Advanced Debt: Stakeholders seek to impede payday loan growth

Desperate times call for desperate measures. For many, desperate measures often mean taking out payday or title loans. While that may be the only option, it may not be the most financially sound.

“The payday loan system makes you a slave,” said Ron Penney, a private wealth adviser with Penney Murray & Associates, Ameriprise Financial Services. “Interest either works for or against you every day of your life.”

Using a payday loan on goods that depreciate  – a car, clothes, food or even to pay rent – leaves the borrower with nothing but a potentially astronomical interest payment. But for many, it’s a fact of life.

“It’s the basic law of supply and demand,” said Rep. Kevin Austin, R-Springfield, noting the need for some type of short-term loan system. “Are they the best? Maybe not, but they can serve a legitimate purpose.”

In 2016, the Queen City and the state aim to take charge of the industry through alternative options and new regulations.

Beyond poverty
Despite the payday industry’s stigma as a go-to for the poor, CU Community Credit Union President Judy Hadsall believes that’s a falsehood. During a recent survey of its members, the credit union found roughly 20 percent use or have used a payday loan.

“People think this is a problem strictly with the low income,” she said. “But it crosses all demographics. Sometimes, you just need a little extra money.”

The nonprofit Pew Charitable Trusts reports more than 2 million Americans annually use auto title loans, in which they borrow against the value of their cars, with the title used as collateral. Another 12 million Americans take out the more popular payday loans each year, in upwards of $7.4 billion in loans annually.

According to the Missouri Division of Finance, roughly 2 million payday loans were taken out in Missouri from October 2013 to September 2014, the most recent period recorded. The average amount borrowed was nearly $310 with an average annual percentage rate of 452 percent.

In the Show-Me State, customers can roll over the payday loans six times, adding additional fees each time, but the legislature may soon put a stop to the practice.

One week into the new session, Rep. Don Gosen, R-Ballwin, has filed a bill seeking industry changes. Among other things, House Bill 1881 would limit renewals to two from six rounds and prohibit a borrower from having more than $750 in outstanding loans at one time. The proposed law also would require the Division of Finance within the Department of Insurance, Financial Institutions and Professional Registration to develop and administer a real-time statewide compliance system for licensed payday lenders to record each payday loan transaction.

“This would be a step in the right direction,” Austin said. “The House doesn’t want to interfere with the people’s right to contract and burden an industry with regulations. But if these institutions are acting like a bank, they should be subject to the same type of oversight and regulations as other financial institutions.”

Springfield Business Journal reached out to multiple Springfield-area payday and title loan companies for comment on the pending regulations, but calls were not returned by press time.

Breaking the cycle
In the Queen City, roughly 26 percent of the population lives at or below the federal poverty level, leading the Federal Reserve to classify the community as in “severe fiscal distress.” In an effort to break the payday loan cycle, CU Community Credit Union plans to roll out a payday loan alternative, dubbed the Fresh Start Loan Program.

Funded through a $2 million U.S. Treasury grant, the credit union twice applied for the money, first going through the laborious process of becoming a Community Development Financial Institution to even qualify. Once all paperwork is signed by the Treasury, Hadsall hopes to roll out the first phase of a potential four phase program this spring – which also includes a credit builder loan program, payday consolidation loan and title loan alternative.

The initiative would offer loans of $500 or less for 26-28 percent interest. While still considerably higher than traditional interest, the rates fall far below the 400 percent or more consumers can pay at a payday loan company. Hadsall said an anticipated high default rate keeps the interest rate from going lower.

“That’s concerning because we want to help, but not to the detriment of the credit union,” she said.

Nationwide, other credit unions with similar programs have reported a 10 to 15 percent default rate. Comparatively, Hadsall said CU Community Credit Union has a less than 1 percent default rate on traditional loans.

Those seeking a loan also must sign up for a credit union account, which can be opened for as low as $1, and maintain that account for 90 days before they’re eligible for a loan.

“We need to know they are committed and willing to work to pay this back,” Hadsall said, noting after the plan’s announcement the credit union was inundated with calls by people seeking free money. “That’s not how a loan works.”

Will the alternative help or just be intimidating for those seeking quick cash? Hadsall said that was a serious consideration, but only time will tell.

Financial adviser Penney said until Springfield can loosen the grip of poverty on its residents, little will slow payday loan growth.

“When you spend more than you make, you go into poverty. That’s just a fact,” he said. “Springfield is attractive to those in poverty. We have a lower cost of living and you can make a better life here than in other, more expensive towns.

“As long as that is a reality, the payday loan industry will continue to skyrocket.”