Over the last 10 years, payday lenders have proliferated within low-income communities nationwide, advertising themselves as a quick and easy way to make ends meet. In reality, these loans, with onerous fees and interest rates in excess of 100 percent, cost low-income workers billions a year, and often trap borrowers in a long-term cycle of debt.
Despite their predatory nature, these lenders can seem a necessary service to cover expenses for those who lack access to traditional financial products and are trying to get by on paychecks that are too small to begin with.
President Obama recently traveled to Birmingham, Alabama, to announce that the federal Consumer Financial Protection Bureau will propose new rules to limit the predatory practices of payday lending. While this is welcome news for many, some aren’t waiting for federal rules before taking local action.
One organization at the forefront of this fight is the Alabama Asset Building Coalition (AABC). Among AABC’s many areas of work is challenging the predatory nature of the payday lending industry in the state through consumer education and legislative advocacy. America’s Tomorrow spoke with AABC’s Executive Director Mike Milner on how predatory payday lending has been stripping wealth from Alabama families.
How does predatory lending affect the Alabama economy?
$48 million is pulled out of the state of Alabama annually through the payday lending industry. For every $1 that is paid to a high-cost lender, $2 is taken away from the local economy due to lower consumer spending and additional debt burdens leading to bankruptcy.
Dr. Lonnie Hannon III at Tuskegee University has researched the impact of payday lending in Alabama, particularly in communities of color. He showed that payday lenders target low-income communities of color because they don’t have the best credit and are considered easy pickings. The challenge with this population is that because of their lack of income, payday loans were being used to make ends meet, as opposed to being used for an emergency.
When did payday lenders come to Alabama?
Payday lending came to Alabama in 2003, when the state legislature created the Deferred Presentment Services Act, which allowed for up to 436% APR on these small loans. That means that a $500 loan could cost a person over $2,000. Originally the law said that the borrower cannot have more than one $500 loan open at a time; however there was no process set up to verify any outstanding loans. A borrower would borrow $500 here and then maybe two weeks later go down the street to borrow another loan. The normal customer has at least five loans. People were owing thousands of dollars and using their entire paycheck to refinance these loans, driving many people into bankruptcy, having already low wages garnished, and more.
I live on the eastern part of town in a nice middle-class neighborhood. Within a mile radius, there was a thriving area with grocery stores and restaurants, a very popular area. Then the payday lenders moved in and in many cases, they would move in right next to each other. There might be 14 or 15 of them in one neighborhood. Eventually other retail stores started moving out, grocery stores started closing. The commercial bank moved out, payday lenders moved in. This was a booming area years ago — the negative economic effect of payday lenders has been devastating to the community.
Why did you choose to focus on payday lending?
We held listening sessions all over Alabama, talking to individuals and businesses about what they needed to build assets. As we talked to low-income people, payday lending became more prevalent. It was the opposite of asset-building, it was asset-stripping out of communities. This issue is just as important as teaching someone how to save. Low-income people really need to be in the mainstream of financial services for their borrowing and lending. The problem is that the payday lending industry targets those with less access to credit and who tend to be the most vulnerable. So we began our campaign three years ago to try to increase consumer protections through the state.
How are you addressing payday lending?
Out of all of this we created a policy organization, the Alliance for Responsible Lending in Alabama, which includes a number of powerful organizations, such as the YWCA, AARP, and NAACP.
To date, we’ve been able to get an administrative ruling from the State Banking Department that ensures borrowers are not taking out multiple loans at once. That rule is set to go into effect in June of 2015.
Overall, we see our role as being the educators on the issue. We have explained to folks across the state the challenges of payday lending. We also developed a 101 booklet and a video, explaining the issue. We use those as educational training tools, we work with our partners to have town hall meetings and workshops across the state.
What are you planning for next?
We’re hopeful for having new legislation that in some way reduces the interest rate. In the meantime, we believe that we have a responsibility to educate the community and to look at alternatives to payday lending that doesn’t gouge people.
How does this relate to the national conversation on predatory payday lending? What can be done to address this problem?
President Obama came to Birmingham, Alabama, a few weeks ago to announce the rule currently under consideration at the Consumer Financial Protection Board regarding payday lending. Before his announcement, he met with our group. We were very honored.
I’m excited about the proposed new rule, especially the affordability piece. Anything that can be done on a national level that would reduce the number of payday lending institutions, or push them out of the business. I think that is something that would help reduce the number of people using payday loans.