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Payday Lenders To Reform Policies |
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Thursday, 15 March 2007 |
CALIFORNIA
By Chris Levister
The reforms aimed at African-American and Latino borrowers
seeks to educate customers about the use of payday loans, voluntarily limits
advertising and offers a once-a-year break to borrowers who don't pay back
loans quickly.
 Critics say the $40 billion payday industry which crowds the
streets of California's
lower income neighborhoods is the greatest obstacle to creating and retaining
wealth for many African-American and Latino families.
About 13 states have banned payday lending arguing the
interest rates are exorbitant and often trap financially strapped borrowers
into a cycle of paying additional "rollover" fees to renew the same principal.
Against this backdrop, the Community Financial Services
Association of America (CFSA), a trade group that represents about 60% of the
nation's payday lenders says it will band advertising loans for "frivolous"
purposes such as gambling, entertainment or vacations and will warn borrowers
that "payday advances should be used for short-term financial needs only, not
long-term financial solutions."
The biggest change would give customers more time to pay
back a loan with no financial penalty. This "extended payment plan" would be
available at least once a year and provide borrowers between two and four extra
months to pay off loans.
The industry has launched a $10 million media advertising
campaign on BET, Telemundo and Univision targeting African-American and Latino
audiences.
Consumer advocates call the move "a public relations gimmick
aimed at heading off more regulation."
The industry is under intense pressure from state
legislatures and Congress. "This is an attempt to stay ahead of the regulators.
This does not solve the problem of triple digit interest rates for payday loans
that traps borrowers into a vicious cycle of debt," said Jean Ann Fox of the
Consumer Federation of America.
Millions of Americans take out small loans from so-called
"payday" loan shops and then find themselves paying sky-high interest rates
that can soar to 500 percent a year. But making loans for people who live
paycheck to paycheck has become a
multi-billion dollar enterprise with more than twice the number of
stores as Starbucks.
Here's a borrowers profile: Credit constrained, and/or
working but low income, young female head of household African-American,
Latino, renter. African-American households are 2.5 times more likely to use
payday loans than whites. Lenders are more prevalent in low income
communities. Borrowers are typically 3
times more likely to be burdened with debt or been denied credit.
"Traditional mainstream banks have abandoned lower-income
communities and communities of color while their role is being filled by
predatory check cashers, payday lenders and finance companies that prey on
consumers with few financial alternatives," said Alan Fisher, executive
director of the California Reinvestment Coalition. "Millions of dollars are
being taken out of the pockets of the working poor in predatory fees."
"Payday lenders make it easy for poor people to keep
borrowing money," said Elizabeth Dixon, a Riverside CPA who specializes in
building and managing wealth among African-American families.
"The lack of bank and savings & loans branches in
neighborhoods of color has created a price gouging opportunity." Dixon recalls a client
who borrowed $225 in cash. The man wrote a post dated check for $300, paying a
fee of $45 for the transaction. "His check bounced when the payday lender
cashed it. He was charged $28 dollars. For this one payday loan he ended up
paying $118 in fees - almost 50 percent of what he borrowed," said Dixon.
Payton Brown started borrowing money from a payday lender
when he was in college at Cal State San Bernardino, and said he quickly became
addicted.
"I started going there literally every week," said Brown,
now a 29-year-old retail manager. "Eventually my world crashed. I borrowed from
one lender to pay off another. When I graduated I was completely broke. You
don't have to be poor and ignorant to get caught up in the payday loan spiral,"
said Brown.
Darrin Anderson, president of CFSA, who also serves as
president of QC Holdings, Inc. a Kansas
payday lender, defended the groups reforms saying the changes are meant to help
the 5% to 10% of borrowers who don't pay off their loans.
"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."
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