Spiraling into Debt: Predatory lenders are on the rise

Predatory lenders offer loan options that do not directly benefit borrowers. Some might call the practice legalized loan-sharking, and it’s taking the Show-Me state by storm.

The Missouri Division of Finance licensed 1,198 payday lenders in 2004, the last year the agency released numbers, representing a 37.5 percent increase compared to 2003.

From Oct. 1, 2003, to Sept. 30, 2004, the stores made nearly 2.6 million loans, a 30 percent increase from the previous reporting period. The average loan was $241; and the most commonly reported annual interest rate was 391 percent, or $15 per $100 for 14 days.

Why would someone borrow money at such a ridiculously high interest rate?

“Instant cash,” said Bob Horton, executive director of Urban Neighborhoods Alliance.

UNA is spearheading the Springfield-Greene County Reputable Lending Collaborative, a group formed in August to educate people about the many guises of predatory lending. The collaborative has launched a local adaptation of Freddie Mac’s Don’t Borrow Trouble initiative, which teaches would-be victims how to recognize and avoid predatory lending practices.

“If the public is better educated, they will be less likely to get into that situation,” Horton said. “We definitely know it’s here … and that’s why we’re trying to hit it head on.”

Capturing customers

Payday and title loan stores advertising in the yellow pages use recurring images and catch phrases to reach customers.

Fists clenching wads of cash are common, as are smiling adults pictured with happy families. The ads promise quick cash with no credit checks and no hassles. Many lenders sweeten the deal by offering the first loan at no interest.

As of June 30, Greene County was home to 66 payday lenders – roughly 24 per 100,000 people – and 12 title lenders. For the 28-county southwest Missouri region, the Division of Finance tallied 311 payday lenders and 51 title lenders at the end of June, said Joe Crider, the division’s supervisor of consumer credit.

Jackson County had the highest number of payday lenders at 147 followed closely by St. Louis County with 124, Crider said. Jasper County had 27 and Taney County had 21.

Statewide, the number of payday lenders has ballooned to nearly 1,300, almost double what it was five years ago, Crider said. Based on a 2005 U.S. Census population estimate of 5.8 million, there are 22 payday lenders per 100,000 Missouri residents.

The Division of Finance conducts unannounced annual examinations of every payday loan and title office licensed by the state, but keeping pace with the unprecedented growth has been a “real challenge,” Crider said.

In the last six years, the number of examiners has grown from six to 10, he said. For years, a lone examiner policed the Springfield region until a second was hired in late 2004.

Keeping tabs on payday lenders

While payday lenders are examined and licensed annually by the state, Missouri law places few restrictions on the businesses compared to neighboring states.

State statute limits the maximum unsecured payday loan to $500, but does not cap the amount of interest lenders can charge on the loans.

While the most common annual percentage rate on payday loans in 2004 was 391 percent, another commonly reported APR was 469 percent, or $18 per $100 for 14 days. The highest reported APR in 2004 was 1,277 percent, and the lowest was 100 percent.

Missouri’s limp-wristed laws have essentially laid out the welcome mat for less scrupulous lenders, said John Fougere, a spokesman for Attorney General Jay Nixon.

“Missouri is clearly a state where consumers aren’t protected,” he said. “And with these payday lenders, consumers can get into a hole that they rarely get out of.”

Nixon endorsed legislation introduced last year by Rep. John Burnett, D-Kansas City, which would have limited interest on payday loans to no more than $15 per $100 of the principal amount for the first 30 days and no more than 3 percent per month for loans extended after 30 days.

The bill, which was not taken up in the Missouri General Assembly, also would have given the attorney general authority to issue cease and desist orders to payday lenders and to pursue injunctions and restitution in court, Fougere said.

“We can only take action when cases are referred to us by the Division of Finance,” he noted.

The Community Financial Services Association of America, a membership-based trade association for payday lenders, supports regulations that protect consumers and create a level playing field for lenders, said spokeswoman Lyndsey Medsker.

Medsker said CFSA members are required to follow the association’s standards, which prohibit lenders from rolling over loans more than four times. Under Missouri law, however, payday lenders may renew a loan up to six times. Payday loans are renewed an average of 2.2 times in Missouri, according to the Division of Finance.

An inside view

Derek Fraley knows a lot about predatory lenders. He used to be one.

Fraley, assistant treasurer for UMB Bank Financial Corp., worked for a payday loan office in Springfield which he declined to name, and he said the criticism aimed at the industry is well-founded.

“It got me interested in finance but gave me trouble sleeping at night,” he said.

Fraley said the company he worked for used direct-mail marketing to reach its customers base: people with poor credit.

“Poor credit means poor education,” he explained. “In other words, a sucker.”

After reeling in customers and locking them into a loan, store employees would “perpetuate the cycle” for months by renewing loans and manipulating borrowers with small cash advances, Fraley said. All the while, the interest rate was soaring, he said.

“They think you’re their best friend in the world, and you’re actually sending them into a spiral from which they’ll never recover,” Fraley said.

Fraley is one of 15 businesspeople in the local Don’t Borrow Trouble speakers bureau. Fraley said the collaborative’s efforts to assemble a list of reputable lenders are encouraging. Until Missouri’s laws are strengthened, teaching people how to avoid the financial traps set by predatory lenders is the best strategy, he said. Speakers are available by calling UNA at (417) 831-6200.

Fraley, who left the payday lending industry in 1999 after six months, is astounded at the number of payday and title loan offices sprouting up along Springfield’s thoroughfares and in its strip malls.

“These things are coming in like a cancer, a cockroach,” he said. “You can stomp on one, but three more will come up.”

Limited credit options

Borrowing options are scarce for the typical patrons of payday and title loan offices.

In most cases, people turn to predatory lenders because banks, credit unions and other more conventional lenders have rejected them, said Mike Cherry, president and CEO of Consumer Credit Counseling Service, a sponsor of the Don’t Borrow Trouble speakers bureau.

“Most of these people feel that they have no other choice,” Cherry said, “and they just don’t look at the whole picture.”

Medsker at CFSA defended payday lenders as the best alternative for short-term credit.

“Most of the vocal critics are quick to use terms like predatory but slow to offer other alternatives,” she said. “The reality is that people do need access to funding in between paychecks.”

But Horton at UNA wants the public to know there are other ways to make ends meet, starting with better money management.

“You’re only making things worse when you go to these payday loan places,” he said.

Horton and Cherry are working to broaden sub-prime lending options that would allow people to borrow a few hundred dollars needed to cover bills or emergency expenses.

Consumer Credit Counseling has prefiled more than 8,500 bankruptcy certificates on behalf of clients, many of whom have a significant amount of debt with payday lenders, Cherry said, adding that the lenders usually aren’t flexible when it comes to restructuring a customer’s debt.

“They want their money,” Cherry said.