The District Chronicles

Issue date: 7/19/09 Section: Business

Critics contend that payday loans are designed to overwhelm the borrower

(NNPA) - New research from the Center for Responsible Lending has found payday lenders are nearly eight times more concentrated in California's Black and Latino neighborhoods as compared to White neighborhoods, draining these communities of $247 million in payday loan fees.

"Payday lenders contend that they provide access to credit for underserved communities," said Leslie Parrish, a senior researcher at the Center for Responsible Lending. "What they are really providing is access to long-term debt traps which too often lead to extra overdraft fees, credit card delinquency, trouble paying bills including medical expenses, even bankruptcy."

The payday loans work like this: the customer writes a check to the lender. The amount on the check equals the amount borrowed plus a fee that is either a percentage of the full amount of the check or a flat dollar amount. The customer must either pay back the full amount of the check and the fees, or pay another fee to extend the loan. The loans too often become cyclical and take much more money to get out of, say advocates.

Payday lending is a $40 billion industry made up of roughly 23,000 lenders, such as Check 'n Go, Advance America, Cash America and Check Into Cash, where a typical borrower takes out between eight and 10 loans each year, according to researchers at Stephens Inc., which follows the industry.

Fifteen states and the District of Columbia have legislated caps on various amounts. Such a cap has been introduced in the U.S. Senate and House, and would not prohibit California or other states from instituting their own caps.

"H.R. 1214, the Payday Loan Reform Act of 2009, creates significant protections from abusive payday practices by preventing rollovers and freeing consumers from the debt trap by mandating a cost-free, 90-day repayment plan. The bill lowers the effective APR of a payday loan to 48 percent, or 15 cents for every dollar loaned," said Rep. Luis Gutierrez (D-Ill.) at a spring congressional hearing of the subcommittee on Financial Institutions and Consumer Credit.

"This is a rate that is lower than 23 current state rate caps, including California, Colorado, New Hampshire and even my home state of Illinois. My legislation would also prohibit unfair mandatory arbitration clauses, increase disclosures and honor all existing stronger state protections by creating a federal floor on which stronger laws can then be built," he said.

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