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Payday Lending: Without reform the industry harms families

Posted by Stephen on January 29, 2008

OpEd By CHRIS FREUND AND DOUGLAS SMITH

Congress passed the Truth in Lending Act 40 years ago to ensure that citizens could make fair comparisons when borrowing money on credit. For this reason, the law requires interest rates to be listed annually rather than by week or day, meaning all lenders must tell you the annual percentage rate for loan products – allowing you to compare and get the best deal. That’s why it is called truth in lending.

The true rate helps us compare loan products when buying a car, a house, or even opening a 90-day line of credit at the local Home Depot.

Sadly, the payday lenders currently fighting against reasonable interest-rate reform in Virginia want to create their own rules and tell you a two-week loan does not have an annual percentage rate. They insist that the calculation doesn’t really apply to their “short-term” loan. Even though the Bureau of Financial Institutions suggests that many payday loans get rolled over and over for a long period of time, payday lenders allege that it is unfair to describe their high interest rates on an annual basis.

But that’s just plain wrong.

When payday lenders advertise their loans without telling you that the annual percentage rate is 391 percent, they violate both the Truth in Lending Act and the Virginia Payday Loan Act.

Truth and honesty seem to be a struggle for payday lenders in Virginia these days. The picture they paint of their services just doesn’t fit with the reality of Virginians’ experiences with high debt and abusive collection practices. For instance, Virginia’s Bureau of Financial Institutions recently fined Check N Go, one of Virginia’s largest payday lenders, for $100,000 for multiple violations. Add this to a recently surfaced recording of a lender impersonating a sheriff, whistle-blowers saying they were trained to threaten to arrest customers on the day loans were due, and fines for putting customers’ personal information at risk – and it seems honesty may not be such a virtue for these companies.

Don’t be misled by the advertising: Payday lenders in Virginia are struggling with the truth.

We know families are facing tough financial times right now. The shaky economy, the soaring gasoline prices, and rising home foreclosures demonstrate how those with unsteady finances are not the beneficiaries of quick credit by predatory lenders.

Because a person must pay back $575 for each $500 borrowed, every two weeks, from each lender he sees, a cycle of debt is quickly created. That is why so many cash advance shops offer the first loan “for free.” The incentive isn’t meant to get you in the door like a sale at the supermarket. Instead it entices you to borrow as much as you can, because payday lenders know that you will likely be forced to borrow again to cover the first loan.

Borrowers are like runners in a marathon who are so weighed down by unreasonable interest that they struggle to get from milepost to milepost – much less actually get ahead. And once in the payday-loan debt cycle, it can take months, or years, to escape.

In fact, the typical borrower in Virginia takes out eight to 14 short-term loans a year.

Payday lenders claim that without their services, people will resort to “loan sharks” or other illegal means to find money. The truth is that there have always been alternatives to loan sharks and payday lenders: families, friends, congregations, and social-service agencies. In fact, there are more alternatives now than ever, as increasing numbers of credit unions offer competitive products.

The radical difference between payday lenders and all of the alternatives is that the alternatives want to help break the cycle of need while the lenders’ business model requires the creation of more customers to keep their 800 shops open.

Payday lenders will not tell you the truth about what is happening, but the faith community and social-service providers speak plainly. While people once came to our ministries asking for money to help out with a light bill or rent, families now ask for financial assistance to pay off the lenders. One ministry in Charlottesville, Love INC (In the Name of Christ), recently stated that more than 60 percent of the financial assistance requests received are used to pay off payday loans – still leaving lean times for families between jobs or in emergency situations. Social-service providers are not shy about exposing the horrific financial crisis the industry inflicts, and they should know – they see how predatory lending exacerbates poverty every day.

We agree that money gets tight at times. And while no one denies the need for short-term credit, families trapped by payday lenders are not as ignorant as the payday industry treats them. But they are desperate enough to be a target for those looking to turn a quick buck.

The truth is that the payday-lending industry does not fill a need as much as it creates more economic despair. Virginia would be better off without payday loans. Yet as a compromise, we believe the General Assembly should reform the payday-lending interest rate to the 36-percent cap enforced on other lenders in the commonwealth. That would help many Virginia families – and that’s the truth.

Chris Freund is the Family Foundation of Virginia’s vice president for policy and communications. He may be contacted at www.familyfoundatio n.org. Douglas Smith is the executive director of the Virginia Interfaith Center for Public Policy.He may be contacted at www.virginiainterfa ithcenter. org or 804.643.2474.

Opinions expressed by OpEd writers do not necessarily reflect those of Conservative Viewpoints.

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