Strat­egy aimed at curb­ing preda­tory lend­ing

Chattanooga Times Free Press - - FRONT PAGE - BY JOAN MCCLANE STAFF WRITER

Ten­nessee is awash in preda­tory lenders who charge high in­ter­est rates for small, short­term loans, and those who op­pose the in­dus­try have long been stonewalled by a pow­er­ful pay­day loan lobby and spe­cial statewide leg­isla­tive pro­tec­tions.

But one lo­cal think tank has come up with an ap­proach to push back on the in­dus­try that it ar­gues is hurting poor, work­ing-class and mi­nor­ity fam­i­lies and sti­fling eco­nomic mo­bil­ity.

The Metro

Ideas Project, a Chat­tanooga-based re­search startup de­voted to the anal­y­sis and de­sign of pub­lic pol­icy, spent four months study­ing preda­tory lend­ing in Ten­nessee be­fore pub­lish­ing its find­ings last week. Its 19-page re­port high­lights the ex­tent of preda­tory lend­ing statewide and sug­gests a three-pronged strat­egy to curb the in­dus­try’s growth and reach.

Joda Thongnop­nua, ex­ec­u­tive di­rec­tor of Metro Ideas Project, said the pay­day loan in­dus­try be­came a re­search fo­cal point once he and his staff learned about Ten­nessee’s unique and cozy re­la­tion­ship with the in­dus­try, which is heav­ily reg­u­lated else­where in the U.S.

The re­port, “Fight­ing Preda­tory Lend­ing in Ten­nessee,” says the state has the most preda­tory lenders in the coun­try with more than 1,200 lo­ca­tions across 89 of the state’s 95 coun­ties. The group’s anal­y­sis of state li­cens­ing data showed Hamil­ton County is among the coun­ties with the high­est num­ber of brick-and-mor­tar pay­day loan lo­ca­tions and the high­est con­cen­tra­tions of preda­tory lenders per capita.

De­mand for pay­day loans is huge. Pay­day lenders or check cash­ers, which charge an­nual in­ter­est rates be­tween 391 per­cent and 521 per­cent in the 28 states where they are al­lowed to op­er­ate, are used by more than 12 mil­lion Amer­i­cans, ac­cord­ing to the Pew Re­search Cen­ter.

Many who use these kinds of loans are peo­ple with­out a four-year de­gree, renters, African-Amer­i­cans and those earn­ing be­low $40,000 a year, the Metro Ideas Project study shows, and 70 per­cent of bor­row­ers use their pay­day loans for reg­u­lar, re­cur­ring ex­penses, not un­ex­pected emer­gency costs, as is of­ten claimed by in­dus­try pro­po­nents. Low credit scores keep many from ac­cess­ing con­ven­tional loans with lower in­ter­est rates.

“Preda­tory lenders are able to ex­ploit this need, in part, be­cause there are few al­ter­na­tives for con­sumers to go to,” the re­port states.

And cre­at­ing more lend­ing op­tions for fam­i­lies strug­gling to make ends meet is one of three steps that need to be taken to cut back on the wide­spread use of small loans with triple-digit APRs, Thongnop­nua said.

The Metro Ideas Project re­port ar­gues for the cre­ation of al­ter­na­tive, com­mu­nity-based and non­profit lend­ing in­sti­tu­tions un­der the same le­gal struc­ture used by preda­tory lenders but fea­tur­ing af­ford­able rates, trans­par­ent fees and hon­est un­der­writ­ing prac­tices.

“As cities look to build strong lo­cal economies and bring peo­ple out of poverty, en­sur­ing that peo­ple are not trapped in debt and have lend­ing op­tions that en­cour­age up­ward mo­bil­ity will be paramount,” the re­port states.

Thongnop­nua said Metro Ideas Project also is en­cour­ag­ing places such

as Chat­tanooga to push back on preda­tory lend­ing by in­tro­duc­ing cre­ative lo­cal reg­u­la­tions.

State law pro­hibits cities from set­ting restric­tions on in­ter­est rates. But the re­port says cities can re­quire preda­tory lenders to post plain-spo­ken warn­ings on all ex­te­rior sig­nage about the dan­ger and risk as­so­ci­ated with their ser­vices.

Jen­nifer Harper, a cer­ti­fied fi­nan­cial plan­ner who owns her own fi­nan­cial plan­ning and in­vest­ing com­pany and sits on the Mayor’s Coun­cil for Women, said she is for the idea. In the spring, the Mayor’s Coun­cil for Women pub­lished its own re­port on preda­tory lend­ing, which was sparked by con­cern that so many lo­cal, sin­gle moth­ers were us­ing pay­day loans and fac­ing dis­as­trous con­se­quences.

“We have to be a lit­tle bolder than we have been,” said Harper, who also founded a lo­cal non­profit, Com­mon Cents Fi­nan­cial Lit­er­acy Inc., that teaches peo­ple about man­ag­ing money. “I don’t see it as any dif­fer­ent than a warn­ing on a pack­age of cig­a­rettes. These [loans] are not healthy for our com­mu­nity.”

Still, Harper ac­knowl­edged the sig­nage could ex­ac­er­bate the sense of shame some may feel when go­ing to get a pay­day loan.

“This is a mul­ti­fac­eted prob­lem. You won’t take one ac­tion and solve it all,” she said. “This is some­thing where we ap­proach it from a lot of an­gles to get the best re­sults.”

A third ap­proach, the re­port sug­gests, is to re­quire an additional lo­cal per­mit to op­er­ate a preda­tory lend­ing es­tab­lish­ment in city bound­aries, which could make open­ing new lo­ca­tions more costly.

Calls to Check Into Cash, Quick Loans, Ad­vance Amer­ica and the Com­mu­nity Fi­nan­cial Ser­vices As­so­ci­a­tion of Amer­ica — the pri­mary trade group rep­re­sent­ing pay­day lenders — were not re­turned.

Re­gard­less, how­ever, new rules set by the Con­sumer Fi­nan­cial Pro­tec­tion Bu­reau in Oc­to­ber are ex­pected to dra­mat­i­cally cur­tail pay­day and auto ti­tle lenders if this first na­tion­wide reg­u­la­tion of the in­dus­try isn’t re­jected by Congress.

Now, be­fore giv­ing a loan, pay­day and auto ti­tle lenders must de­ter­mine if a bor­rower can re­pay the loan within 30 days. The rules also limit the num­ber of times a bor­rower can re­new a loan. Stud­ies con­ducted by the CFPB have shown 60 per­cent of such loans are re­newed once and 22 per­cent are re­newed at least seven times.

Un­der the new rules, the CFPB es­ti­mates loan vol­ume in the pay­day lend­ing in­dus­try could fall by 55 per­cent.

At the same time, the Of­fice of the Comptroller of the Cur­rency is loos­en­ing restric­tions on pay­day lend­ing-like prod­ucts, known as de­posit ad­vance prod­ucts, and mak­ing it a lot eas­ier for banks and credit unions to move into the small-loan niche.

Con­tact staff writer Joan McClane at jm­c­clane or 423-757-6601.

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