://www.responsiblelending.org
              The Dirty Secret=The Debt Trap


Payday lenders:
  Don’t want you to be able to repay loan in 2
  weeks
  Entice you to write a check you can’t afford
  with offers of quick and easy cash
  By holding live check over your head, coerce
  you into paying additional fees every two
  weeks for no new money
  This is the business model

               http://www.responsiblelending.org
            A PREDATORY BUSINESS MODEL



Payday industry revenues (estimated at $28
billion) are driven by the borrower’s inability to
repay and chronic borrowing

Not a conventional loan product
  no underwriting
  no reasonable repayment method (balloon only)
  encourages check-kiting




               http://www.responsiblelending.org
            The Debt Trap=Avoiding Default


Trying to avoid default, step into the debt trap:
  Pay another $45 to extend 2 weeks
  Pay the $300 back and immediately reborrow, with
  another $45 fee (borrowing back your own money)
Pay $90/month to float $255 advance
Like paying $1200 for $300 line of credit for a
year
Why continue?



              http://www.responsiblelending.org
                            Why Continue?


Fear of having payday lender report debt to
commanding officer (Military borrowers)
The easiest and, perhaps,cheapest
alternative, at that moment
Going to jail for writing a bad check
Confused
Too embarrassed to seek help from family,
friends, religious or charitable institutions


             http://www.responsiblelending.org
                       Real Consequences


Paid thousands of dollars for $250 loan
Quit paying rent or mortgage
Could not cure default on home
Lost opportunity to buy a Habitat home
Stopped driving car
Turned off lights
Quit buying food
Filed for bankruptcy


             http://www.responsiblelending.org
              The Cost of Payday Lending




Each year, more than five million Americans
are caught in the payday lending “debt trap.”

Each year, predatory payday lending strips
Americans of $5.6 billion in excessive fees.




             http://www.responsiblelending.org
             QUANTIFYING THE COST


Repeat payday lending borrowers
account for 99% of all payday loans
Only 1% of payday loans are to borrowers
who take out one loan in a year
State regulatory data finds that 90% of
loans go to borrowers with 5 or more
transactions per year and 62% of loans
go to borrowers with 12 or more
transactions per year


         http://www.responsiblelending.org
                       Payday & the Military


“Enemies at the Gate”—Peterson Graves Study

Soldiers are the perfect target:
  Young and financially inexperienced
  Struggling to support a family
  Steady income from US Government
  Honest and want to repay loan
  Can always find them
  Major trouble for not repaying debt

              http://www.responsiblelending.org
                             Military Customers


Possible consequences of not repaying payday loan debt:
   Report to supervisor
   Violation of UCMJ Act 123a (bad checks) & 134
   (dishonorable failure to pay)
   Punishable by:
1. Confinement
2. Court-martial
3. Loss of security clearance-65% of security clearance
   denials due to personal financial problems
4. Administrative discharge



                  http://www.responsiblelending.org
            Military Payday Lending Facts and
                         Figures


CRL research has found:
 Active-duty military personnel are 3 times
 more likely than civilians to have taken out
 a payday loan
 One in five active-duty military were
 payday borrowers last year (2004)
 Predatory payday lending costs military
 families over $80 million in abusive fees
 every year.

              http://www.responsiblelending.org
               DoD Report on Predatory Lending
                  Practices and the Military

Explanation of predatory loans (payday, Internet, car title,
installment, rent-to-own, tax refund anticipation, collection
actions)

Facts-Between 2000 and 2005, 1600% increase in Navy
security clearance revocations and denials due to financial
problems

Protections-financial education and Armed Forces
Disciplinary Control Boards (AFDCB)

Alternatives-military aid societies, banks, credit unions

Need for Federal and State Government assistance


                  http://www.responsiblelending.org
            DoD Report Recommendations


Unambiguous and uniform price disclosures
Federal APR cap of 36% for credit extended
to Servicemembers and their families
Prohibit lending without regard to ability to
repay
Maintain Servicemember’s right to full legal
recourse (no mandatory arbitration clauses)
Afford state consumer law protections to all
Servicemembers and their families
(regardless of their residency status)

             http://www.responsiblelending.org
                Talent Nelson Amendment


Added to DoD Authorization Bill
Passed by U.S. Senate on 9/30/06 and
signed into law by President Bush on
10/17/06
Provisions include a 36% interest rate cap on
all loans to military members and their
families; a broad definition of “interest” that
includes all fees and single premium
insurance; protections against arbitration
clauses; and bans on prepayment penalties


             http://www.responsiblelending.org
                  MILITARY LENDING ACT


Effective for loans written on or after October
1, 2007
MLA covers the following types of loans:
Payday Loans (narrowly defined)
Vehicle Title Loans (narrowly defined)
Tax Refund Anticipation Loans (narrowly
defined)




             http://www.responsiblelending.org
                   Payday Loan Alternatives

Arrangements with creditors & late fees
“Good” overdraft protection: transfers money from
saving or credit card
Credit card advance (1/20th cost)
Salary advances from credit union (1/30th cost)
Small loan from credit union (prime interest rate to
18% APR, 1/30th cost)
Small consumer loan (1/10th cost)
Casual pay (pay advance approved from unit
commander (no fees, no interest)
Military Relief Societies (first resource instead of last
resort)

                http://www.responsiblelending.org
                           THE SOLUTION

Eliminate 7 major payday abuses:
 Consider the ability to repay
 90-day minimum loan term
 Installment payments
 Prohibit out of state banks violating state law
 No mandatory arbitration clauses
 No use of check
 Real limits on renewals, rollovers, back to
 back transactions

               http://www.responsiblelending.org
                               Contact Information


Payday loans don’t solve a financial crisis;
they create a new crisis every two weeks

Charles Lowery
Policy Counsel
Center for Responsible Lending
910 17th Street, N.W., Suite 500
Washington, D.C. 20006
202-349-1879
charles.lowery@responsiblelending.org


                     http://www.responsiblelending.org