I think we can all agree that these are not particularly attractive terms. Of course, the purveyors of these products do not pitch them this way but once you add in the interest and the fees, the full cost of many payday loans becomes outrageous. It makes plenty of people downright angry and others scream that there ought to be a law…Well, some right-thinking lawmakers are trying to get their head around the issue of how to regulate these short-term loans and stop the abusive practices that have allowed the payday loan industry to mushroom on the backs of consumers with few resources and little recourse. As I have previous noted, there are some good ideas out there, including a law which now bans them for military families and a proposal from Senator Durbin. Unfortunately, there are also some bad ideas out there.

"Give them a stick with which to whack vulnerable Virginians, and they'll pick up a crowbar."

It turns out the Daily Press (Newport News, VA) isn't about to mince words regarding the payday lending industry in Virginia. Like many states around the country, Virginia recently wrestled with regulating payday lenders, but the General Assembly failed to pass the strict 36% interest-rate caps that have effectively put the industry out of business in other states. From a January 7th editorial:

And how did the payday lending industry respond after legislators caved to its aggressive lobbying and generous checkbook? It went for more.

Some payday lenders have started offering open-ended loans as a way around the few safeguards the General Assembly imposed on payday loans, such as limiting borrowers to one such loan at a time and capping loans at $500. Inexplicably, open-ended loans are virtually unregulated in Virginia, so lenders can really sock it to borrowers on interest and terms. Now, borrowers who are already teetering on the brink of financial disaster can, with the eager help of a payday lender, hurl themselves over the edge with an open-ended loan at an equivalent annual interest rate of more than 450 percent. 

 As they say, read the whole thing.

By Leslie Parrish, Senior Researcher, Center for Responsible Lending

On Tuesday, Ohio and Arizona voters not only selected leaders to deal with the credit crisis on the national stage, they also roundly rejected ballot initiatives sponsored by the payday lending industry in an effort to curtail high-cost lenders from preying on vulnerable families.

My organization, the Center for Responsible Lending, advocates for reasonable interest rate caps that apply to all small loan products, including payday loans. While these loans are marketed as a quick and easy way to deal with an occasional unexpected expense, their high cost and short two-week term typically cause borrowers to become trapped in a cycle of debt where they must take out a new loan every pay period. The average borrower takes out more than eight loans a year (usually on a consecutive basis) at the cost of around 400% APR. More often than not, borrowers ultimately end up paying more in fees than they actually receive in credit.

Saturday's Washington Post carried an article with the hopeful headline "Credit Unions Slowly Fill Void as Payday Lenders Leave D.C."  In January-before Ohio enacted its anti-payday lending law, before the Arkansas Supreme Court interpreted that state's laws to effectively ban payday lending-the District of Columbia capped interest rates on short-term loans at 24%.  That meant that traditional payday lending was out of business.

While the article's headline was hopeful, what followed showed the difficulty these bans face.  Credit unions are indeed trying to fill the gap, not just in the District, but nationally.   And the Federal Deposit Insurance Corporation (FDIC) has a small-dollar loan pilot underway with 31 banks around the country (although none in the District).

It looks like the pressure is continuing to rise on payday lenders across the country.

Back in March, the attorney general of Arkansas Dustin McDaniel ruled that all payday lenders must shut down immediately or face lawsuits. The demand was made based on two recent legal rulings by the state Supreme court which found that the high interest rates that payday lenders charge were "unconscionable" and there were widespread deceptive trade practices.

Well, a few months later, reporter Jason Wiest highlights the work of the Arkansans Against Abusive Payday Lending which documents that the total number of payday lenders operating in the state has fallen from 237 in March to 136 in July. That's a pretty big drop.

However, they also report that about one-third of the payday lending operations still up and running were operating illegally. Others have tried to adopted new business models. It will be the job of the attorney general's office to figure out which lenders are conforming to the law and which are not, but it sure looks like pressure is being brought to bare. I'm all for making sure people have access to credit and loans but lenders have to ensure that borrowers know what they are getting into. Seems like Dustin McDaniel agrees.

 Well, it's now official: Ohio Governor Ted Strickland signed into law a 28% cap on what payday lendings can charge for their unsecured, short-term loans. When lenders have been previously counting on returns of closer to 400%, this law will effectively shut down the payday loan industry in Ohio.

Here's an article from CNN about the growing threats to payday lending business model across the country. The Democratic presumptive nominee Barack Obama has already proposed a national cap of 36%, and it seems pretty clear that there is downward "pressure" on the stock prices of Advance America Cash Advance Centers Inc. and QC Holdings Inc. Perhaps these firms can remake their business models to find innovative ways to offer consumers valuebale services that don't depend on capturing them into a debt trap.

The international microfinance movement - cheered and arguably hyped for its ability to alleviate poverty through access to microcredit - originated based on a social mission to provide financial services such as small loans to the poor and underserved.  However, the recent explosion of profit-seeking providers (in some instances, non-profit MFIs going public, such as the now-infamous Compartamos IPO, in other cases, a surge in predatory micro-lenders) has been met with a mix of applause, skepticism and in some cases, disgust.  Now, some microfinance leaders are speaking out about the risks industry faces if it loses sight of its social mission, fearing the likelihood of an influx of profit-seeking actors offering credit products that are actually more welfare-harming than welfare-enhancing.  My question is: Has anyone else noticed some eerie similarities between these debates over profits from microcredit and the debates within the US over payday lenders?

I heard from a few payday lenders following my last blog post lauding the Ohio legislature for their passage of a 28% interest rate cap on payday loans. They thought I was being callous to the job loss that would be brought on by the new law. They gave me momentary pause. But then I considered the work of my former colleague Leslie Parrish, who has moved on to work at the Center for Reposnsible Lending. She argues convincingly that measures short of an interest rate cap fail to fix the problem.

The Ohio Coalition for Responsible Lending has the CEO of Cash America on record as describing the business model as one that strives to transform customers into a "repetitive, long-term customer, because that's really where the profitiability is." Well, that may be so but it creates a debt trap that can be difficult for people to get out of.

The action of the Ohio legislature is getting pretty high marks all around the state. Here is the Cleveland Plain Dealer's editorial of support. More importanlty, it is serving as a model for others aound the country who seek to limit the debt trap.

One unfortunate growth industry in recent years has been the rise of alternative financial institutions. These are the payday lenders, auto title companies, and check cashers who offer access to cash to virtually anyone that walks through their doors but on horrific terms. I mean really bad.

Payday lenders often charge about $15 for every $100 borrowed on a two-week loan. This would be equivalent to an annual interest rate is approaches 400%. It is an outlandish deal that many people take because they feel like they dont have other options. The problem is that many people in America don't have basic bank accounts, so they conduct their everyday financial transactions with these stores just move their money around. Our colleagues at the Center for Responsible Lending have been committed to ending these abusive practices and are working with people all across the country to change the state laws that govern these transactions. The need for the service is real but the terms are criminal. There ought to be a law...

In true blogger fashion, I've brought my laptop along to a conference we are co-hosting today on Confronting the Debt Culture.

It is a pretty compelling gathering for a couple of reasons. First off, the idea behind the conference is to raise the profile of the concept of thrift and all of the anti-thrift institutions that now prevade our culture. Secondly, the conference is sponsored by a really diverse set of organizations. It has been spreaheaded by the Institute for American Values, a group lead by David Blackenhorn which has mainly been known for its work promoting marriage. In recent years David has become a champion of thrift and has teamed up with other groups such as Demos, Consumer Federation of America, Public Agenda, and others.