The ups and downs of consumer protection efforts during this century teach an important lesson. Reforms don’t last. They either get appealed, as have many states’ unfair interest-rate laws, or they go unenforced, as have many tenants’ rights laws, or they find their regulatory agencies tied up in the spider webs woven by corporate law firms.
Unscrupulous businesses keep thinking up ever more creative ways to defraud people. Terminally ill patients are preyed upon by sleazy firms offering to pay them a fraction of their life insurance policies when they are still alive, in return for keeping the full policy value for themselves.
In the slums, predatory merchants ply their “rent-to-own” schemes on desperate and unknowing families.
Now comes payday loans, described by Daniel A. Edelman as “Big Interest Rates and Little Regulation” in one of my favorite publications — the Loyola Consumer Law Review in Chicago.
The typical customer for payday loans is someone with bad credit and debt that needs to be paid immediately. All that is needed to get the loan is a photo ID, a bank statement, and a pay stub. The borrower receives a short-term (two weeks is typical) high-rate loan. How high? Try annual percentage rates ranging from 200 percent to more than 2,000 percent. Yes, three zeroes.
As a reporter for the Ashville Citizen-Times wrote, “Instead of using a loan once in an emergency, borrowers tend to get on a treadmill of repeated loans they can’t get off … It’s almost a pattern …” The more the payday-loan store gouges, the more repeat business it is likely to receive. The average borrower takes out 11 such loans a year.
This business is growing rapidly. According to Edelman, there were no payday loan establishments in Illinois until 1997. Now there are several hundred. Naturally, such high rates of return has attracted the national chains. One of them, Check into Cash, opened its first office in 1993 and now has 320 of them with revenues skyrocketing. The company is planning to issue public stock shortly.
In one promotional brochure, the industry says, “Where can one go in an emergency, for a quick $300 loan! We are the only resource they have!! It is more economical to use our services than to ‘bounce’ checks.”
Consider the plight of the typical customer for such loans. They are living from paycheck to paycheck with mounting family debts. Perhaps some of their checks have bounced and the bank gouges them with penalties of $25 to $35. So, in order to pay for food, medicine, or rent, they are easy pickings for the payday loan marketers who actually refer to these outrageous bounced-check fees.
But there is an alternative: community development credit unions tailored to lower-income people. There are now about 400 such credit unions, but many more are needed. As cooperatives with a different economic philosophy than the payday loan companies, the interest rates for such small loans are much lower and the service more humane. After all, the borrowers are the owners of the credit union.
There is also a need for tougher legislation. According to the Washington, D.C.-based Consumer Federation of America, payday lenders “have persuaded nineteen states to legalize triple-digit interest short-term lending and are pressing the remaining states to make payday loans legitimate.”
So the trend is moving in reverse, instead of toward protecting desperate borrowers. Which is why CFA titled its report The Growth of Legal Loan Sharking.
As recently as April of this year, Pope John Paul II called usury “a serious social evil.” He urged his audience of Anti-Usury Foundations to “continue to combat usury, giving hope to individuals and families who are its victims.”
It is clear that too many state legislatures and Congress are unconcerned about the tragic lessons of the history of usury and how it generates multiplying burdens on its victims.