Good afternoon. I am Michael Calhoun, president of the Center for Responsible Lending. We are a nonprofit, non-partisan research and policy organization that protects family wealth by working to eliminate abusive financial practices.
I thank our fellow presenters today. They are Jean Ann Fox, director of consumer protection for the Consumer Federation of America, who has done groundbreaking work on the payday lending issue for a decade, and Julian Bond, chairman of the NAACP, whose life work has contributed greatly to the cause of economic justice.
Today, CRL is releasing "Financial Quicksand," a research report that substantiates three aspects of predatory payday lending.
First, payday loans do indeed sink borrowers in debt that can be as difficult to escape as quicksand. Second, the economic damage from this practice alone is simply huge. And third, state policymakers can solve this problem for their citizens.
To the first point, our new analysis confirms previous research showing that payday loans trap borrowers in debt. In spite of increased scrutiny and in spite of attempts to reform the practice, payday lending remains today a business that, rather than floating a short-term advance on their paycheck, keeps borrowers caught in a costly trap for months on end.
Today's report finds that 90 percent of payday loans still go to borrowers who have five or more loans per year. Because these loans are so expensive, with interest rates of 400 percent, these repeat borrowers are worse off for ever having taken out a payday loan. They end up paying back more in interest than they borrowed.
Our new analysis, based on data from state regulators, not only confirms the findings of our 2003 study; it shows that incremental reforms have not helped. The typical borrower is still paying back nearly $800 for a $325 loan.
The problem of payday loan flipping has gotten more attention from financial analysts in the past couple of years. Morgan Stanley concluded in a report issued last year that, "rather than bridging a gap in income, the payday advance may contribute to real financial distress."
This loan flipping is the dubious hallmark of payday lending. The terms of a payday loan require a cash-strapped borrower to choose between paying off a loan of $300 in one lump sum after just two weeks, or paying interest of $50 or so to renew the loan for another pay period. When this cycle repeats every two weeks, that $50 of interest adds up very quickly.
Working one cash-poor borrower after another this way, systematically and methodically, adds up to a staggering national economic cost for payday lending, to the tune of $4.2 billion.
This annual cost has risen by nearly a billion dollars since our first quantification of the problem. In today's report, we break the $4.2 billion down state-by-state, finding that working families pay tens of hundreds of millions of dollars in predatory fees in every state where payday lending is legal.
But the good news is that this problem can be solved—and eleven states are solving it. The rent-a-bank partnerships that payday lenders used to get around state laws have been shut down. And some states have steadfastly refused to grant payday lenders exemptions from their consumer loan laws. This group of states has seen payday lenders quietly close up shop and leave.
Our report finds that the states that have solved their payday lending problem are collectively saving $1.4 billion in earnings. That's $1.4 billion that would have been transferred from the paychecks of working families to the pockets of predatory lenders.
How are they doing it? These states are refusing to grant predatory lenders exemptions from their consumer loan laws. They are simply enforcing a reasonable cap on annual interest rates for consumer loans.
Most states have such a cap in the double digits; about a dozen set the limits at a generous 36%. Congress recently adopted a 36% cap on consumer loans to military families to protect them from predatory lenders. This measure is expected to eliminate the payday lending problem for the military, whose young families with steady paychecks have been attracting predatory lenders in droves.
Our troops most certainly deserve our immediate and unequivocal protection. But so do our teachers, police officers, service workers, emergency workers and retirees. Therefore, we recommend that state policymakers place a cap on interest rates for consumer loans in this 36% range.
A 36% cap leaves plenty of room for responsible loan products. It preserves access to credit for working families while protecting them from abusive loans.
Payday borrowers are caught in financial quicksand. The problem is huge and stubborn. But safe states have shown there is a solution. Enforcing a reasonable rate cap solves the payday lending problem.
Thank you very much and I look forward to your questions.
For more information: Kathleen Day at(202) 349-1871 or kathleen.day@responsiblelending.org; Sharon Reuss at (919) 313-8527 or sharon.reuss@responsiblelending.org; or Ginna Green at (510) 379-5513 or ginna.green@responsiblelending.org.