The Cincinnati Beacon - An Unlikely Partnership: Civil Rights Organizations and the Payday Loan Industry

Friday, August 15, 2008

An Unlikely Partnership: Civil Rights Organizations and the Payday Loan Industry

“The Cincinnati NAACP does not support a 400 percent interest rate for any American citizen.”
- Christopher Smitherman, Cincinnati NAACP President

The recent explosion of home foreclosures has cast a spotlight on the dubious practice of granting subprime mortgages to people who could not afford them. In addition to the subprime crisis, a greater light is being cast upon the entire industry that often seeks to make money off of people who are poor. This industry was the recent focus of a report on the Bill Moyers Journal on PBS. Moyers and his colleagues, with the help of Business Week, examined the practices of the used car company, JD Byrider. Used cars are often sold to lower income buyers at interest rates that make it impossible for the buyer to keep the car. In fact, JD Byrider has it down to a formula.

As the article in Business Week points out:

“Byrider dealers say they can generally figure out which customers will pay back their loans. Salesmen, many of whom come from positions at banks and other lending companies, use proprietary software called Automated Risk Evaluator (ARE) to assess customers’ financial vital signs, ranging from credit scores from major credit agencies to amounts spent on alimony and cigarettes.Unlike traditional dealers, Byrider doesn’t post prices—which average $10,200 at company-owned showrooms—directly on its cars. Salesmen, after consulting ARE, calculate the maximum that a person can afford to pay, and only then set the total price, down payment, and interest rate. Byrider calls this process fair and accurate; critics call it “opportunity pricing.”

JD Byrider and the used car industry are not alone in turning a profit off of those who are struggling to make ends meet; criticism has also been leveled at the payday loan industry. This industry is designed to give people a short-term loan that is often intended to cover the borrower’s expenses until the borrower’s next payday. Loans are often due in a two week time period and (depending on the state) can carry an interest rate up to close to 400%. In a recent study, The Center for Responsible Lending reveals that:

“Despite attempts to reform payday lending, now an industry exceeding $28 billion a year, lenders still collect 90 percent of their revenue from borrowers who cannot pay off their loans when due, rather than from one-time users dealing with short-term financial emergencies.”

Also in the report, which you can download here, it is found that:

- 90 % of payday lending revenues are based on fees stripped from trapped borrowers, virtually unchanged from the 2003 findings.
- The typical borrower pays back $793 for a $325 loan.
- Predatory payday lending now costs American families $4.2 billion per year in excessive fees. - States that ban payday lending save their citizens an estimated $1.4 billion in predatory payday lending fees every year.

The majority of the money that is made in this industry is from borrowers who cannot pay back their initial loan and then take out another loan on top of the existing. This quickly leads to a cycle of debt from which it is often very tough to escape, especially considering the initial financial status of the borrower. This cycle of debt led to a total cost of $209 million to Ohio families according to the 2005 study by the Center for Responsible Lending. Lawmakers within Ohio realized that there was a problem and worked to pass Ohio H.B. 545.

Gov. Ted Strickland signed this bill into law on June 3rd of this year which caps the maximum interest rate that can be charged by payday loan companies, at 28%. While 28% still may seem like a high figure, it is quite a drastic change from the previous 391% that could be charged before the law was passed. The law would also limit how many loans individuals could take out at a time. Some institutions feel that such regulations on the payday loan industry are inappropriate in a so-called free-market society. A group called Ohioans for Financial Freedom has started circulating a petition to gather signatures in order to repeal Section 3 of Ohio H.B. 545. This group has also started a television campaign in which they are running the following ad:

Ohioans for Financial Freedom are funded by the lobbying group CFSA, the Community Financial Services Association, and are pushing hard to gather enough signatures before the law takes effect on September 11th. This group must gather 241,365 signatures before the law takes effect which will then allow the opportunity for the law to be repealed on November 4th. There has been much criticism of the efforts of those who are seeking the repeal of the law. This article in the Toledo Blade quotes people who claim that those seeking the signatures misrepresented the issue and even bribed homeless people with money in return for signing the petition. This article, posted on Forbes.com, speaks to audio tapes and affidavits obtained by the Coalition for Responsible Lending, that suggest that circulators of the petitions are often uninformed on the issue and have mislead citizens on what they were signing.

As controversy continues to surround this issue, it may be surprising to see who is lining up on the side of the payday lenders. This recent online article in Mother Jones magazine outlines how prominent civil rights voices and groups have lined up behind CFSA in their attempt at fighting off strict regulation of the payday loan industry. Groups such as the Congress on Racial Equality (CORE) and the National Conference of Black Mayors have aligned themselves with CFSA because, as stated in Mother Jones:

“They provide a public service by catering to the “unbanked” and other financially underserved communities—i.e., those discriminated against by white banks that won’t make loans to African Americans. Without payday or other subprime lenders, they argue, many poor minorities would have no way of buying homes or keeping their lights on in an emergency.”

While the African American community does have a history of being discriminated against by the banking industry, payday loans at such high interest rates will do little to solve the problem of poverty or provide any reasonable long-term solution to the struggle of economic mobility within African American communities. I recently asked the President of the Cincinnati NAACP, Christopher Smitherman, to weigh in on this issue. “The Cincinnati NAACP does not support a 400 percent interest rate for any American citizen,” Smitherman stated. When asked about why civil rights groups seem to be divided on this issue, Smitherman chose not to comment, but in reference to groups like Ohioans for Financial Freedom, Smitherman added “The organization does have the right to collect signatures to place issue on the ballot. I think voters will make the right decision and not allow a 400 percent interest rate.” I also contacted the office of Mayor Mark Mallory as well as the Urban League of Greater Cincinnati for comment, but my phone calls and emails were not returned.

While the Cincinnati NAACP seems to support a cap on payday loan interest rates, other civil rights organizations continue to work with CFSA and have even invoked the memory of Civil Rights leader Martin Luther King Jr. As stated in the Mother Jones article:

“Payday lenders were popular honorees this year among civil rights groups celebrating the birthday of Martin Luther King Jr. The president of CFSA, the payday lending industry lobby group, chaired the Congress of Racial Equality’s (CORE) Martin Luther King Jr. awards dinner in January. To honor the King holiday this year, SCLC gave its presidential award to CompuCredit’s Harrod for her “leadership in the struggle for economic justice through the political process.”

CompuCredit was sued last year by the Federal Trade Commission for violating the Fair Debt Collection Practices Act and for “deceptive practices” that often left their borrowers in so much debt, that it was difficult for them to get out.

CompuCredit, J.D. Byrider, and CFSA are all part of the industry that makes the majority of its profits from those who have difficulty making ends meet. From formulas that are designed for the purpose of milking as much money out of people as is possible to charging exorbitant interest rates that spin people into a cycle of debt, it is clear that this industry is doing little to help those in society who need the most help. The connection of CORE and the National Conference of Black Mayors to groups like CFSA work to legitimize the payday lending industry as an important economic tool to the African-American community. The studies that have been conducted and the reports that have been filed seem to indicate that this industry is doing little for the economic mobility of the African-American community while making solid profits for the lenders.

It remains to be seen if this issue will come to a vote in Ohio on November 4th, but if the issue does appear on the ballot, let’s hope that citizens can sift through all the details before they head into the voting booth.

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R says:
16 Aug 2008 at 03:21 pm | #

God forbide the banks help all people the same way. They would probably be surprised for instance, that Ms Jones got a mortgage , that was equal to, or less than the rent she pays, takes pride in her home, and creates a positive enviroments for her children.

In the “electronic age” it is going to get to the point that little Johnny who got busted smoking a joint 5 years ago, can find an apartment to rent. what happens then? He lives on the street?

There is a bank in Florida, who actually helps lower income people build themselves financially, instead of raping them. The attend a class once a week, have an individual at the bank who is there point person, and the goal is to get out of debt, establish credit , and on completion of the program, helps them find a house and provides the mortgage, and continues to work toward keeping them self sufficent, owning their own home, building savings and investments. This is a “program” it is a chain bank, that takes people and is building a loyal customer base, accounts etc etc, and helps rebuild the communities that they are in. No fee’s or high interest etc etc. these people should win an award.

There was a guy here in cincy a while back, he was partners with Puff daddy or whatever his name is, to start the company that sold pre-paid credit cards. The company for instances , would charge 300 dollars for a Visa, which after the fee, was a 200.00 card and marketed as a “staus symbol” for those who couldn’t get a normal visa. So it doesnt surprise me that a certain group of people were exploiting a certain group of people and supportive of these companies. . it amazed me.

whats even worse, is going to be the medical Fico scores. But of course, they promise they will not use them to determine treatment. right

says:
16 Aug 2008 at 03:39 pm | #

While it may appear to be a clear issue, one might look at it in a perspective that those in power have a dog in this fight.

While it costs 4.2 billion and a bill prohibiting the high interest rate can save one third of that amount, just who are they saving it for? These people have to eat and the government makes sure that they can through programs so that they don’t revolt, etc. There is competition for the money saved. If the people pay less on interest they have more to pay for food and the government doesn’t have to pay as much. There probably would be much said if the recipients of the money expended for interest were reputable bankers and not sleazy loan sharks. Reputable banker support our existing political structure with contributions, etc.

Ironically if you would peel back the corporate cloak of these payday loan companies, I think you would be surprised who is raking in the profits. I think some of the politicians would also be surprised. It is all about money and nobody gives a rat’s ass about the borrowers, except the borrowers, who are just trying to exist. The borrowers are just pawns in the grand schemes.

NtotheC says:
18 Aug 2008 at 10:12 am | #

It’s astonishing that these groups would line up behind these companies. I understand that historically there has been a strong racial tension in the banking industry and unfairness towards minorites. However, these payday loan places that are pervasive in depressed socio-economic communities are just not the answer.

I’m not sure what R means by “it doesnt surprise me that a certain group of people were exploiting a certain group of people and supportive of these companies” but it doesn’t surprise me either, but only if “a certain group of people” means exploitative sleazeballs.

Dewey says:
19 Aug 2008 at 05:52 am | #

I think they’re tryng to say “Business is business eh, Mordecai”?

R says:
20 Aug 2008 at 12:15 pm | #

Yes, thats what I meant, but I also gave an example to the Puff Daddy Dog, or whatever his name is. I think selling prepaid credit cards marketed to the black community with HUGE interest rates ( pay 300 dollars and get a 200 card) is exploitation. He markets them as a status symbol. What about the furniture stores in OTR that would gladly give you a 200 couch for 1,899 dollars, 45.00 a week ? same thing . I understand someone might not have a couch without it, but it is still an astronomical interest rate. So, in my opinion, it is a type of entrapment. The payday stores say that they are providing a servbice to those who may not have other options. Maybe. They also say that they have to charge those rates because they lose so much money, and actually are in the 2-3 % profit range. I doubt that. Someone write you a bad check, you have the biggest collection agent in the county. HCS .

I can see the need, but the banks should step up, and create programs to get these people with no other options into the banking system. Help them develope credit etc etc. In the information age, think how many people will not be able to rent an apartment because of credit, or such. What happens to these people???

a Job. companies will tell your boss that you had a DUI last night before you probably know, or are able to tell anyone. What happens? you get fired before you go to trial? Inncocent until proven guilty.

your girlfriend can find out now if you ever burped in your life by clicking on a site.

It all ties together.

Medical FICO .

Stan says:
20 Aug 2008 at 05:27 pm | #

The banks are not going to do anything.

They were forced into making bad mortgage loans by the crooked politicians and they are now paying the price.

..... or should I say WE are paying the price?

Dennis says:
21 Aug 2008 at 10:24 am | #

It is really unfortunate that those groups are teaming up with payday lenders. The payday lobby is pretty smart. Go to your weakness - the groups representing those most taken advantage of by payday lenders! Apparently it works!

We need to end predatory payday lending in Ohio. It puts too many people further in debt when we need to be building wealth in our state, not throwing it away!

Vote Yes on Issue 5!

http://www.yesonissue5.org

says:
21 Aug 2008 at 02:49 pm | #

Gee Dennis thank you for saving us from ourselves.

No longer will I have to make a decision as to my priorities.

The next time I forget my wife’s birthday until the last minute, I can blame no gift on you. So she is hurt that doesn’t matter. But when she get pissed that does matter because I don’t get any sugar for weeks. I do think it would be fair and appropriate that you compensate for my forced abstention from sex by giving me at least six blow jobs.

But I won’t hold my breath because you are a pompous ass that would probably screw it up too.

dieter

Stan says:
22 Aug 2008 at 11:04 am | #

Typical,

You forget your wife’s birthday and it’s someone else’s fault.

Never mind that you were too fucking selfish/stupid/lazy to handle things yourself.

What things you ask?…

1) Selfish that you were thinking about something/someone else other than your best friend.

2) Stupid that you did not think enough to save money for the gift. Stupid that you have not lived within your means and cannot get conventional credit from a traditional lender.

3) Lazy you did not take advantage of your education opportunities (yep, political science degrees pay big money) that you are now only making $21,000 per year. Lazy because you’d rather spend all your free time bitching about your self inflicted financial/social problems on internet blogs, instead of working another job so you can better yourself.

R says:
22 Aug 2008 at 11:50 am | #

Did anyone that had/has an account with 5/3 notice that about 4 years ago, they started this little trick with deposits and debit cards. Say for instance, you deposit your paycheck. You could even go further and say you deposited 1,000 in cash. Before 2 P.M that night, you go online, maybe pay the cable bill( so lets say 100.00 ) cell phone ( 100 dollars) and maybe a couple of small things. So lets say you spend 400 dollars using your card. a week later, you get a letter saying that your account is overdrawn by 63 dollars. “ How can that be you ask? “ you call them, or go there and yes, they tell you that you are overdrawn 63 dollars, so there is a 35.oo overdraft fee plus 6 dollar a day. You say, that’s impossible, I deposited my paycheck and a 1,000 cash today at 1 pm. Inspite of FDIC rules, and the fact their is a systen that ‘honors’ checks bank to bank , so they dont wait for the actual check, they have a hold on the funds of your paycheck ( even though it’s been cleared to them ) and they credit your cash AFTER the payments you made with you debit card. Anyone have that experience? It is done, by design, to generate fee’s. Most people who dont look on line, wouldnt see it. So, by the time you notice it is the overdraft fee, plus the 6 dollars a day and they notifiy you buy mail, so that is 3-4 days so another lets say 24.00 Nice racket, and it is done by design. They are branches in Florida that NOBODY will use, as they have to generate their numbers. A good Branch manager, will get them waived, but try some of them, and they will fight you to death for those fee’s. Other banks do it of course, but 5/3 is notorious for it, and Florida Smacked them badly. yet it still goes on. So essentially, it is the same fee as a payday loan. I left them because of it, and I owe them 26 dollars and it will be never when I pay that.

So watch your stuff onlione. as they try to make up for the Huge losses, they will turn to you, Mr loyal customer.

Warren Buffet said yesterday that anyone that thinks we are not in a recession, is fooling themselves, and that the next 5-6 months it is going to get much worse , and you will see many banks fail.

The good news is, save your cash, and in 7-8 months, it is one of those rare times in history that you can make a killing in the market, based ONLY on fundementals, and not all this blind, hidden, we dont tell crap.

The big banks are not going to do anything to help people get into the system, but there are some regional banks that have fantastic programs. But if something is not done to get everyone in the system, such as savings accounts, education to financial management. You will have AArons, check cashing etc etc. Cap it in ohio, and they will just have to take the bus to Ky. There has to be an answer somewhere. Some people are in this postion due to their own fault, I believe many are not. These people need help, and 389% interest rate is not going to help. What choice do they have no though?

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