Las Vegas Sun

November 25, 2015

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J. Patrick Coolican:

High-interest lenders need more, not less, supervision

To prevent payday loan abuse, House bill promoting deregulation must be stopped


Sam Morris / Las Vegas Sun

Photos show some of the payday loan businesses located on a stretch of Charleston Boulevard between Eastern Avenue and Rainbow Boulevard.

J. Patrick Coolican

J. Patrick Coolican

Joann Little had a terrible streak of luck about five years ago. She was supporting a daughter in college when she was forced out of an apartment because it was being converted into a condominium and all the residents had to move.

Then she rented a condominium, but the owner went into foreclosure, requiring another expensive move. All the while she was fighting breast cancer, which meant added medical bills.

She was surviving but then made a terrible error: She took out a $300 payday loan from Handy Cash Loan Center at more than 1,000 percent annual interest. She paid and paid but could never get it to zero, especially when she was laid off from her job as a radiology transcriptionist at Valley Hospital.

Little is among thousands who turn to high-interest, alternative financial products such as Handy Cash. That’s obvious from driving around the Las Vegas Valley — payday lenders and title loan stores seem to anchor every other shopping center, and not just in working-class neighborhoods. There are 421 branches of high-interest loan licensees in Nevada, most here in the Las Vegas Valley, according to the Nevada Department of Business and Industry.

According to the results of a recent survey by the Federal Deposit Insurance Corp., Nevada leads the nation in the percentage of residents who are “underbanked” — meaning they have some sort of bank account but also resort to high-interest loans from nontraditional lenders to make ends meet. In theory, a borrower uses these services to tide him or her over until the next paycheck because he or she doesn’t have access to a bank loan or credit card. One-third of Las Vegas Valley residents use these services.

This is worth considering as Congress mulls loosening regulation of an industry that its critics charge is by nature predatory and traps borrowers in high-interest debt — a legalized usury that redistributes money up the income ladder from the working classes to the lenders. According to a recent report from the Pew Charitable Trust, the average borrower takes out eight $375 loans per year and spends $520 on interest.

In a large study of Oklahoma borrowers, 80 percent of borrowers took out more than one loan in a year, and of those, 87 percent received new loans within the same pay period as receiving the previous loan.

According to a 2011 study from the Center for Responsible Lending, “In their first year of payday loan use, borrowers are indebted an average of 212 days. Over the full two-year period, borrowers are indebted a total of 372 days.”

Consumer advocates say borrowers end up on a debt treadmill, using one loan to pay another or paying off a loan but quickly needing another, all the while racking up interest and fees.

The industry rejects the idea that its borrowers are in a debt trap and says it provides emergency credit to people who can’t get it from traditional sources.

Amy Cantu, spokeswoman for the payday lenders trade group Community Financial Services Association of America, said, “We’re seeing that consumers are making a clear choice to use our product because they like the product. They weigh different products and consider the costs and consequences, and in many cases the payday loan can be a less expensive option than unregulated loans or overdraft fees from a bank. They are looking for a product that will cause them the least pain to overcome their short-term financial difficulty.”

David Stoesz, a professor at Mississippi Valley State University, wrote a paper casting doubt on the notion of a debt treadmill. In a phone interview, he told me his working hypothesis is that some consumers use the alternative lenders rarely and pay off the loan immediately; another subset find it useful but sometimes get in trouble; a final subset are abused by the system, using multiple lenders and seeing their circumstances exacerbated by the high-interest loans. He said we need more evidence to evaluate the exact breakdown.

Stoesz said that given that most loans are paid off rapidly, it’s possible that people might take out multiple loans not because they are using one loan to pay off another, as in a debt treadmill, but because they are in a state of perpetual economic crisis. In this formulation, the borrower determines that a high-interest loan is worth it if it means fixing an old car that will allow them to get to work or preventing a utility shutoff.

Still, Stoesz is by no means sanguine about the industry, especially in the absence of proper regulations to curb abuses: “Unregulated, the fringe economy not only adversely affects the poor but also diverts a significant portion of social welfare funds — perhaps as much as 10 percent — to companies that market financial products with high fees and interest rates. As a result, too many low-income households find themselves in an economic vortex that spirals downward with increasing velocity.”

This is worth considering as Congress mulls loosening industry regulation.

Although legislation won’t pass this session, a bipartisan group of legislators is clearly trying to build momentum for future sessions. HR 6139 would create a federal charter for these financial products under the supervision of the Office of the Comptroller of the Currency. Why? To begin with, the legislators are seeking to shield the high-interest lenders from the Consumer Financial Protection Bureau, the new federal agency charged with regulating financial products and whose aim is to prevent the kind of predatory lending that has become all too common in recent decades.

As it happens, the Office of the Comptroller of the Currency thinks this is a terrible idea. Grovetta Gardineer, deputy comptroller for compliance policy, testified before Congress on the bill, saying the entire business model is “dependent on effectively trapping consumers into a cycle of repeat credit transactions, high fees and unsustainable debt.”

The bill also would strip away the requirement that lenders reveal the annual percentage rate of a loan, a 40-year-old Truth In Lending Act provision.

Most important, the proposal would cripple Nevada’s attempts to regulate the lenders. Barbara Buckley, former speaker of the Nevada Assembly and primary author of Nevada’s own consumer protection law in this realm, is the executive director of Legal Aid of Southern Nevada. She wrote a letter to Sen. Harry Reid in July asking for his help to stop the deregulation: “By getting a (federal) charter, companies could evade state consumer protections that are not replaced by equivalent or stronger federal law ...”

Nevada’s own law has been instrumental in stopping the worst abuses. Like Little, Jeannie Richard also took out a payday loan from Handy Cash. Though gainfully employed in medical billing, she was a single mom supporting three children plus three grandchildren when she was laid off after 22 years on the job in 2007. Her unemployment compensation was $1,300, but she was paying $1,150 in rent. “I was barely struggling to keep our family from becoming homeless,” she said.

Even after Little and Richard went into default, Handy Cash continued to charge more than 1,000 percent annual interest, plus additional fees, which violated Nevada law.

No surprise there; truly predatory lenders seek to lend to borrowers whose ability to repay is questionable.

I asked George Burns, the commissioner of the Financial Institutions Division of Nevada’s Department of Business and Industry, why lenders would give a loan to someone who can’t repay. In an email, he responded: “Those borrowers who cannot afford to repay all principal and interest end up on a ‘debt treadmill’ and keep paying high interest, for extended periods of time, that may end up being a multiple of the amount originally borrowed. The profit margin can still be lucrative in these circumstances.”

Under Nevada’s statute, Handy Cash was illegally overcharging Little and Richard. Once in default, the lender can only charge the prime interest rate plus 10 percent, not the more-than-1,000 percent that it was charging.

(The law also doesn’t allow lenders to seek criminal sanctions against borrowers for passing what amounts to a bad check, another key consumer protection.)

Legal Aid of Southern Nevada filed a class-action lawsuit against Handy Cash over the interest rates and fees it charged.

Legal Aid won.

The owner of Handy Cash declared bankruptcy, but because the law required him to provide a surety bond, the borrowers still received a small amount of compensation.

Cantu said Community Financial Services Association of America members — including 11 in Nevada comprising 100 storefronts — have created industry standards to prevent abuses. She also said the members welcome both state and federal regulation and have taken no position on the proposed federal law because the bill would only affect lenders who make loans of more than 30 days. Consumer advocates are skeptical and suspect the payday lenders would begin writing 31-day loans if it means less regulation.

I went to a financial services hearing recently as the division considered regulatory changes for high-interest lenders. Ever since the Buckley statute, NRS 604A, became law, there’s been a constant push and pull with regulators and subsequent legislative sessions.

It was a bit surreal, a bunch of people in business suits and crisp shirts debating the finer points of gouging the desperate.

Given the sheer number of Nevadans who are using these loans, we need people such as Buckley and Burns to prevent the worst abuses.

That means killing HR 6139 with due haste.

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