Sunday, December 07, 2008

Moving Memphis From Pay Day Lending To Micro-Lending

It seems more than passing strange that at a time when local government is considering a lawsuit against the predatory lending that contributed to Memphis’ foreclosure catastrophe, some members of Memphis City Council would try to defend the predatory lending that is the underbelly of our personal finance businesses – pay day loan companies, title loan businesses and check-cashing storefronts.

It made for an odd tableau at last week’s City Council meeting as high-powered, politically-connected lawyers stood side-by-side with clients who looked like they stepped out of one of those newscasts of people whose trailers had just been hit by a tornado. To their credit, Council members did vote unanimously to move ahead with a change that was almost negligible in its impact, but only after some seemed to try to throw a lifeline to members of these parasitic businesses.

It is troubling what we are willing to accept as part of our city – as long as it’s “only” the poor who are being victimized. City Councils in the past have shamelessly acted as an enabler to the worst visual polluters in Memphis – the billboard industry – and given them carte blanche to pepper inner city neighborhoods with an endless array of ads for liquor, cigarettes and gambling. These billboards deserve greater regulation, but there’s been little will to do it, so we guess that it’s no surprise that some Council members – ironically, representing inner city constituents – seemed to grudgingly go along with a modest requirement that the companies could not be located less than 1,000 feet from each other.

There’s Legal And There’s Legal

We admire Councilman Bill Morrison for putting it on the City Hall agenda. His concern is well-placed, and because of him, we did at least acknowledge the presence of companies in Memphis whose introductions at City Council seemed only to be missing the theme from Jaws, so willing are they to feast on desperate victims trying to keep from downing in financial emergencies.

Councilman Morrison, who is emerging as a reliable voice of reason and source of new thinking, has greater ambitions for regulating the companies, but at least this was a start. It’s hardly a fair fight in City Hall, because for too many politicians, money talks, and as usual, there’s no one lobbying for the poor.

Their neighborhoods remain dumping grounds for tawdry businesses that prey on them and are justified by some Council members on the simplistic grounds that they are “legal.” Well, so are strip clubs, but no one wants them in their neighborhoods.

Naked Greed

As a result, valiant Thomas Pacello, assistant city attorney with the Memphis and Shelby County Division of Planning and Development, was left to reason with some Council members who seemed unable to grasp the simple notion that if government can regulate naked bodies, surely it can regulate naked predatory lending.

Ultimately, the new ordinance will not end the financial strip mining of our poorest neighborhoods, but at least it sends a message, albeit a soft one, that our community is concerned about companies that charge so much in interest that they make usury look inviting. Despite that, Council Member Barbara Swearengen Ware said that “nobody’s holding a gun to these people to make them walk in and hand somebody the title to their car.”

We couldn’t help but think of the famous Woody Guthrie lyric: “Yes, as through this world I've wandered/I've seen lots of funny men/Some will rob you with a six-gun/And some with a fountain pen.”

Robbery By Another Name

We’re certain that Council Member Ware’s true feelings aren’t as callous as they sounded, because there are places in her district where desperation is as real to her constituents as guns in their backs. And like the “company store” before it, once you start doing business with the loan predators, it’s awfully hard to ever pay off your balance. After all, the business model is built on keeping you in debt.

When the annual interest rate is about 450%, it’s pretty hard not to stay upside down in the loan. Consumer Federation of America conducted a survey of 100 lenders that showed they frequently charged 650%, a rate that stirs up nostalgia for the days of the old Mafia loan shark.

Parenthetically, all of this conjured up the war in the blogosphere some time back when it was pointed out that there was a strong correlation between the number of these pay day lenders and Christian Right strongholds in the Bible Belt, despite the Biblical admonition against usury. Pay day lenders have been able to side stepped usury limits by affiliating with a South Dakota or Delaware-chartered financial institution.

Big Bucks From Poor People

You wouldn’t know it by looking at the sometimes seamy storefronts, but this is big business. According to the Center for Responsible Lending, “despite attempts to reform pay day 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.”

The Center also concluded that “states that ban payday lending save their citizens an estimated $1.4 billion in predatory payday lending fees every year. “ North Carolina shut down payday lending in 2006 and an analysis by the University of North Carolina said that the closing “had no significant effect on the availability of credit for the households of North Carolina.”

To fill the gap in states without payday lending, some credit unions have set up Salary Advance Loans with annual interest rates of 12%. While we are supportive of emulating North Carolina’s actions, it’s unlikely to happen, because, to repeat, there aren’t any high-paid lobbyists in Nashville representing the interests of the state’s low-income families.

Memphis Microcredit

Perhaps, what we need to do here is to experiment with microcredit, the kind of loans that have proven successful for Third World nations. It began in Bangladesh, and there are census tracts in Memphis whose infant mortality rates and other disturbing demographic statistics aren’t too different from that South Asian nation.

Microcredit is even gaining attention of the traditional financial industry, which is considering ways to get in the game.

In other ways, if Memphis City Council wants to help out, it could consider ways that City Hall could help set up some form of micro-lending here. We are willing to bet that just like and other micro-lending sites, there are an awful lot of Memphians willing to lend money to allow people to have more financial sufficiency and to engage in self-employment projects.

Memphis Branch Of Kiva

It may be that Kiva isn’t the exact model for our city, because it’s aimed especially at entrepreneurship, but we love the person-to-person aspect of the program. But if we can inspire and create national model programs like MIFA and Church Health Center, and if social entrepreneurs like Aaron Shafer can imagine ways that poor people can control their own destinies, surely we can come up with the model micro-bank for Memphis.

Perhaps, besides offering a new way to address the financial needs that are being exploited in neighborhoods across Memphis by predatory lenders, this kind of program could also contribute to an attack on the divisions that weaken us at the time when community connectivity is a competitive advantage.

We leave the details to people a lot smarter than we are, but put us down to buy the first share in this revolutionary people-to-people business.


Anonymous said...

Agreed, agreed. While I like the investment model where you see a return on your funds, helps local families with one-time costs. It's not microlending, it's microgiving, but it's a start.

Michael said...

I disagree completely. The people of this nation need short-term lending options available to them. By banning the payday loan industry you're taking away that credit option all together. Obviously, there is a need for it, or people wouldn't be using them.

Payday lenders get a bad rap for charging high interest rates, but it is a short-term loan, with no credit check. The people who get loans with payday lenders have NO OTHER OPTIONS!

Additionally, payday lenders run on very thin operating margins, typically 10-12%. I don't see the problem with the industry. In fact, I believe it to be helpful to a niche market in our community.

In North Carolina bankruptcies have sky rocketed since the dismissal of payday loans. You're telling me there's no need for short-term financing?

Anonymous said...

"The people who get loans with payday lenders have NO OTHER OPTIONS!"

I think this was what the blog was exploring, i.e., other options.

What is needed is non-profit bank bank that provides life-skills training classes and manages participants moneys so that theses predatory businesses are no longer needed. Back it up further, you really need a housing component as well since it's likely that the rent is what forcing these cash strapped folks to use these fast cash places.

Workforce housing coupled with money management. Catch them before they have to go to the loan shark or MIFA ( emergency housing). This is a critical demographic to catch as they have yet to give up and resort to "alternate" methods of income. These folks are working hard and going nowhere fast.

payday loan software said...

Payday loans are a great way to avoid bank fees!

Anonymous said...

a bank like Hope Community Credit Union?

Anonymous said...

Funny, Mrs Ware seems to be missing that her own district is one that suffers year after year with little improvement.
Where does Joe Brown stand on this?
Summer Ave. has too many in a few square blocks.
The eagles beak, right in the eye.
Oppression with no reprieve, ever, slavery? Oh yeah.

I spell Memphis, A-T-R-O-C-I-T-Y.

Payday Lending Rep said...

Calling payday lender predatory is a misnomer. “Defining and Detecting Predatory Lending,” a study by Donald P. Morgan, Research Officer, Federal Reserve Bank of New York, concludes that payday loans do not fit the definition of predatory because they are not a “welfare reducing” form of credit. To the contrary, the author suggests that payday lenders enhance the welfare of households by increasing the supply of credit.

While critics of the industry assign labels to payday lending customers in an attempt to further their political agendas, the fact is that we provide services to a broad cross section of Americans because there is widespread demand for the financial service we provide. Our customers represent a large demographic segment and cannot be grouped based on race, sex or religion.

Because payday loans are two-week loans they cannot be offered at the same annual rates as annual credit products such as credit cards, auto loans and home mortgages. Payday advance compares favorably to many consumer alternatives, even when expressed as annual percentage rates for two-week terms: $100 payday advance with $15 fee is 391% APR.; $100 bounced check with $55.59 NSF/merchant fee is 1449% APR; $100 credit card balance with $37 late fee is 965% APR; a $100 utility bill with $46.16 late/reconnect fees is 1203% APR; a $100 off-shore Internet payday advance with $25 fee is 651.79% APR; $29 overdraft protection fee on $100 is 755%. The only way to reach the much-hyped triple digit APR is to take out one advance and continue to renew the same advance every two weeks for an entire year. State laws and industry best practices do not allow this to happen. In most of the 37 states that regulate payday lending, rollovers or loan extensions are either limited or prohibited. In states without limits, CFSA members limit the number of rollovers to four. It is not possible for someone to rollover an advance for an entire year or to accrue the kinds of fees claimed by payday lending critics.

The hard reality is that employed, well-meaning Americans sometimes fall short of cash between paydays and efforts to prohibit or limit the supply of products in this market hurt consumers.

Anonymous said...

A great study would be to figure out what these payday loans are paying for....

These numbers could be provide some great insight into the consumer habits and appropriate corrective measures that would obviate the need for these loans.

Most likely we have a lot of hard working people with lousy jobs with salaries that barely cover the essentials.

Anonymous said...

Yeah, where I live mostly poor people use them, for necessities and to get their checks cashed to buy drugs to self-medicate the effects of Memphis corruption on their households. Booze, crack, pot, etc.

People DON"T NEED short term lending options, they need banks that will cash their checks without accounts and some way to protect the banks from fraud.
Felons re-entering NEED EFFECTIVE retraining.

Payday lenders thrive on strife. Deal with that.

raya said...

insightful...but the thing I love about Payday loans is that they are meant to be short term and can help in a difficult situation if you are running a little short on cash during the month.

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