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Editorial: Excesses growing in payday lending

Posted by Stephen on June 5, 2007

Virginian Pilot Editorial

Last winter, the payday lending industry blanketed Virginia with warm and fuzzy testimonials from customers. To hear them tell it, payday lenders rank right up there with neighborhood priests and favorite uncles. Their loans merely extend a helping hand through hard times.

That’s undoubtedly true for some customers, about 11 percent of the 433,537 Virginians who took out payday loans last year, to be exact. They’re the ones who used a payday loan just once as a financial bridge to payday.

For all the rest, that “helping hand” was less benign. For thousands, it wasn’t pulling the customers out of deep water; it was pulling them under.

Updated figures from the state Bureau of Financial Institutions strip away commercial airbrushing and substitute reality’s harsh glare.

Almost 290,000 Virginians took out between two and 13 loans last year, paying interest rates that averaged 378 percent and could go as high as 782 percent on each. An astonishing 96,831 others received 13 loans or more. Typically, unable to pay off one loan, they took out another, bringing on ever-escalating debt.

That’s not a helping hand; that’s a two-ton boulder tied to your waist when you’re tossed overboard.

The most serious losers were the 12,486 borrowers subjected to lawsuits by the industry for non-payment. Not surprisingly, given the rapid growth in an industry that preys on financial weakness, such lawsuits have more than doubled since 2003.

Speaking of growth, contributions from payday lenders to lawmakers are soaring as well. No surprise there either. In 2002, according to the Virginia Public Access Project, lending and consumer credit companies contributed $72,260 to Virginia campaigns. Last year, the figure was almost $400,000.

There’s a reason Congress banned payday loans to military personnel – they are like a whirlpool sucking the vulnerable toward disaster. The limited good they may do a relatively few families does not justify legalized loan-sharking.

Last session, the General Assembly had the chance to set this right by banning payday lending or at least ensuring that the interest charged is in line with other loans. At one point, opponents of the practice – including the conservative Family Foundation, the liberal NAACP and assorted consumer, military and faith-based groups – managed to get a House vote on banning payday lending.

Five local delegates voted against repeal: Dels. Chris Jones of Suffolk , and Bob Purkey, Terrie Suit, Bob Tata and Leo Wardrup, all of Virginia Beach . Wardrup isn’t running for re-election, but voters need to urge all the rest to change their minds before next year.

The facts speak for themselves. A growth industry that invests heavily in campaign contributions and glossy advertising is building its fortunes on the backs of the poor. It’s unconscionable to allow this to go on.

Opinions expressed in editorials do not necessarily reflect those of management of Conservative Viewpoints.

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6 Responses to “Editorial: Excesses growing in payday lending”

  1. Scott Putnam said

    Payday loans ARE NOT LOAN SHARKING. To avoid an ignorant post get a dictionary before you write.

    Tell me… would you loan someone $100 for 15 – 30 days to earn a return of just $1.38 cents? If you would and think the rate cap of 36% is fair you should enter the payday advance business yourself. You could run all the rest of them out of business in a few months.

    Payday loans at $15 per $100 are a much better alternative than a bank overdraft. Banks earn up to 3000% loaning cash via overdraft protection programs. Over 20 billion in overdraft fees were collected by banks just last year. It is common knowledge that the payday advance industry has grown due to the high cost of bank overdraft fees. IF you really want to make a difference go after the banks. Good luck though… they have a great lobby. Just ask the pentagon guys that re-wrote the rate cap just in time to exclude bank overdraft fees.

  2. Scott,
    I think people use the term ‘loan sharking’ for two reasons. First, I think people want to make clear how emotional the issue is by using what is clearly inflamatory descriptions of the industry. Though I didn’t write this column, I have used the term in the past as a comparison to the practices of the industry. Second, I think it is the only comparison that expresses the usery practices that charge outrageous fees that lock people into long term debt traps.

    When a person takes 9 consecutive loans and they still have not paid ONE dollar toward the principle than I would easily argue that bounced check fees are a much better option. For example, a person that has taken 9 loans for 200 dollars each and paid them back with fees than they have paid 2070 dollars on a 200 dollar loan. That is criminal.

    Remember, each payback for a 200 dollar loan is 230 dollars. Because they are taking each loan after the first simply because they can’t make it to there next check after paying off the loan they are not receiving ‘new’ money, they are struggling to pay off the orignial loan. Furthermore, much of the increase in bounced check fees in Virginia are as a result of payday lending practices. In Harrisonburg, Virginia businesses banded together and convinced banks to increase their bounced check fees in the city soley because of the influx of bad checks caused by payday lenders. It was an alarming response that I was a part of as a former manager of a payday lender at that time.

    One thing’s for certain, payday lenders also have some of the most powerful lobby groups in the Commonwealth today.

    It’s simple for me because I just want payday lending to be subject to the same laws that every lending institution in the US has to abide by which includes a 36% cap on interests. I also support the free market. The free market is predicated on the understanding that free enterprise will provide a solution. Remove the problem and the market will insert a solution. We’ve seen it happen in NC, Iowa, and other states that have done away with the predatorial practices of payday lending.

  3. Mike Hodges said

    Mr. Winslow,

    If you truly believed in the free market system then you would stop advocating for a regulatory solution to payday lending. The payday loan product fills a need in the market place. It was created in a free market. The free market is judging it a success. If you do not like the price of the product then simply roll up your sleeves and creat a competing loan product that is faster, better, cheaper and put the current model out of business.

    respectfully,

    Mike Hodges
    Advance Payday
    Nashville, Tn.

  4. Mr. Hodges,

    I can respect your attempts to keep your business afloat, and heavens knows your industry is running rampant in Tennessee.

    However, I am reminded of the words shared by Milton Freidmon, the 20th centuries most important free market engineer, who stated “any forces that would eliminate, or remove, the consumer from the free market or their ability to participate in the free market, should be eliminated.”

    In a nut shell, payday lending turns on the free market and saturates the consumer in a blanket of debt until they reach the breaking point. This is an industry that removes the ability of the consumer to make a choice and therefore provide them with no alternative but to stay and take loan after loan after loan until the inevitable happens, and they default.

    Products are moving into the market as this industry is removed. Oregon is the latest example of a state that has moved to successfuly place a 36% cap on interest rates. As a result, the predator practice of payday lending may end, but in its place are a number of new loans including one being provided by a credit union with a 13% cap. Rational minds and the spirit of the free market will overcome the practices of payday lending.

    Furthermore, the payday lending industry is exactly the reason that ‘limited’ government intrusion is not only allowed, but is necessary to the success of the greatest market economy in world history.

  5. K.L. Lewis said

    People who don’t pay off the loans are probably doing this by choice. If you are an adult, you make your decisions to borrow or not to borrow based on your ability to pay the loan back. So because there are people out there that are not responsible with their money, you decide to protect them by taking the Payday Loan option away from the rest of us. Personally, I think paying $15 for a $100 loan when I have no other options, is a fair deal. Most of the people using this option do not have the credit to borrow from other sources. What will people like me do when this option is taken away from us? Who will help me fill my prescriptions when I am waiting for my disability check? I NEED THIS OPTION AVAILABLE TO ME! Payday loan companies will not stay in business at 36%! Who will fill this void for people like me? Just because there are idiots that don’t know how to manage a Payday Loan, you decide to protect them but you are hurting the responsible borrower like me! We’re all adults here. If they can’t manage their Payday Loans, don’t punish me!

  6. People who don’t pay off the loans don’t have a choice thanks to your payday lenders. People who turn to the usery practices of payday do so because they are in crisis and they are drawn in by false statements by the industry that attempts to say they are providing a service while their intention is only to exploit a need.

    Oh, so now you are on disability…hmmm, you didn’t mention that in another post that you provided. However, I’m used to industry reps trying to make the same stale arguments that I was trained to provide when I managed a payday lender. They were false statements then and I know they are today. NO ONE IS FILLING PRESCRIPTION DRUGS WITH PAYDAY LOANS FOR VERY LONG BEFORE THEY WILL BE FORCED TO DEFAULT ON THE LOAN.

    If anyone uses this predator practice to cover a repetitive expense like prescriptions will default in short order right after they take a loan from their third lender which is no being used to payoff the first two lenders. The debt cycle you are advoacting is a system meant to saturate the customers financial position to the breaking point. When the customer defaults they eventually will be sent to collections agents who will threaten court and other destructive practices with no regard for the fact that it is the industry itself that put the customer there.

    I have no empathy at all for this industry and I certainly hope it rots on the vine, falls to the ground and dies….

    The free market will provide a solution once they have blown away in the wind.

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