Payday Loans Blamed for Trapping Poor in 'Quicksand'

David Thibault | Editor in Chief | Friday, December 01, 2006

Payday Loans Blamed for Trapping Poor in 'Quicksand'

( - Cash starved Americans, many of them serving in the U.S. military, are watching an increasing crackdown on one of their most frequent sources of last ditch credit - payday loans.

Even Congress has clamped down on the practice, but a spokesman for the payday loan industry Thursday told Cybercast News Service that criticism of the loans is being led by "elitist" consumer groups whose members "never have to go paycheck to paycheck."

Payday loans allow individuals to stay financially afloat between paychecks. They are short-term cash loans in which the borrower often hands over electronic access of their bank account to the lender so the lender can then gain access to the borrower's deposited paycheck to get repaid.

Huge finance charges can accumulate from payday loans since the borrower has the option of renewing or "flipping" the loan in exchange for another fee. Critics of the industry also say millions of people take out multiple loans, paying one loan with the proceeds of another and end up getting caught in a financial trap.

In September, Congress passed an amendment to the Defense Department Authorization bill, creating a 36 percent cap on interest rates that members of the military can be charged on loans. A Virginia state legislative committee next week is also expected to take up legislation that would produce more restrictions on the industry.

But 39 states still allow payday lending in some fashion, prompting liberal consumer and civil rights groups Thursday to urge a national crackdown on the practice.

Michael Calhoun, president of the Center for Responsible Lending argued in a teleconference that "in spite of increased scrutiny and in spite of attempts to reform the payday industry, the industry of payday lending remains today a business that is dependent upon keeping borrowers caught in a debt trap."

Calhoun said 90 percent of payday loans go to borrowers who take out five or more loans per year and that over 60 percent of the loans go to borrowers who take out 12 or more loans in a single year.

Citing data from state regulators, Calhoun said the average payday customer borrows $325, but ends up paying back almost $800. This "predatory payday lending," he said, costs borrowers who take out five or more loans per year $4.2 billion per year.

"We think that payday lending is a defective product. It's based on enticing consumers to write checks when they don't have money in the bank to cover them and pledging those checks in order to borrow money to tide them over until the next payday," added Jean Ann Fox, director of consumer protection at the Consumer Federation of America.

Julian Bond, chairman of the NAACP, alleged that "this 4.2 billion is the hard-earned cash being siphoned out of the wallets of working people.""\ul
"This 4.2 billion should be helping people stay firmly put in the middle class, rather than keeping them trapped in the quicksand of poverty," Bond said.

However, Steven Schlein, spokesman for the Community Financial Services Association of America, which represents payday lenders, said the liberal groups are unable to come up with any answers for those people who "need short-term, low denomination credit."

The liberal and civil rights groups are "hopeful more credit unions are getting into the business. Well it's a free market," Schlein said, adding that "customers are coming to us because no one is offering an affordable alternative."

Schlein blamed critics of the payday lending industry for a "very condescending" attitude and characterized them as "elitists who never have to go paycheck to paycheck to tell people who do what their alternatives should be."

Payday loan customers appreciate the product because they understand other worse alternatives, Schlein said. "They say they want to avoid credit card late fees, they want to avoid utility turnoffs, they want to avoid overdraft protection, so these people are actually making very, very good decisions."

State regulators also receive complaints about other consumer products in far larger numbers, Schlein added. "You'll find all kinds of complaints, about credit unions, even about automobile dealerships. You will find very few people complaining about payday loans."

As for the recent effort by the Pentagon and Congress to limit the interest rates and the availability of payday loans to members of the U.S. military, Schlein said it will prove a failure.

"Before the legislation passed, we were in the middle of doing focus groups and studies of all of our customers. We told the military people that this was coming down the pike and that there might be a congressional ban. And all they said was, they were going to send their wives. The military has really accomplished nothing by doing this," he said.

Eleven states ban full fledged payday lending practices. They are Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia, according to the Consumer Federation of America.

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