I. Introduction
During the past few months, the credit crunch has spread to all areas of the credit market, including: commercial real estate mortgages, student loans, and even auction-rate securities that are considered as safe as cash.[1] In attempt to prevent further loss, many lending industries have tightened lending standards to the extend that some consumers have found obtaining a loan or even a credit card more difficult.[2] At a time where borrowing money has become harder, people with bad credit and low income are flocking to lenders that are willing to fill their wallets with no questions asked. The “payday” loan industry is growing rapidly and is known for its quick and easy lending.[3] Although the quick and easy money may seem attractive, the outrageously high interest rates are leading payday loan users into an inescapable debt trap.[4] Aside from high interest rates, another critical problem surrounding the payday loan industry is its practice of targeting the elderly and other recipients of government benefits.[5] The elderly falling victim to these predatory lenders has only grown over the years, and this exploitation calls the need for regulation and strict enforcement.
II. Payday loans: What They Are and How They Work
Payday loans became popular in the 1990s and the industry has grown rapidly.[6] Currently, payday loans are widely available in thirty-seven states and there are over 22,000 operating establishments.[7] Payday loans are small short-term single-payment loans intended to carry a borrower with a temporary cash deficiency through the borrower’s next paycheck. [8] A typical payday loan is a two-week loan for around $250-$325 with fees ranging from $15 to $20 per $100.[9] This amounts to a $52 fee for a $325 loan, an interest rate ranging from approximately 300% to 400%.[10] For an average borrower, these terms would equal an $800 repayment for a $325 loan.[11]
Many people that are in need for quick and easy money flock to payday lenders because borrower screening is almost non-existent.[12] Potential borrowers are not required to disclose their debt, credit history, or any other material information that would project the borrower’s ability to repay the loan.[13] Currently, payday lenders only require identification, a checking account, proof of income from either a job or government benefits, and a signed personal check to secure the loan.[14] Through their practice, payday lenders are contradicting their original purpose of getting borrowers through a temporary cash deficiency because the triple digit interest rates and expensive fees are trapping borrowers into prolonged debt. Although payday lenders argue that the current interest rates are the only way for the industry to be profitable, the business practices of this industry are questionable.
Borrowers have several options when the loan is due. The borrower can either return to the lender and pay the loan off or allow the lender to cash the borrower’s personal check provided at the time of borrowing.[15] However, if the borrower cannot repay the loan, which is often the case, the borrower is forced, by the lack of an alternative, to renew and extend the loan for another two weeks for an additional fee of $52, this practice is referred to as "loan flipping".[16] The biggest problem with the repayment system is that the repayment must be a single payment, paying in installments is not an option in many payday lending establishments.[17] Further, because personal checks are often cashed when a borrower has insufficient funds, overdrawn accounts and bounced checks add additional bank costs to the average borrower.[18] With continuous renewals, renewal fees, bank fees, and accumulated interest, borrowers find it impossible to cut their ties with this small loan industry.
III. Targeting the Elderly
Payday loans have largely marketed to low and moderate income consumers; however, in recent years, payday loans have made government benefit recipients, like the elderly, there newest target market.[19] In many states, there are clusters of these predatory lenders established around subsidize-housing complexes for the elderly and disabled.[20] Although there are no concrete statistics concerning payday lenders and the elderly, these lenders and their workers are encourage by management to recruit this particular social group.[21] Payday lenders recruit the elderly through active solicitation, whether it is actual home visits or friendly conversations the lenders strikes up at nearby areas of a subsidize housing complexes, the lenders are on a mission to get the elder borrower into the door.[22] The predatory lending industry has directly stated that they market to the elderly and other government benefit recipients like the disabled and veterans because “these people always get paid, rain or shine,” and “will always have money, every 30 days.” [23]
Aside from the fact the elderly have guaranteed monthly paychecks, critics focus on other factors that drive these predatory lenders to target this vulnerable group of consumers. First, payday lenders recognize that older homeowners tend to have higher home equity. Targeting the elderly allows the lenders to easily “strip” the equity from a borrower’s home by including excessive fees and lending under unfair terms. [24] For example, lenders will continuously convince the elder borrower to refinance their loans; however, the refinancing does not benefit the borrower because high fees are charged each time, and the accumulated costs eventually wipes out the borrower's equity.[25] Secondly, payday lenders recognize the borrower’s need for money.[26] Many elderly borrowers look to payday lenders because they have a greater need for cash to supplement limited income.[27] Finally, predatory lenders target the elderly because of the greater likelihood of physical impairments, diminished cognitive abilities, and social isolation.[28] These characteristics are beneficial to payday lenders because the borrower is at a disadvantage when it comes to comparing credit terms of different companies, accessing financial information, and fully understanding the terms and conditions of a loan.[29]
In addition, payday lenders that target the elderly with often abusive and unfair terms, are also engaging in the practice of tapping Social Security checks of this vulnerable group of borrowers.[30] Because most elderly receive their benefit through direct deposit, it has made it easier for borrowers to pledge their future checks as collateral for small short-term loans.[31] Interestingly enough, the payday loan industry has grown in recent years coinciding with the rise in direct deposit among Social Security recipients.[32]
Just like the illegality of wage garnishment, it is illegal for lenders to directly receive a recipients Social Security benefits.[33] However, many lenders are forging relationships and making arrangements with banks to get their hands on a recipient’s benefits.[34] For example, the payday company lends money to an elderly borrower that pledges their future government benefits as collateral to the short-term loan.[35] When the loans is due, the recipient’s bank that receives the Social Security benefits through direct deposit, immediately transfers the funds to the payday lender. [36] At that point the lender subtracts the debt repayment, fees, and interest, before the actual recipient receives a single penny. [37] This repayment structure awards almost all control to the payday lender, while the recipient has very little control over their benefits or finances.
Although the elderly are reliable borrowers because they get monthly checks through Social Security, reliable does not mean that the elderly are able to repay their loans.[38] It is rare for the elderly borrower receiving Social Security to pay off their loans quickly.[39] In fact, the elderly are targeted because they are a lucrative consumer group.[40] The elderly are borrowers with a small "fixed income" and they are different from other groups because the elderly have no means of increasing their monthly check. While other low income groups can get a second job or an increased bi-weekly paycheck from working more hours, the elderly have little to no control over of how much money they receive, this makes the elderly a more attractive candidate for payday lender looking to make profit.[41] Having a fixed income and limited finances, the elderly are often forced to either renew their loans adding more costs; and in states where renewal is illegal, borrowers are essentially forced into taking out another payday loan to pay off the old.[42]
IV. Attempts to Regulate Payday Lenders
Currently, garnishment of social security benefits is illegal and all active-duty military families are protected by the Military Lending Act signed into law on October 2006 – capping interest rates at 36% on all small loans, including payday loans, for all military families.[43] Small loans are governed by state law, and many states have implemented restrictions on payday lenders.[44] For example, many state have placed restrictions on renewals of payday loans and some states have banned loan renewal all together.[45] States including Florida, Michigan and Oklahoma have put limits on the number of loans outstanding a borrower may have in order to receive another loan.[46] Some states have adopted payment plans, capped loan amounts, and capped interest rates.[47]
Unfortunately, despite states efforts, payday lenders have found loopholes in order to continue with their lucrative business and borrowers are still trapped. Whether it is the lenders allowing back-to-back lending to substitute for renewal loans; or allowing other family members to take out more loans for an individual with outstanding loans; or misrepresenting payment plans to be unattractive to customers or making eligibility for payment plans difficult, borrowers are drowning in repeat borrowing and growing debt.[48]
In addition, the law is not protecting vulnerable groups like the elderly, disable, and veterans. More importantly, Social Security recipients, like the elderly, have little to no protection from the lenders tapping their benefits. The Treasury Department has stated that privacy rules forbid monitoring a recipient’s bank account without cause; and the Social Security Administration officials have stated that the agency is not responsible for a recipient’s benefit once the check is paid. [49] As of 2007, thirteen states have saved their citizens approximately $1.5 billion by banning payday loans and/or capping interest rates for small loans at 36%.[50] The thirteen states include Connecticut, District of Columbia, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Vermont, and West Virginia.[51] The Federal Deposit Insurance Corporation has also encouraged banks to craft and market small loan interest at 36% or less to the general public.[52]
V. Conclusion
The payday lending industry is sinking borrowers in debt, charging $4.6 billion in fees alone every year, while making over $28 billion in loans.[53] 90% of payday lending revenue is based on fees stripped from trap borrowers, 99% of payday loans go to repeat borrowers, and a single lender flips an average payday borrower eight times.[54] Currently, only twelve states and the District of Columbia have interest rate caps averaging 36 % or less for small loans.[55]
The state governments along with federal government agencies should place more regulatory restriction on these predatory lenders, and equip the vulnerable groups like the elderly with more protection. Some general suggestion in regulating this industry would include capping not only the interest rates at 36% or less, but also cap loan amounts depending on a borrower’s income in all states where payday loans are available. Further, payday lenders should also be required to limit the number of loans outstanding per household, rather than basing the loan limit on individuals. Lenders should also have a system to check the borrower’s current debt with other payday loan companies before lending. Also, collateral for the loans should not be personal checks or bank accounts because the bank fees from bounced checks and overdrawn accounts have been just as burdensome to borrowers.
As for the elderly, States should ban banks from forming relationships with payday lenders to ensure that lenders are not tapping Social Security checks of the elderly. What the elder borrower decides to do with their money, including repaying their payday loan, is the decision the elder should make, not a decision a payday lender should make for the elder. States should also ban payday loan companies from soliciting to the elderly through home visits or any other means of direct contact. Direct solicitation makes it easier for lenders to exploit and manipulate the elderly into abusive and unfair loan terms. States should also place restriction on lending to elder borrowers, either through capping loan amounts and interest rates, or by requiring a co-signer for elderly borrowers with physical or mental impairments.
The growth of the payday loan industry has been unstoppable and the industry continues to generate enormous profits at the expense of the public and the less fortunate. The interest in protecting the public alone makes it more than necessary to take steps in limiting and restricting the practices of this predatory lending industry.
Sources:
[1] Jenny Anderson, Wall St. Banks Confront a String of Write-Downs, N.Y. TIMES, Feb. 19, 2008, at C1, available at http://www.nytimes.com/2008/02/19/business/19banks.html?_r=2&ref=business&oref=slogin&oref=slogin#
[2] Jane J. Kim, Credit Cards Are Playing Hard to Get, WALL ST. J., Feb. 5, 2008, at D1, available at http://online.wsj.com/article/SB120217434152042887.html
[3] Ellen E. Schultz & Theo Francis, High-Interest Lenders Tap Elderly, Disabled, WALL ST. J., Feb. 12, 2008, at A1, available at http://online.wsj.com/article/SB120277630957260703.html
[4] Id.
[5] Id.
[6] Uriah King, Leslie Parrish & Ozlem Tanik, Center for Responsible Lending, Financial Quicksand: Payday Lending Sinks Borrowers in Debt with $4.2 billion in Predatory Fees Every Year 3 (2006), available at http://www.responsiblelending.org/pdfs/rr012-Financial_Quicksand-1106.pdf
[7] Uriah King & Leslie Parrish, Center for Responsible Lending, Springing the Debt Trap: Rate Caps are Only Proven Payday Lending Reform 7 (2007), available at http://www.responsiblelending.org/pdfs/springing-the-debt-trap.pdf
[8] Id.
[9] Mark Flannery & Katherine Samolyk, Federal Deposit Insurance Corporation Center for Financial Research, Payday Lending: Does the Costs Justify the Price? 1 (2005); see also King, Parrish& Tanik, supra note at 3.
[10] King, Parrish & Tanik, supra note 6 at 3.
[11] Center for Responsible Lending, Predatory Payday Lending 1 (2005), available at http://www.responsiblelending.org/pdfs/2b002-payday2005.pdf
[12] King & Parrish, supra note 7 at 5.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id. at 7.
[18] Id.
[19] Schultz & Francis, supra note 3 at A1.
[20] Id.
[21] Id.
[22] Id.; see also United States General Accounting Office, Consumer Protection Federal and State Agencies Face Challenges in Combating Predatory Lending 99 (2004).
[23] Schultz & Francis, supra note 3 at A1.
[24] United States General Accounting Office, supra note 22 at 99-100.
[25] Id.
[26] Id. at 100
[27] Id. at 100
[28] Id. at 100-101
[29] Id.
[30] Schultz & Francis, supra note 3 at A1
[31] Id.
[32] Id.
[33] Id.
[34] Id.
[35] Id.
[36] Id.
[37] Id.
[38] Id.
[39] Id.
[40] Id.
[41] Id.
[42] King & Parrish, supra note 7 at 7.
[43] Id.
[44] Id. at 6
[45] Id. at 7
[46] Id. at 13
[47] Id. at 9
[48] Id. at 14
[49] Schultz & Francis, supra note 3 at A1.
[50] King & Parrish, supra note 7 at19
[51] Id.
[52] Id.
[53] Id. at 7
[54] Center for Responsible Lending, supra note 11 at 1.
[55] King & Parrish, supra note 7 at 7