(Reuters) – Borrowers in California took out 40% fewer payday loans in 2020 compared to the year before, the state’s consumer finance regulator said in an annual report on Thursday.
Data payday lenders submitted to the California Department of Financial Protection showed that the aggregate value of the loans taken out in 2020 also dropped 40%, to $1.68 billion from $2.82 billion the year before.
DFPI Acting Commissioner Christopher Shultz said that state and federal economic intervention during the COVID-19 pandemic, including federal relief checks, expanded unemployment insurance, and various types of loan forbearance, are a likely factor in the decline.
But Shultz said that while the relief helped keep California consumers afloat financially, the agency is watching what happens “as we come out of the pandemic.”
“Some of the economic consequences will be downstream and we need to monitor that closely,” he said.
Shultz took over the agency in mid-June when its former Commissioner Manuel Perez departed for an in-house role at cryptocurrency exchange Binance.
Payday loans are small-dollar, short-term loans made to customers who hand over a signed check for the amount. The lender provides the funds minus a fee and agrees to cash the check within a month.
Around half of California borrowers who used the loans in 2020 made less than $30,000 a year, according to the DFPI. The average annual percentage rates on the loans was 361%.
Payday lenders in California are not alone in experiencing a decline in business. Aggregate weekly lending in nine states dropped 60% between February 2020 and May 2021, according to data from Veritec Solutions, which manages payday lending data for state governments.
Kiran Sidhu, policy council at the Center for Responsible Lending, said on Thursday that the correlation between pandemic relief and payday lending illustrates how low income borrowers use the loans as a financial stopgap.
“If we paid people a universal basic income, or paid them better wages, they probably wouldn’t need these products,” she said.
The DFPI report also showed that 2020 saw a 27.7 percent drop in the number of payday lenders in the state, leaving 1,121 licensed locations.
Ed D’Alessio, the executive director of consumer finance trade group INFiN, said in a statement on Thursday that 2020 was “was a difficult time from a business standpoint.”
He attributed the downturn in small dollar loans to consumers staying home, paying down debt and receiving government aid.
For those who did use consumer finance products, “we have been proud to be there during this time of need,” he said.
In the winter of 2016, Missy Juliette, now 36 and of St. Paul, Minn., had to choose between paying the rent and settling overdue heating and electric bills. Her credit cards were maxed out, and her wages were being garnished for back taxes. Getting a small loan from a bank wasn’t an option, nor was borrowing from family. “I’d asked them for money before and couldn’t face the humiliation of it,” she says.
So, as millions of Americans do every year, she went outside the traditional banking system, turning to payday lenders to borrow $730 in two separate loans. The interest rates were high—with one at 266 percent—and she was unable to pay the loans off by her next payday in two weeks, as required. In four months she owed $960 on that initial $730.
For people like Juliette who need emergency money quickly, payday lenders have long been among the few available options. They are ubiquitous in the U.S., with an estimated 13,700 storefronts in 2018, many in low-income and Black communities. Although 18 states and Washington, D.C., have strong interest rate caps on payday lending, in others some lenders charge annual interest rates that surpass 600 percent.
But in the wake of the COVID-19 pandemic and the inequalities it exposed and exacerbated, there is a renewed focus on the need to counter payday lenders by bringing better, fairer banking services—personal loans, but also mortgages and small business loans—to the primarily low-income people who have long had difficulty accessing them.
The federal government as well as corporations and at least one bold name philanthropist are injecting money into Community Development Financial Institutions (CDFIs), financial service providers whose mission is to bring financial services to low-income communities and people within rural, urban, and Native communities—the places many traditional banks have largely excluded. The game-changing infusion amounts to billions of dollars’ worth of investment.
At the same time, some retail banks and credit unions are launching or broadening programs that extend small low-cost loans to their customers. And some independent nonprofits are amplifying their efforts to help people escape from crippling payday loan debt and avoid the toxic impact of predatory lending.
That’s what Missy Juliette eventually did, seeking out the services of Exodus Lending, a Minnesota nonprofit dedicated to helping people get out of payday loan debt. They paid off the $960 she owed, offering her a no-fee, 0 percent interest refinance program instead.
After paying off her debt, Juliette stayed connected to the organization, even sharing her story at a fundraiser and eventually being invited to join the board of directors. Exodus Lending is weighing whether to apply for CDFI certification; meanwhile, the nonprofit did apply for a CDFI technical assistance grant earlier this year.
Here are some of the ways the federal and other funding assistance will be changing the landscape of options for people who need to borrow, and advice about how to find a community resource for affordable financial help.
CDFIs Get a Big Boost
In perhaps the most unprecedented shift, the Consolidated Appropriations Act of 2021, designed to provide financial relief during the pandemic, included $3 billion specifically for the CDFI Fund, which provides financial assistance to CDFIs and Minority Deposit Institutions (MDIs). That amount almost equals what the fund has received in total since its inception in 1994. “There’s a lot of public investment in mission-driven institutions,” says Betty J. Rudolph, the Federal Deposit Insurance Corporation’s national director of minority and community development banking.
Spurred by 2020’s national reckoning on race, CDFIs and MDIs—institutions that are often also CDFIs but serve predominantly minority communities and have minority leadership—have also attracted hundreds of millions of dollars from some of the country’s biggest technology and finance companies. That includes Google ($180M), Bank of America ($150M), PayPal ($135M), and Twitter ($100M). At the end of 2020, philanthropist MacKenzie Scott made public her gift of more than $4.1 billion to 384 organizations, with special attention to those operating in communities with “low access to philanthropic capital,” 32 of them CDFIs.
The influx of funds means CDFIs will be able to reach, and help, more customers. “We’re focused on positioning them to take these new resources to build and grow, to better serve their customers and to build wealth in their communities,” Rudolph says.
In mid-June the Treasury Department awarded $1.25 billion in funding to 863 CDFIs; 463 loan fund organizations received awards, along with 244 credit unions.
Capital Good Fund, a CDFI in Rhode Island, says it will have a transformative impact on its ability to provide unsecured personal and other loans to its customers. Unlike banks, which according to Capital Good’s founder and CEO Andy Posner look at pay stubs, credit reports, and 1099s to determine an applicant’s loan eligibility, Capital Good weighs banking history, considers letters from family or friends, and makes allowances for immigrants who may be paid cash. The process can be completed entirely on a smartphone in about 10 minutes, and decisions are made within two days. The CDFI’s small-dollar loans have an APR of 5 percent, with no application, origination, closing, or late fees.
In April, the CDFI Fund opened applications for its new Small Dollar Loan (SDL) Program, designed to compete with payday lenders. Under the program, up to $13.5 million will be dispersed to certified CDFIs to create loans for as much as $2,500, to be repaid in installments with payments reported to at least one credit bureau. The program aims to provide opportunities to the unbanked and underbanked who don’t traditionally have access to the mainstream financial system.
Other Alternatives Expand
CDFI’s aren’t the only outlets offering alternatives to payday loans. In October, America’s second-biggest bank, Bank of America, introduced a short-term cash loan program called Balance Assist. Bank clients who’ve held checking accounts for at least a year may borrow up to $500 (in increments of $100) for a $5 flat fee, repaying the advance in three equal monthly installments over 90 days.
In a press release, Bank of America called the program a “low-cost way for clients to manage their short-term liquidity needs” that is designed “to improve their financial lives.”
Almost a third of CDFIs are credit unions—nonprofit, member-owned financial cooperatives that generally offer the same services as retail banks. CDFI credit unions may also offer an alternative to payday loans called the Payday Alternative Loan (PAL). Open to individuals who’ve been credit union members for at least one month, applicants pay an application fee of up to $20 to borrow between $200 and $1,000 for one to six months at an interest rate not to exceed 28 percent. “With more funding, the agency could increase the number of credit unions receiving grants and increase the size of the grants it makes, deepening the program’s impact in underserved communities,” said National Credit Union Administration chairman Todd M. Harper in an NCUA press release this June.
Another growing option is nonprofits, such as the one Missy Juliette turned to in Minnesota.
“They consolidated my loan payments into one,” Juliette says, “so instead of paying two hundred bucks and fees a month, I paid $80 a month for a year.” In 2019 the nonprofit began reporting its clients’ timely payments to the credit bureaus. At Exodus Juliette improved her credit score and connected to credit counseling, where she learned how to create a budget and identify a student loan repayment plan that worked best for her.
In April, when Juliette had to replace the brakes and a ball joint on the 2008 Chrysler 300C she’d just purchased in February, the $600 repair bill was frustrating but manageable because Exodus had helped her build an emergency fund for such purposes.
Know the Payday Loan Options
Though CDFIs welcome clients who have poor or limited credit histories, some may require a bank account with them as a prerequisite for a loan. So it makes sense to establish a relationship with a CDFI—or, alternatively, a credit union—before you need to borrow. Joining a CDFI can be affordable. Many offer banking services at no or low cost with an initial deposit as small as $25.
Find and join a credit union. Even if you have a traditional bank account elsewhere, membership at a credit union has its advantages. The nonprofits may charge lower banking fees and offer higher interest rates on savings. Some credit unions are tied to work or professional organizations; others can be joined by paying a small initiation fee. Royal Credit Union was recently awarded $1.8 million from the CDFI Rapid Response Program. Residents of Minnesota or Wisconsin may join the credit union with a $5 donation to the RCU foundation and a $5 deposit to open a savings account. Use the National Credit Union Administration’s directory of credit unions to find one with the features you want with membership requirements you can meet.
Whether you turn to a CDFI or a credit union, look for one with a program that addresses your specific concern. The hyperlocal nature of these institutions means they often focus on solving the needs of their local communities. In North Carolina, for example, the Latino Community Credit Union offers Immigration Assistance Loans of up to $15,000 to an individual for any type of immigration-related expense. BlueHub Capital, a CDFI in Boston, has a lending program for homeowners facing foreclosure. It buys the home and sells it back to the homeowners with mortgages they can afford.
Find nonprofits with payment relief programs. Charitable organizations across the country offer everything from food assistance to help paying utilities. Modest Needs awards fee-free “Self-Sufficiency Grants” by matching applicants with donors. Groups like Catholic Charities and Lutheran Services in America provide a wide array of assistance regardless of religious affiliation.
Learn the law. The interest rate payday lenders can charge varies from state to state. Though all lenders are legally bound to disclose all fees and interest rates, it can still be confusing. USA.gov has a directory of State Consumer Protection Offices, searchable by state, where you can get help if you have a problem with a lender. Washington State’s Department of Financial Institutions, for instance, has a website and toll-free number where consumers can verify licensed lenders and learn the rights and responsibilities of borrowers.
NEW YORK (AP) — Congress on Thursday overturned a set of regulations enacted in the final days of the Trump administration that effectively allowed payday lenders to avoid state laws capping interest rates.
The House voted 218-208 to overturn the Office of the Comptroller of the Currency’s payday lending regulations, with one Republican voting with Democrats.
Thursday’s vote to overturn the OCC’s “true lender rules” marked the first time Democrats in Congress successfully overturned regulations using the Congressional Review Act.
The act was enacted in the mid-1990s and gives Congress the authority to overrule federal agency rules and regulations with a simple majority vote in the House and Senate. Its powers are limited to a certain period after an agency finalizes its regulations, usually around 60 legislative days.
The Senate voted 52-47 to overturn the OCC rules on May 11. The bill now goes to President Joe Biden, who is expected to sign it.
By overturning the Trump administration rule enacted in late 2020, Democrats aimed to stem a payday lender practice that critics had dubbed a “rent-a-bank” scheme.
While payday lenders are regulated at the state level, the payday lender would partner with a bank with a national banking charter when making high-cost installment loans. Because a national bank is not based in any one state, it is not subject to individual state usury laws.
“State interest rate limits are the simplest way to stop predatory lending, and the OCC’s rules would have completely bypassed them,” said Lauren Saunders, associate director at the National Consumer Law Center, a consumer advocacy group.
This isn’t the first time that “rent-a-bank” has been an issue. Federal regulators clamped down on the practice in the 1990s, but with the proliferation of online banking and fintech companies specializing in online-only financial services, the practice is growing once again.
An example on how the practice works can be seen in Elevate, a Texas-based fintech company that offers high-cost installment loans like a payday loan. Elevate offers loans in several states, including Arizona, which has a state law capping interest rates on payday loans at 36%. Because Elevate uses banks out of Utah and Kentucky to originate those loans, Elevate is able to make loans in Arizona for as high as 149%. In other states, Elevate makes loans with annual interest rates as high as 299%.
In a statement, Biden’s appointee to the Comptroller of the Currency said he would “respect” Congress overturning their regulations.
“I want to reaffirm the agency’s long-standing position that predatory lending has no place in the federal banking system,” acting Comptroller of the Currency Michael J. Hsu said in a statement.
While Thursday’s vote marked a first for Democrats, former President Donald Trump and a Republican-controlled Congress used the Congressional Review Act when they came to power in 2017, overturning 15 rules and regulations enacted in the waning days of the Obama administration.
Before Trump, the law was used only once, in 2001, when Republicans in Congress voted to repeal a set of ergonomic regulations enacted in the final day of the Clinton administration.
On Thursday, the House also used the act to overturn a set of regulations approved by the Equal Employment Opportunity Commission under Trump regarding employment discrimination issues. The vote was 219-210.
On Friday, the House is expected to use it again to overturn Trump-era regulations that would have allowed oil and gas companies to produce more methane when they drill.
By Michael Calhoun, President of the Center for Responsible Lending
A recent rule by the Office of the Comptroller of the Currency (OCC), a federal bank regulator, threatens to upend the rights and responsibilities between banks and their nonbank lender partners, displacing state regulators and subjecting consumers to predatory loans. The U.S. Senate has already, with a bipartisan vote, passed legislation to rescind the rule, using a mechanism called the Congressional Review Act (CRA). The House of Representatives is scheduled to vote on the measure this week to do the same, which would then send the legislation to the President’s desk for final approval. Passing this measure is needed to protect consumers and to preserve long-standing precedent permitting states to enforce their laws.
Banks regularly enter into partnerships with nonbank entities in carrying out their operations and providing services to customers. However, some nonbank lenders have attempted to use banks as vehicles to evade state laws, since banks are typically exempt from certain state laws by virtue of federal preemption. Some nonbanks have added the name of a bank to their loan documents and then claimed they are entitled to the bank’s preemption rights over state regulation and consumer protection laws, including usury limits.
This reached a peak in the early 2000s when some states moved to prohibit 400% interest payday loans. Some payday lenders responded by entering into agreements whereby they paid a small fee to a few banks to add their names to the loan documents and claimed preemption from these state laws. They combined this with mandatory arbitration clauses that effectively prevented consumers from being able to challenge these arrangements in court. Eventually, state regulators and attorneys general joined with federal regulators to shut down these arrangements. They won by utilizing legal precedent, dating back to at least 1825, that courts look at transactions to determine who was the true lender – the party with the predominant economic interest — and that state laws apply to the loan if the true lender was not a bank with preemption rights. At that time the OCC was adamant that preemption rights were not something that banks could lease out to nonbank entities for a fee. This shut down these so-called “rent-a-bank” schemes, and state laws were again enforced against these nonbank lenders.
In recent years, lenders have again sought to use these bank partnerships to avoid state regulation and laws. Last October, the OCC reversed its prior position by issuing a rule that seeks to displace this longstanding law by both asserting that the OCC has authority to override the court true lender doctrine and enacting a standard that would specifically grant preemption rights to nonbank lenders if they merely put the partner bank’s name on the loan document.
This rule would upend the current bank regulatory system without a coherent alternative. It would grant nonbank entities sweeping preemption without the chartering requirements or oversight requirements of banks.
During a recent congressional hearing, the former acting comptroller who issued the rule could not point to any enforcement actions when asked by Senator Elizabeth Warren (D-Mass.). The senator referred to the experience of a married couple who owned a small restaurant supply distributor in Massachusetts. They are immigrants, with a limited knowledge of English, who took out a loan with a 92% annual interest rate, well above Massachusetts’ usury cap of 20% that applies to nonbank lenders in the state. The non-bank World Business Lenders arranged the loan, set the terms, and collected the payments even though the name Axos Bank, an OCC-supervised bank, was on the loan document. The couple had to sell their house to get out from under the loan.
Similarly, a restaurant owner in New York is facing foreclosure as a result of a loan at 268% annual interest from World Business Lenders, which again is using the name of Axos Bank.
More broadly, the OCC has a long history of preempting state consumer protection law to the detriment to consumers and the economy, most notably in the run-up to the 2008 Financial Crisis. In recognition of this harm, the Wall Street Reform Act of 2010 “curtailed its power to preempt state laws, especially as to nonbank entities….”
Another claim by defenders of the rule, made recently on the U.S. Senate floor, is that banks in these partnerships would have to “assess a borrower’s ability to repay before making the loan” or “face serious consequences from their regulator….” The existence of around a dozen ongoing partnerships with loans near or far exceeding triple-digit interest rates indicates that unaffordable loans are being made without repercussions. So the evidence does not support that federal regulators will prevent an explosion of predatory schemes like these should the OCC’s rule remain in place.
The Biden administration has announced its support for the CRA resolution to repeal the rule, noting its harm to financial regulation and consumers. The House of Representatives now has an opportunity to help protect consumers by approving the measure and sending it to the President’s desk for his signature.
The author did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.
Hawaii just enacted significant legislation to reform the state’s small-dollar loan market and prohibit balloon-payment payday loans. House Bill 1192 garnered unanimous support in the State Legislature, and Gov. David Ige (D) signed it into law June 16.
The measure goes into effect Jan. 1, 2022, and will save borrowers in Hawaii millions of dollars each year by ensuring access to affordable credit from licensed lenders. Under the new law, small installment loans will cost consumers hundreds of dollars less. (See Table 1.) It will make these small loans available with appropriate protections and incorporate proven policies that have garnered bipartisan support in other states. (See Table 2.)
Before these reforms, Hawaii law permitted unaffordable balloon-payment loans that were typically due back in one lump sum on the borrower’s next payday. These loans carried annual percentage rates of up to 460%. To borrow $500 over four months, a customer would pay $700 in finance charges, and the lump-sum payment often would consume one-third or more of the borrower’s next paycheck. Such large payments meant many borrowers needed to quickly take another loan to meet other financial obligations.
H.B. 1192 will replace these single-payment loans with installment loans for amounts up to $1,500 that are repayable in two to 12 months. They can have annual interest rates of up to 36% plus a monthly fee up to $35, depending on loan size, but the law caps total loan charges at half of the amount borrowed. It also allows borrowers to repay early without penalty, and deems loans made by lenders without a state license void and uncollectable to prevent efforts to circumvent the law’s consumer protections.
As chairs of the committees of jurisdiction, state Senator Rosalyn Baker (D) and Representative Aaron Ling Johanson (D) considered evidence from other states—particularly Colorado (2010), Ohio (2018), and Virginia (2020)—that passed successful payday loan reforms. Hawaii’s approach mirrors reforms in those states, which incorporated strong consumer safeguards and resulted in widespread access to credit.
Backers see important step forward
Sen. Baker, chair of the Senate Commerce, Consumer Protection, and Health Committee and a longtime supporter of payday loan reform, highlighted the need for change, noting that some lenders in Hawaii charged rates that were “three times higher than what the same lender was charging consumers in other states. We had a really, really dysfunctional market.”
Rep. Johanson, chairman of the House Consumer Protection and Commerce Committee, said the reforms are especially important now. “We know that there are so many people who are struggling in Hawaii, living from paycheck to paycheck,” he said. “The installment loan is much better for the consumer with much less accrued debt and interest over time.”
The lawmakers credited Iris Ikeda, the state’s commissioner of financial institutions, for her work in crafting the bill. The commissioner gathered extensive input from stakeholders during the session and testified in support of the measure.
Hawaii’s enactment of H.B. 1192 demonstrates continued support for reining in balloon-payment payday loans and shows how state and federal policymakers can reform consumer finance markets, promoting access to credit while also protecting borrowers.
“To me,” Rep. Johanson said, “this is going to be one of the biggest economic justice wins from this session.”
Nick Bourke is the director, Gabe Kravitz is an officer, and Linlin Liang is a senior associate with The Pew Charitable Trusts’ consumer finance project.
The bank CEOs did not immediately reject the idea. “We absolutely don’t charge interest rates that high for our customer basis,” Citi CEO Jane Fraser said in response to Sen. Reed’s question. She added that Citi would like to have a look at the law, just to make sure there are no unintended consequences to it. “But we appreciate the spirit of it and the intent behind it,” she said.
The CEOs of Chase, Goldman and Wells Fargo agreed they’d like to look over any final legislation, but all expressed openness to the idea.
David Solomon, CEO of Goldman Sachs, said that he wanted to ensure that a “materially different interest rate environment” didn’t close off lending to anyone. “But in principle, we think it’s good to have this transparency and to look carefully at this,” he said.
Brian Moynihan, CEO of Bank of America, said that he also understood the “spirit” of the law.
In the states that allow payday lending, borrowers can generally take out one of these loans by walking into a lender and providing just a valid ID, proof of income and a bank account. Unlike a mortgage or auto loan, there’s typically no physical collateral needed and the borrowed amount is generally due back two weeks later.
Major banks are not totally unbiased on the subject of small-dollar loans. Although banks generally don’t provide small-dollar loans, that is changing. In 2018, the Office of the Comptroller of the Currency gave the green light to banks to start small-dollar lending programs. Meanwhile, many payday lenders contend that a 36% rate cap could put them out of business, potentially giving banks an advantage. If payday lenders ceased to operate because of a federal rate cap, it could force consumers to utilize banks offering these loans.
In May 2020, the Federal Reserve issued “lending principles” for banks to offer responsible small-dollar loans. Several banks have already jumped into the business, including Bank of America. Other banks represented on the panel have not rolled out any small-dollar loan options yet.
Last fall, Bank of America introduced a new small-dollar loan product called Balance Assist, which allows existing customers to borrow up to $500, in increments of $100, for a flat $5 fee. The APR on the product ranges from 5.99% to 29.76%, depending on the amount borrowed, and customers have three months to repay the loan in installments.
One of the reasons Bank of American created the Balance Assist product, Moynihan said Wednesday, was to help customers avoid the payday lenders.
While advocates claim capping interest rates on payday loans protects consumers from getting in over their heads with these traditionally high-cost loans, opponents maintain that these types of laws will reduce access to credit by forcing lenders out of business with unsustainable rates, leaving people nowhere to turn when they’re short on cash.
Payday lenders and other businesses that offer high-cost, small-dollar loans say they serve customers that big, traditional banks ignore.
But a WFAA investigation discovered the money that finances many predatory lenders comes from the very same big banks.
It’s a part of a larger pattern of economic injustice for low-income communities of color south of Interstate 30, which is a dividing line in Dallas and the subject of the ongoing WFAA investigative series “Banking Below 30.”
The term predatory lending is defined by government regulators as businesses that, among other things, fail to fully disclose or explain the true costs and risk of loans; have “risky loan terms and structures” that “make it more difficult or impossible for borrowers to reduce their indebtedness,” and that charge “customers unearned, concealed or unwarranted fees.”
Texas’ Office of Consumer Credit Commissioner regulates the payday, auto title, installment and pawn lending businesses to ensure each “provides compliant financial products,” but those businesses under Texas law are still allowed to charge interest rates and fees far in excess of what a traditional banks would charge.
Leon Cox said he regrets going to a payday lender when he was short on cash.
“I was working from temp agency to temp agency, and there were a couple times I just couldn’t make rent,” he said. “With a payday loan, it’s never worth it. You’ll take out $500 and end up paying, maybe, $1,500 back.”
High-cost lending is a popular business below I-30. Records show there are 88 storefront locations in southern Dallas.
According to the advocacy group Texas Appleseed, in 2019, payday and auto title lenders charged Texans more than $2 billion in fees. While Blacks and Latinos make up 45% of all Texas households, they make up 71% of auto title customers, and 74% of payday loan customers, according to an analysis of FDIC data by Texas Appleseed.
Cox said these types of lenders “keep you down.”
“It’s the old cliché – the rich get richer and poor get poorer,” he explained.
Our review of public records filed with the U.S. Securities and Exchange Commission reveals that almost 20 banks are funding, or have recently funded, predatory lenders. Some are big banks, like Wells Fargo and Bank of America. Other are based in Texas, like Texas Capital, Bank of Texas, Veritex Bank, TBK Bank, Amegy Bank and Independent Bank.
We reached out to several industry groups representing high-cost, small-dollar lenders. They say their fees are reasonable, given the credit histories of their customers, and that they are helping people get loans that banks have abandoned.
“Nearly half of Americans cannot afford a $400 unanticipated expense,” the Community Financial Services Association of America says on their website. “By providing loans to those who cannot otherwise access traditional forms of credit, small-dollar lenders help communities and small businesses thrive and allow money to be reinvested in local businesses and neighborhoods where it is needed most.”
“It’s for economic exploitation,” said the Rev. Frederick Haynes III, pastor of Friendship-West Baptist Church in southern Dallas and vocal critic of high-cost lenders. In April, he testified against them in a U.S. Senate hearing.
“It’s a horrific cycle,” he told WFAA. “It’s a system that is designed to ensure that some thrive at the expense of others.”
Lenders to FirstCash
FirstCash, based in Fort Worth, operates 2,770 pawn stores. Under Texas law, a pawn dealer can charge up 240% interest on a loan. A review of records filed with the Securities and Exchange Commission shows Wells Fargo, Texas Capital Bank and Bank of Texas are all creditors to FirstCash.
Data that Wells Fargo shares with the federal government that was analyzed by the National Community Reinvestment Coalition show the bank makes relatively few loans to low- to moderate-income borrowers in Dallas County. Their analysis shows that Wells Fargo made 18% of its home purchase loans to low- to moderate- income borrowers, which is third from the bottom among banks in the county.
But, Wells Fargo shares in a $400 million line of credit to FirstCash, along with Bank of Texas, Texas Capital Bank, Amegy Bank, Prosperity Bank, First Tennessee Bank, Independent Bank, Southside and BBVA Bank, according to SEC filings in 2016 and 2020.
We asked these banks why they choose to finance a high-cost lender. Bank of Texas, Texas Capital, First Tennessee and BBVA had no comment. Prosperity, Independent and Southside didn’t respond to questions.
Amegy sent us a response.
“With regard to why Amegy would provide a loan to FirstCash, we are active in making loans and providing banking services to businesses that operate within the law – including local, state, and federal – and who fit within our risk appetite,” Amegy spokesperson Stefani Smith wrote. “We leave the decisions as to which businesses should be allowed to legally operate to elected officials, and the enforcement of such laws to the appropriate authorities.”
So did Wells Fargo.
“Wells Fargo provides credit and services to companies in a variety of financial services industries,” spokesperson Camille Brewer wrote. “We have relationships with companies that have demonstrated a strong, ongoing commitment and capability to comply with applicable laws and regulations to their business operations.”
Ann Baddour with Texas Appleseed, a nonprofit advocating for fair lending practices for low-income and minority communities, said she’s not surprised to see Wells Fargo leading credit agreements for these high-cost lenders.
“Wells Fargo has a long history of being a creditor for payday and auto title lenders,” Baddour said. “It’s objectionable to me personally, but it’s legal. I can’t tell them to not do it. But it’s about values and building communities.”
FirstCash also sent us a response. The company provides “quick and convenient locations to buy value-priced merchandise and obtain small, short-term, collateralized pawn loans which customers are not obligated to repay,” Chief Financial Officer R. Douglas Orr said in a statement.
“Pawn loans do not involve credit checks, negative credit reporting or collections activities, even if the customer does not repay or redeem the loan,” Orr added. “All of the company’s pawn operations are fully licensed, regulated and operated in accordance with all federal, state and local laws.”
Lenders to Enova
Another high-cost lender is Enova, which offers, among other products, payday loans online. In disclosures to the state of Texas, Enova documents annual loan rates of 409% to 664%.
And who helps finance Enova’s operations? In part, Veritex Bank and TBK Bank – both based in Dallas. TBK has a $35 million credit agreement with Enova and Veritex $20 million, according to this SEC filing.
We asked these banks why they choose to finance a high-cost lender. Veritex Bank had no comment. TBK Bank responded that “…we follow well-known policies applicable to all banks to ensure that our customers’ business activities comply with the law.”
In a statement, Enova says its “…online services reach people and businesses all over the U.S., including places where banks no longer have branches…”
Lenders to World Finance
World Finance is another high-cost lender. At its 1,200 storefront offices, the company offers installment loans which, under Texas law, carry 80% to 113% interest, plus fees and charges.
According to this 2015 SEC filing, World Finance’s operations are financed, in part, by Wells Fargo, with a commitment as high as $200 million, and Texas Capital, loaning up to $30 million.
This March 2020 filing with the SEC shows several other lenders to World Finance, including Bank of Montreal, First Tennessee Bank, BankUnited, Axos Bank and Pacific Western Bank.
Bank of Montreal, BankUnited, Axos and Pacific Western did not respond to questions. First Tennessee, as before, had no comment.
In this SEC filing, Curo discloses a $50 million credit agreement with several institutions such as BayCoast Bank, Stride Bank, Hancock-Whitney Bank, Metropolitan Commercial Bank, and a $10 million agreement with Royal Bank of Canada.
We reached out to all these banks about why they lend money to Curo.
Hancock-Whitney and Royal Bank of Canada had no comment.
Stride and Metropolitan Commercial did not respond.
In a statement, BayCoast said it is the “lead bank on a revolving corporate credit facility” for Curo, which “accesses this credit facility periodically for liquidity purposes and does not use the credit facility to fund consumer loans.”
“We evaluate all of our relationships regularly to ensure that our vendors maintain our high standards of operation,” said James Wallace, BayCoast chief operating officer.
Baddour said the rise of high-cost, small-dollar lending targeting low-income people has a long history.
“In many ways, we wouldn’t even be having these conversations about payday loans if financial institutions so long ago didn’t abandon these communities,” Baddour said.
She’s saying predatory lending echoes back to an older problem called redlining, where banks refuse to lend in minority neighborhoods.
The Community Reinvestment Act is a law meant to repair that damage. It says banks are required to meet the credit needs of the minority community and reinvest in neighborhoods they’ve long ignored. But Pastor Haynes says when banks finance predatory lenders, they violate the spirit of the law.
“I think it’s time for banking regulators to step up and say, ‘We’re serious about this issue, and we want to ensure that justice in banking is a norm,’” Pastor Haynes said. “It’s not just time. It’s past time.”
One of those regulators is the federal Office of the Comptroller of the Currency, which oversees the biggest banks in the country.
“We do not comment on individual bank matters,” said OCC spokesman Bryan Hubbard in response to WFAA’s questions.
But he pointed out that banks extending credit or loaning money to high-cost lenders doesn’t mean they are playing any role in those businesses’ lending decisions.
“It is important to note that such nonbank lenders and companies are state-licensed and regulated,” Hubbard added. “The OCC does not review and approve bank customers and generally does not determine what company or customer a bank may serve.”
Change in Policy
Some banks have begun to change their policies on financing predatory lenders. Capital One says it will not finance payday and auto title lenders. Chase Bank has stopped lending to them, too. Key Bank in Ohio also stopped.
Bank of America had been a long-time lender to World Finance, with a line of credit up to $150 million. However, the bank says it terminated that relationship in 2020.
Bank of America now also offers a new product called Balance Assist. For a $5 fee, existing customers can borrow up to $500 for terms that are far better than a payday lender – an industry Bank of America now says runs “contrary to our values.”
“It’s encouraging to me to see such a large financial institution take to heart all the feedback that has been around for a long time about the financial services needs of communities and really start to do something about it,” Baddour said. “I deeply believe that that is the pathway forward.”
Banks that finance predatory lenders defend themselves by saying the practice is legal. But Pastor Haynes says, in America’s moment of racial reckoning, these banks should be asking themselves, “Is this right?”
“It creates a permanent underclass – permanent ghettos,” he said. “And it’s being financed by banking institutions. There’s something diabolical and wrong with that picture.”
As the nation and much of the world continue to suffer from the rippling effects of COVID-19, the ability of consumers to remain current on bills and expenses is steadily waning – if not already gone.
According to the Census Bureau’s Household Pulse Survey taken in early February, more than a third (34.9%) adults live in households where it has been somewhat or very difficult to pay usual household expenses during the coronavirus pandemic; and 30% expect eviction or foreclosure is likely in the next two months.
For low and moderate-income families, these are the kinds of financial pressures that can make them vulnerable to high-cost, predatory lending. The irony is that while consumers using these products usually need a small amount of money, the fees that accompany these loans are really a debt trap that worsens, not improves, family finances.
Access to this “quick cash” is tied to direct access to borrower bank accounts or the likelihood of car repossession from an auto-title loan. Besides owing more money for fees than for the loan itself, borrowers also experience other financial harms including delinquency on other bills, overdraft fees, involuntary loss of bank accounts, and bankruptcy.
To date, 17 states and the District of Columbia have enacted rate cap legislation, limiting interest charged to 36% or less. But there are hopeful signs that the number of consumers protected could soon increase.
For example, This January, Illinois’ Predatory Loan Prevention Act, won bipartisan legislative passage in both chambers in January. Led by the state’s Legislative Black Caucus and aided by support of a broad coalition including clergy, industry and governmental officials, the bill will cap consumer loan interest rates at 36 percent interest and affect payday, car title, and high-cost installment loans.
Currently, Illinois borrowers pay payday and title loan fees in excess of half a billion each year. Nearly half of payday loan borrowers on the state earn less than $30,000 per year. In Chicago, the state’s largest city and home to millions of consumers of color who comprise 47% of the city’s population, zip codes in communities of color incur 72% of the Windy City’s payday loans.
According to the Woodstock Institute, an Illinois nonprofit consumer advocacy organization and coalition member, a resident of Chicago’s Austin neighborhood, where the median income of residents is $35,855 and home to mostly consumers of color, is 13 times more likely to have a payday loan than that of a Lincoln Park resident, where median incomes surpass $200,000, more than double that of the entire city’s $61,811, and real estate prices frequently reach seven figures.
If signed by the state’s governor, the bill’s enactment will end what Woodstock calculates is a 297% state average annual percentage rate (APR) on payday loans as well as the 179% average APR on auto title loans.
Additional hopeful signs are found in several state capitols. A bill to cap loan rates at 36% APR has been advancing in New Mexico and bills have been introduced in both Minnesota and Rhode Island.
“The current economic crisis has added crushing debt onto the backs of Americans who can least afford it, which is disproportionately Black, Latino, and Native American communities,” observed Lisa Stifler, the Center for Responsible Lending’s Director of State Policy. “Payday and other high-cost, predatory loans make this situation even worse. Strong loan interest rate caps on the state and federal levels are essential to lifting the burden of debt that so many people have been forced to live with.”
Driving home this point is a newly updated map from CRL that shows the interest rate on a typical $300 payday loan. It sheds light on the financial misery of triple-digit interest rates where they are legal. Many states with large numbers of consumers of color have many of the highest rates: Texas at 664%, Missouri at 527%, and Mississippi with 521%.
At the federal level, lawmakers are expected to re-introduce a payday lending bill that would give both consumers and military veterans the same 36% rate protection as the Military Lending Act (MLA). Named the Veterans and Consumers Fair Credit Act, the measure is hoped to secure the same broad and bipartisan support that MLA received.
Readers may recall that years ago, following extensive research and hearings, the Consumer Financial Protection Bureau (CFPB) under the Obama Administration released an administrative rule to stop payday loan debt traps.
However, under the Trump Administration, the rule was gutted by eliminating its ability-to-repay standard. This underwriting practiced by mortgage lenders, credit card companies, and other lenders, prevents lenders from extending more new debt than they can afford.
Last year, a consumer coalition wrote Congressional leaders about their opposition to removing this key underwriting, particularly when the pandemic imposed severe financial stress on consumers with the fewest financial resources. In a March 2020 letter the advocates wrote in part:
“Predatory lenders are known to prey on the most vulnerable including seniors, veterans, low-income, African American, and Latinx communities. Many in these communities were already struggling before this crisis and will fall deeper into economic instability because of it. Efforts by Congress to help Americans should not be undermined by predatory lenders trapping consumers into loans of 100% or even 300% APR. We want to ensure that relief that Congress is providing to our families is going to cover food, shelter, and other necessities, not to pay back exorbitant interest rate loans.”
With a new President and a new nominee to serve a five-year term as CFPB Director, federal action on payday reform could come quickly.
Rohit Chopra, President Biden’s nominee, previously served at CFPB under Director Cordray and as the agency’s student loan ombudsman. His March 2 nomination hearing by the Senate’s Committee on Banking, Housing, and Urban Affairs, was the second time in three years that Chopra faced Senate confirmation. Three years ago, he was unanimously confirmed to serve on the Federal Trade Commission. That bipartisan endorsement should favor CFPB confirmation.
In his remarks to Senate Banking, Chopra noted, “Due to the economic devastation stemming from COVID-19, millions face the prospect of losing their home, with communities of color particularly at risk. Many have seen their jobs disappear and will not be able to easily resume their mortgage payments.”
“While there are some hopeful signs that the tide is turning,” continued Chopra, “we must not forget that the financial lives of millions of Americans are in ruin. Experts expect distress across a number of consumer credit markets, including an avalanche of loan defaults and auto repossessions.”
“Congress has entrusted the Consumer Financial Protection Bureau,” continued Chopra, “with carefully monitoring markets to spot risks, ensuring compliance with existing law, educating consumers, and promoting competition. This not only helps to protect Americans from fraud and other unlawful conduct, it also ensures that law-abiding businesses, regardless of size, can compete.”
Here’s hoping that CFPB will soon return to its mission.
Illinois Governor J.B. Pritzker on Tuesday signed a bill into law that will cap rates at 36% on consumer loans, including payday and car title loans.
The Illinois General Assembly passed the legislation, the Predatory Loan Prevention Act, in January, but the bill has been awaiting the governor’s signature to turn it into law.
Introduced by the Illinois Legislative Black Caucus, the newly signed legislation is modelled on the Military Lending Act, a federal law that protects active service members and their dependents through a range of safeguards, including capping interest rates on most consumer loans at 36%.
“The Predatory Loan Prevention Act will substantially restrict any entity from making usurious loans to consumers in Illinois,” Pritzker said Tuesday. “This reform offers substantial protections to the low-income communities so often targeted by these predatory exchanges.”
With its passage, Illinois is now one of 18 states, along with Washington D.C., that impose a 36% rate cap on payday loan interest rates and fees, according to the Center for Responsible Lending.
Prior to the legislation, the average annual percentage rate (APR) for a payday loan in Illinois was 297%, while auto title loans averaged APRs of about 179%, according to the Woodstock Institute, an organization that was part of a coalition formed in support of the legislation. Illinois residents pay $500 million a year in payday and title loan fees, the fourth highest rate in the U.S., the Woodstock Institute calculated.
“Hundreds of community groups, civil rights organizations, faith leaders and others joined the Legislative Black Caucus in pushing for the historic reform,” Lisa Stifler, director of state policy at the CRL said in a statement Tuesday. “As the bill becomes law, Illinois joins the strong trend across the nation toward passing rate caps to stop predatory lending.”
But some organizations, including the Illinois Small Loan Association, have already expressed concern with the broad nature of the bill and its potential to completely eliminate access to small consumer loans within the state.
Steve Brubaker, who lobbies for the organization, told a local Chicago news station that the high APRs can be misleading since the average fee (including interest) for a typical two-week payday loan comes out to about $15 for each $100 borrowed.
The Online Lenders Alliance said Tuesday that it was disappointed Governor Pritzker had signed the legislation, saying it was a “bad bill” for residents of the state of Illinois.
“Now is not the time to reduce credit access. Consumers in Illinois are struggling, and elected officials should be working to ensure that all consumers have options to deal with unforeseen or irregular expenses. Sadly, this bill eliminates many of those options for those who need them most,” Mary Jackson, CEO of the alliance, said Tuesday.
Still, advocates of the bill say it can help limit predatory lending. More than 200 million Americans still live in states that allow payday lending without heavy restrictions, according to CRL. And these loans are easy to obtain. Typically, consumers simply need to walk into a lender with a valid ID, proof of income and a bank account to get a payday loan. The balance of these types of loans are usually due two weeks later.
Communities of color, in particular, are targeted by these types of high-cost loans, CRL reports. “As Covid continues to ravage these communities, an end to predatory debt traps is essential,” Stifler says. “We must also pass federal reforms, to protect these state caps and expand protections across the country.”
The terms of the loans were frightening: $5,000 in principal, with payments due every couple weeks at annualized rates as high as 589%.
Interest charges would pile up at such a blindingly fast clip, Jamie Johnson told himself, that he’d have to prioritize debt repayment over everything else. And so he did. This was early April 2020, just as the pandemic was breaking out, and Johnson, a 44-year-old metals worker, had suddenly found himself out of a job and in desperate need of cash. When beefed-up unemployment insurance checks started arriving in his mailbox in Detroit a month later—$965 each week—he set aside big chunks of them to pay back the debt.
This is money, Johnson says, that he would have used to help support his disabled mother and buy food for his girlfriend’s four kids—the kind of essential spending the government had envisioned when it funded a $2.2 trillion relief package for American workers and companies. Instead, it ended up juicing the profits of one of the most controversial corners of the financial industry.
“I can’t even think about how much money I just paid in interest,” Johnson says. “It was just a big mess.”
So good was 2020, in fact, for certain providers of payday and other high-interest loans that they’re emerging from the pandemic stronger than perhaps ever before, a development that’s encouraging them to aggressively ratchet up lending now as the economy rebounds.
It is one of the cruel ironies of the pandemic: At a time of great suffering for millions of working-class Americans, the odd financial rhythms of the past year—with its waves of job layoffs, followed by unprecedented government stimulus and a sharp economic rebound—have helped some of these high-interest lenders rake in record earnings. That the windfall for these companies came just as the Federal Reserve was making near zero-rate loans available for corporate America and the wealthy only further riles up the industry’s biggest critics.
“Debt collectors had a big year, and so did predatory lenders,” said Lauren Saunders, associate director at the National Consumer Law Center, a non-profit that advocates for low-income borrowers. “The idea that any company could keep charging 100% or 200% interest or more during this time of crisis is really outrageous.”
What’s more, consumer advocates point to studies that show Black and Latino communities are disproportionately targeted by providers of high-cost loans.
In Johnson’s home state of Michigan, areas that are more than a quarter Black and Latino have 7.6 payday stores for every 100,000 people, or about 50% more than elsewhere, according to data collected by the Center for Responsible Lending. A forthcoming study from the University of Houston that was provided to Bloomberg shows similar disparities when it comes to online advertising.
The Covid-19 outbreak and the economic fallout from efforts to contain it had the potential to be a major blow for consumer finance companies that cater to the 160 million Americans who don’t have good credit scores. They tightened lending standards in preparation for a surge in delinquencies as the unemployment rate rocketed past 14% last year.
But this crisis proved to be different.
Trillions of dollars in government stimulus, largely in the form of direct payments to low- and middle-income earners, helped countless people keep their heads above water financially. Many borrowers—facing the prospect of being chased by debt collectors and seeing their wages garnished—chose to spend at least some of the cash repaying their most expensive obligations.
According to data collected by the Federal Reserve Bank of New York through March, U.S. households had used or planned to use about a third of the cash they received via stimulus checks to pay down debt. For families earning less than $40,000 a year or without a college degree, the share was closer to 40%.
It’s proven a boon for some of the largest players in the industry. Enova International Inc. and Elevate Credit Inc., two publicly traded companies that provide high-cost loans to non-prime consumers online, reported record profits in 2020, even as overall revenue declined.
“Earnings were definitely higher than we would have expected because they benefited from an improvement in the credit environment,” said Moshe Orenbuch, an analyst at Credit Suisse Group AG who covers the sector. “Consumers tended to pay back debt with funds they were given by the government.”
Providers of high-cost loans say they offer credit to communities that are under-served by traditional banks, and that high interest rates are necessary because those borrowers are more likely to default. But according to consumer advocates, the loans often cause families to fall into debt traps built on exorbitant fees and endless renewals.
That’s the situation Kimberly Richardson found herself in late last year.
Her hours got cut following an outbreak at the factory where she works. Before long, the Tennessee resident began to struggle making payments on a $1,500 loan she had taken from CashNetUSA, a subsidiary of Enova, on which interest was accumulating at a rate of 276%.
As the coronavirus ravaged the U.S., CashNetUSA encouraged Richardson, who like Johnson is Black, to borrow even more on her credit line. She’d get prompts by email anytime her account had available credit. Little by little, she was digging herself deeper into debt.
Richardson filed for bankruptcy last month, but not before paying CashNetUSA nearly $10,000 all-told.Out of ControlHow Richardson went from borrowing $1,500 to bankruptcy
Through a spokesperson, Enova said its policy is to provide customers with flexibility and to help them be successful with their loan. The company said it plays a critical role serving people who need short-term financing to make repairs or avoid even costlier expenses such as bounced checks or late fees on bills.
In an emailed statement, Elevate said it is committed to serving those with non-prime credit scores who are locked out of traditional financial products. The company added that many of its customers are eligible for payment deferrals as a result of the pandemic.
A few months after Covid-19 was officially declared a pandemic, the National Consumer Law Center and other advocacy groups urged Congress to mandate a cap on the interest rates that could be charged on consumer loans. The idea, in part, was to provide desperate borrowers some relief, much like deferral programs put in place to help homeowners and students.
The provision never made it into law. Instead, policy making in Washington largely went in the opposite direction.
In July, the Consumer Financial Protection Bureau repealed substantial portions of a 2017 rule that would have required lenders to determine consumers’ ability to repay loans. The scrapped provision—which applied only to some types of high-cost loans—could have wiped out as much as 68% of the industry’s revenue from traditional payday loans, according to the agency.
In announcing its decision, the CFPB said its actions would ensure “the continued availability of small-dollar lending products for consumers who demand them, including those who may have a particular need for such products as a result of the current pandemic.”
A separate rule issued by the Office of the Comptroller of the Currency in October made it easier for lenders like Enova and Elevate to partner with national banks to originate high-cost loans. Consumer advocates have denounced such arrangements as “rent-a-bank schemes” designed to circumvent state-level interest-rate caps.
Over a dozen states and the District of Columbia have caps limiting the rate that can be charged on payday loans to 36% or less, but Michigan and Tennessee aren’t among them.
At the federal level, there are early signs that President Joe Biden’s administration and Congressional Democrats plans to reverse course.
Just last week, the Senate voted to overturn the controversial OCC rule. CFPB Acting Director Dave Uejio wrote in a blog post in March that the agency is concerned “with any lender’s business model that is dependent on consumers’ inability to repay their loans,” and that it believes the harms identified by the 2017 regulation still exist.
Even if restored, however, the CFPB regulations are unlikely to cover the type of credit line Richardson received.
Nor would they cover the loan that JoAn Cumbie, a retired truck driver who lives in an RV Park near West Columbia, South Carolina, also took from CashNetUSA.
The 52-year-old, who is disabled and was recently treated for cancer, borrowed $650 in August. In just a few weeks, she saw her balance top $900 as interest started accumulating at a rate of 325%.
She managed to pay off the loan in October, but only after selling her six-month-old power generator for about half of what she’d paid for it.
“I sold it so cheap, someone got a real good deal,” said Cumbie, who estimates she paid over $1,500 to CashNetUSA all-told. “I just needed to pay them off as fast as I could.”
Even though scrutiny of the industry may intensify, executives are confident demand for high-cost loans will grow in the coming years.
U.S. households expect to increase their spending by 4.6% over the next year, according to latest New York Fed survey of consumer expectations, only slightly below the 4.7% reading recorded in March, which was the highest since December 2014.
“As the economy opens back up, we believe that consumers will raise their spending potentially to elevated levels due to increased activity and pent-up demand,” Enova Chief Executive Officer David Fisher told Wall Street analysts during a conference call in April. “We saw the same dynamic following the financial crisis, which led to strong origination growth in 2010 and 2011.”
Anticipating a boom in demand from struggling borrowers, Enova last year acquired OnDeck, a lender that specializes in small-business loans that have an average interest rate of 49%. The opportunity, as the company puts it, is to capitalize on the hair salons, gyms, local retailers and restaurants that have struggled over the past year.
“Many of these businesses have used up their savings trying to survive the pandemic,” Fisher said on the April call. “This could lead to a large surge in demand that we are ready to fill.”
Back in Detroit, Johnson, the metals worker, is slowly digging out of debt.
He got his factory job back last summer and was able to pay off his most expensive obligations—two payday loans he had been juggling for months. “I was lucky,” he says. “I was able to get some overtime.” Every two weeks, though, he still sends $241 to Rise, a unit of Elevate, to service a separate $4,500 loan that won’t mature until October.