Can Alabama Crack Down on Predatory Lending? - Pacific Standard

Can Alabama Crack Down on Predatory Lending?

With skyrocketing annual interest rates on payday loans, borrowers often don’t have enough money left over to cover rent and groceries.
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A payday loan storefront. (Photo: frankieleon/Flickr)

A payday loan storefront. (Photo: frankieleon/Flickr)

On Thursday, President Obama is traveling to Alabama, where he is expected to discuss payday loans, among other economic issues. Since the early 1990s, the brightly colored storefronts of payday lenders, with subtle names like CASHMONEY and CA$HMONSTER, have sprung up in (mostly) low-income communities across the United States. Alabama has one of the highest numbers of payday lender stores in the country, and policymakers in the state are trying to crack down on such “predatory” lending practices.

Payday loans allow those in need of fast cash to borrow a small amount of money—$375 on average—and pay it back when their next paycheck comes in. These short-term loans sound like a sweet deal to those strapped for cash, but more often than not they can trap borrowers in a cycle of debt. The small loans are often marketed for unexpected expenses—car repairs or medical bills—but according to a 2012 study from the Pew Charitable Trusts Foundation, almost 70 percent of borrowers used the money to cover recurring bills. When borrowers then have to re-pay loans with interest (and annual interest rates on payday loans can be as high as 5,000 percent), they often don’t have enough money left over to cover other expenses like rent and groceries. Once again, they take out another short-term loan, repeating the financial loop.

Those in opposition to payday lenders believe that they unfairly target the poor—hence the predatory moniker. And there’s a fair amount of research to back those critics up. An analysis from Howard University released last year used 2012 Census data to compare the locations of payday lenders to the socioeconomic status of the people in those neighborhoods in Alabama, Florida, Louisiana, and Mississippi. The researchers found that lenders tended to set up shop in urban areas—specifically minority and low- to middle-income neighborhoods. Payday loans are, after all, tailored to customers who don’t qualify for loans from banks and credit unions; payday loan customers typically make less than $50,000 a year, and they’re four times more likely to file for bankruptcy.

Payday loan customers typically make less than $50,000 a year, and they’re four times more likely to file for bankruptcy.

In 2013, Paul Heibert reported on a study for Pacific Standard that found in addition to low-income neighborhoods, payday lenders were seven times more likely to open up stores in neighborhoods with high crime rates:

Using data obtained from local police reports, a team of researchers at St. Michael's Hospital in downtown Toronto compared the city's crime-ridden neighborhoods to the locations of multiple payday lenders and discovered a strong overlap between the two. An overlap that held steady despite the particular area's socioeconomic standing, whether rich or poor.

The growth of payday stores in Alabama—which, by state law, can charge annual interest rates of up to 456 percent on loans—has not been good for the state or its residents. The average borrower there takes out eight or nine loans a year and spends the equivalent of roughly seven months of every year in debt. The Howard University study found that while payday stores were responsible for a net increase in jobs in the state, they replaced high-paying jobs in consumer services with low-paying gigs in payday stores. The result is a net decrease in labor income.

Alabama is not the only one hurting from payday loan stores. In fact, several states have already cracked down on the industry. In 2009, Washington state passed a bill that limited the number of payday loans customers could take out to eight a year. Afterwards, the total number of the high-cost loans dropped by more than 75 percent between 2009 and 2011. Arkansas has taken a different, but still successful, approach to keep high-cost lenders at bay: capping non-bank annual interest rates on loans at 17 percent.

Increasingly, the payday loan marketplace is moving online, where it's easier for lenders to skirt state regulations, and annual interest rates average 650 percent.

Alabama has not been so lucky, though. Borrowers are barred from taking out more than $500 at a time by state law, but given the abundance of payday lending businesses, these limits are not all that effective: When a customer hits that limit at CASHMONEY, they can head on over to CA$HMONSTER and get another $500 there. Alabama Governor Robert Bentley has tried to create a centralized database of payday loans that would track a customer’s loan history across all lenders in the state, AL.com reported. Several cities in Alabama have had some success enacting moratoriums to prevent new lenders from opening up new businesses, but lenders don't need storefronts to hand out loans anymore.

Increasingly, the payday loan marketplace is moving online, where it's easier for lenders to skirt state regulations, and annual interest rates average 650 percent. Many online loans are set up to renew automatically or drag out the re-payment process to increase interest.  Not only are they more expensive than storefront loans, 30 percent of online borrowers have been threatened by online lenders, which may partly explain why the vast majority of complaints to the Better Business Bureau about the high-cost loans—90 percent—are against online lenders.

That's a shocking majority when you consider the fact that only about a third of all payday loans are issued from lenders on the Internet.

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