Capital Commentary is the weekly current-affairs publication of CPJ, written to encourage the pursuit of public justice.
Seeking Just Lending Practices (2)
Stephen K. Reeves
By Stephen K. Reeves
January 19, 2015
This is the second article in a two-part series.
A young father had trouble paying his bills and turned to his Baptist congregation for help. They gave freely from their benevolence fund, no questions asked. When he returned for help a few months later, a mentor was provided to assist with budgeting, and it became clear that there was no way for the family to make ends meet. When his monthly income had fallen short of expenses, the father had taken out a payday loan of $700. Now, $200 was being automatically deducted from his checking account every two weeks, making it impossible for him to keep up. After several months, he still owed the original principal and the same amount of fees and interest as the day he walked away with the loan thought to be the answer to his problems. By the time the church helped pay the balance, that $700 cost over $3,300 in less than five months.
While charging more for riskier loans is understandable, the degree to which the payday lending industry relies upon repeated borrowing from those stuck in debt-trap loans has generated loud bipartisan calls for reform. Even some of the strongest defenders of the free market have found such usurious loans beyond the moral boundary of respectable business. In many places, advocates have managed to rein in the most abusive practices, even in more conservative states like Georgia, Arizona, Montana, and North Carolina. Since 2005, not a single new state has authorized payday lending within its borders.
However, payday lobbyists and political contributions in other states have managed to ensure that citizens continue to fall victim to this modern form of usury. In Texas, industry members contributed nearly $4 million to friendly candidates in just two election cycles and paid eighty-nine lobbyists between $2.1 and $4.4 million to beat back reform during a five-month legislative session. In response, advocates there moved closer to the people, evoking change on the local level. Away from the power of the lobby, over twenty-two city councils in Texas have passed local ordinances to curb the worst abuses by the payday lending industry.
Industry members claim that strict regulations would put them out of business and borrowers would have no other place to turn. However, according to borrower surveys, those who found themselves in a cycle of debt often received help from sources of funds that were available to them when the initial need arose before they took out a loan in the first place. Lenders also claim unscrupulous online lenders will fill the void and offer even more dangerous products, but studies have shown no increase in online loans when storefronts leave a market.
Politicians and other defenders claim a market-based alternative is the ultimate solution. Careful study of the industry shows that traditional market forces do not seem to be at work. In states with interest rate or fee limits (often $15 per $100 borrowed for two weeks or 391% APR), all lenders tend to charge the maximum. In states like Texas that have no limit, there is not only remarkable uniformity in price, but fees are actually higher in some of the largest markets with the most lenders. Abundant competition does little to reduce costs for borrowers and is unlikely to offer a solution.
Concerned pastors and churches are not just asking the government for help. Many churches teach stewardship of financial resources as a central tenet of their faith. Some offer personal financial education courses to their members and community (like Dave Ramsey's Financial Peace University). Other congregations provide affordable alternative loan products by partnering with a local community credit union. A few congregations have even established their own credit unions to serve their members and neighbors. But churches aren’t banks-- they cannot regulate to ensure fair products and they’ll never offer loans at a scale that makes a dent in the market. Rather, this need to venture into financial services reflects the damage these loans have inflicted on communities.
After years of fighting for reform at the state and local levels, people of faith are now seeking change at the national level. Moral conviction rooted in scripture and personal encounters have turned many pastors and people of faith into reluctant political activists. In addition to the Cooperative Baptist Fellowship, a broad range of religious organizations with national scope are awakening to this issue and are committed to advocacy in Washington. This includes, most recently, the board of the National Association of Evangelicals.
At the federal level, the newly established Consumer Financial Protection Bureau is explicitly authorized to regulate payday lenders and is expected to act soon to put forward new rules. In addition, Congress has considered, and will likely consider again, a national 36 percent interest rate limit for small loans. Many industry members have a national footprint and some are publically traded. It is time for regulations that apply to all Americans.
Those concerned about predatory lending are hoping for a return to the traditional view that condemns usury as immoral. Our elected officials and regulators must put the law back on the side of working families, like the young father above, instead of on the side of those making billions off of their desperation.
- Stephen K. Reeves serves as the associate coordinator of partnerships and advocacy for the Cooperative Baptist Fellowship based in Decatur, GA.
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Capital Commentary is a weekly current-affairs publication of the Center for Public Justice. Published since 1996, it is written to encourage the pursuit of justice. Commentaries do not necessarily represent an official position of the Center for Public Justice but are intended to help advance discussion. Articles, with attribution, may be republished according to our publishing guidelines.”