By Susan Cihla and Angels Jones
Payday lenders are partnering with traditional banks to circumvent usury laws and exploit consumers, argued Dr. Creola Johnson, in a presentation to the Metropolitan Strategy Group Forum on June 8. Johnson a professor at the Ohio State University College of Law gave a detailed description of these so-called alternative financial service agencies, their business practices, and their detrimental effects on consumers.
Payday lenders, also known as check cashing agencies, extend loans in an amount up to eighty percent of an individual’s bi-weekly paycheck. For example, a person earning one thousand dollars over a bi-weekly period could borrow eight hundred dollars. One turns over the information from one’s most recent pay stub and bank statement an ID card, as well as a postdated check for the amount of the loan plus a fee. This fee amount may vary widely, as in most states the maximum fee is not regulated by any federal or state governing body. The term of the loan is usually 2 weeks. The lender holds a worker’s check until the next pay day, then attempts to collect the amount due plus the fee, unless the customer can pay the amount due in full. Most payday lenders do not allow partial payment. In Ohio, this can mean an additional fee charged of 10 or 15 percent. Elsewhere, figures of 30 percent and higher are not uncommon.
Additionally, if the borrower has agreed to such terms, the borrowed amount and fees may be automatically taken on the due date directly from the borrower’s bank account. Often, this results in a bounced check, an overdraft, and associated fees.
If one is able to pay off the loan in the initial two weeks, all is well. However, those borrowing from payday lenders offer their clients the option of writing a new loan for the same amount to be paid on the next paycheck, if the customer will only pay a fee. Johnson reported that according to statistics obtained by regulating agencies in the state of North Carolina, it took payday loan customers an average of seven transactions to pay off their loans. This means that the average person taking out that loan, paid the variable fee as many as six times. If the original loan was for the amount of one thousand dollars, the person receiving the loan would have paid between six hundred and nine hundred dollars for that thousand-dollar loan without having touched the principal due. That situation applies only if the loan recipient was living in a state where the fee cap was between 10 and 15 per cent of the amount borrowed.
Even in the state of Oho, which has established a fee cap, payday lenders have found a loophole, allowing them to exceed the state cap. Partnering with financial institutions based in states having no fee cap, the payday lender creates situation, which increases the revenues for both payday lender and financial institution, but which exploits the borrower. Once the payday lender partners with a credible financial institution in another state, the payday lender becomes subject to the usury laws or lack of them in the financial institution’s home state. This is how payday lenders, even in a regulated state, are legally permitted to charge exorbitant fees for their services.
Take the example of Patricia Ortega, the Franklin County resident who fell victim to those questionable practices. Ortega took out a three hundred dollar loan from a payday lender. Because she could not pay the amount owed in a timely manner, she found herself charged $1,800 dollars in fees in addition to the 300 dollars she had originally borrowed. While few studies have yet been conducted in this area, her type of case does not seem uncommon according to anecdotal information.
Payday lenders tend to prey upon those living in lower-middle class to below poverty-level neighborhoods. These are people with the greatest opportunity to have to resort to paying extra fees, because they have less disposable income to start with. If one gets behind on payments, and cannot afford even to pay the new loan fee, fees still compound, and frightful collection tactics are used to get the defaulted borrower to pay up. Any person listed as a reference on the loan application may be called, and harassed – asked why so-an-so won’t pay up. This includes employers, family, and friends.
Professor Johnson detailed cases in Columbus in which certain payday lenders register complaints against the defaulted borrower with the county. Instead of receiving a standard collection letter, these borrowers receive a letter on Franklin County Prosecutor’s office letterhead stating that they must appear at a hearing regarding their debt. As the slew of collections callers has already been telling each defaulted customer that he or she will be going to jail for non-payment of the loan, the person, upon receiving a summons to a hearing, is convinced that this is indeed the case. Such tactics do not cause the magical materialization of moneys to the debtor; they simply serve to terrorize him or her. Of course, if the debtor appears at the hearing, s/he need only express a desire to pay in order to be given a slight reprieve. Many are unaware this is the case, and decide against appearing in court. This is the case for those with a prior arrest record or outstanding warrant. This in turn accelerates the increase in fees owed and adds legal difficulty to the financial one.
Extricating oneself from such a situation is not easy. Typically legal services are involved. However, viable options are being explored. Changes in state and federal legislation as well as the reformation of private sector practices are under review. In the meantime, those companies continue to exploit the needy without remorse. “I’m afraid to think what life needs are not being met because of the financial demands placed upon these debtors,” stated Johnson.
Copyright NEOCH Homeless Grapevine Issue 48 July-August 2001