One of the primary emphases of the New Baptist Covenant II meeting in Oklahoma was a push for economic reforms related to “payday lending” – industry terminology for the practice of extending short-term, high-interest loans with no credit checks.
Typically, the borrower gives the payday lending firm a signed check for the amount that will be due on the note’s expiration, usually 12 to 45 days after the loan.
The borrower pays stiff fees per each $100 borrowed, sometimes making the interest rate more than 1,000 percent if factored as an annual percentage rate (APR).
Jeanie McGowan, a staff pastor at First Baptist Church of Jefferson City, Mo., said her state is the worst in the country in limiting the power of payday lenders, even though the Missouri legislature had six pieces of legislation last session.
“In Missouri, this has become a partisan issue,” McGowan said. “Republicans are making it difficult to enact reforms through the legislature. This doesn’t have to be a partisan issue. Republicans helped get reforms done in Ohio.”
That Ohio reform capped the APR on short-term loans at 28 percent, a percentage that critics claim makes it impossible for them to do business.
“The head of the House Finance Committee in Missouri owned a payday lending business for 12 years,” McGowan said. “We’ve been pushing for a cap of 36 percent, and he’s said it’s impossible to do business at that rate.”
In Missouri, payday lenders can legally charge up to $75 on every $100 borrowed, making the final interest rates on rollovers and multiple loans as high as 1,995 percent.
In Missouri, the average payday loan rate is 450 percent, which puts the rate nearly 100 points higher than Missouri’s southern neighbor, Oklahoma.
When the NBC II met in Oklahoma City last year, at least one state senator showed interest in tackling the problem of exorbitant interest rates.
Rick Brinkley (R-Owasso) has regularly spoken out about another complicating factor in the payday lending business: tribal lenders.
American Indian tribes are sovereign nations with their own laws, many of which can create problems for state legislatures.
Brinkley called the companies’ business practices “unethical,” and according to the Center for Responsible Lending, he said that most grievances against payday lenders involve fees of more than 1,000 percent. Even more troubling to Brinkley is that some of the worst offenders are in his back yard.
“Nearly 30 percent of the complaints filed by U.S. consumers against payday lenders are filed against seven payday lenders in Miami, Oklahoma, which has a population of about 12,000,” Brinkley wrote on his senate web page.
In addition to the tribes, advocacy groups are also worried about another growing trend that has the potential to circumvent state consumer protection laws.
Kathleen Day, spokesperson for the Center for Responsible Lending’s (CRL) Washington, D.C., office said: “We are very concerned about banks being allowed into the payday lending arena. These are national banks, and they could potentially override state consumer protection laws. We’re also concerned that the same bank regulatory office that oversaw the subprime mortgage meltdown is in charge of payday lending.”
In a letter written by the CRL and sent to bank regulators, the five national banks are named and the practice defined: “Wells Fargo, US Bank, Fifth Third, Regions and Guaranty Bank’s deposit ‘advance’ loans are structured just like loans from payday loan storefronts – carrying a high-cost combined with a short-term balloon repayment.”
Kate Richey, a policy analyst with the Oklahoma Policy Institute, said the major banks have been involved for years, but there is a new push to get more involved.
“These are the same practices used by payday lenders,” Richey said. “The interest rates are too high, and they eat away at the discretionary income of those who are least able to afford it.”
Richey said the problem isn’t a one-time, short-term loan. Many people can’t afford the immediate repayment that comes due at the end of the term.
The lack of money forces them to take out another short-term loan or roll the other one over with the fees that come with such a move.
Missouri has tried to limit the ability of people to take out a payday loan with another outstanding, but many states have no such protections.
“These loans really aren’t just an issue of choice, as their proponents claim,” Richey said. “The businesses are clustered in poor neighborhoods where people have no credit, bad credit or no access to a bank. They have no place else to turn, so they turn to coercive financial arrangements.”
The idea is to trap people in a series of high-interest loans, according to McGowan.
“We have the CEO of Quik Cash on record saying the goal is to get people pulled in so they’ll have to renew the loans and then roll them over,” she said. “I’ve stopped calling it payday lending. It’s predatory lending.”