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Controlling the Growth of Payday Lending Through Local Ordinances and Resolutions

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Controlling the Growth of Payday Lending Through Local Ordinances and Resolutions

Controlling the Growth of Payday Lending Through Local Ordinances and Resolutions

A Guide for Advocacy Groups and Government Officials

Preface

Neighborhoods across America are witnessing the resurgence of predatory small loan operations. In the last twenty years or so, payday lenders have exploited deregulated interest rates, won special treatment from state legislatures, or designed products that slip through legislative or regulatory loopholes. 

As a result, payday lending legally operates in 32 states, while 18 states either prohibit it, curb it with rate caps, or have other restrictions that disrupt the payday loan business model costing consumers as much as $7.46 billion a year in interest for over $44 billion in loans from both storefront and online lenders. Payday Loans cost cash-strapped borrowers triple- digit interest rates, trap borrowers in repeat loans, foster coercive debt collection practices, and endanger bank account ownership for families that live on the financial edge.

Payday lending has become increasingly controversial as the consequences of this defective financial product have become painfully apparent. Payday lenders now outnumber Starbucks and Burger King outlets across the country. Billions of dollars in usurious interest flows out of communities to the national chain lenders. Mapping of payday loan locations by neighborhood characteristics and studies of payday loan use issued by regulators and academics document that these high cost loans disproportionately harm minority families and low to moderate-income borrowers. (For more information, please visit Consumer Federation of America's www.paydayloaninfo.org)

Local leaders see the impact of payday lending on economic development, requests for financial assistance, and financial distress in communities with high levels of low-to-moderate income and minority families. While industry lobbying and campaign contributions have thwarted reform in many state legislatures, local officials are taking action to stop payday lenders from exploiting their neighborhoods by enacting restrictive zoning requirements and local ordinances. Local policymakers interested in preventing predatory payday lending can also lend their support to state-level reform efforts to cap annual interest rates at an all-inclusive 36 percent or repeal payday loan authorization outright. As documented in North Carolina, reinstating small loan caps allows responsible credit to flow, while saving consumers the billions of dollars now lost to predatory payday lenders. Resolutions urging state legislative reform were adopted by local governments in Virginia and Ohio, starting in 2007. Local officials who are closest to their communities have a powerful role to play in the nationwide campaign to stop predatory payday lending and improve the financial lives of millions of families. This guide has been developed to assist community consumer advocates and government officials take action to combat payday lending in local communities and at state legislatures. The guide is divided into the following sections: * Introduction - How payday loans work and their harmful effects on consumers and communities. * How to pass an ordinance for advocates. * Assistance for Government Officials - Understanding payday loans, the type of ordinance that might be best for their community, and legal challenges that have been faced in the past. 

Along with this section are the following appendices: o Appendix 1 - List of Payday Lending Ordinances o Appendix 2 - Legal Challenges to Local Payday Lending Ordinances o Appendix 3 - Ordinance and Resolution Examples 3 Introduction Local governments have a right and a responsibility to protect the economic health, welfare and safety of their communities using whatever tools they have available to them. High cost payday lenders are proliferating in low-to-moderate income areas of cities and towns in states where this form of lending is authorized or loopholes are exploited. As a result, land use code amendments, commonly known as ordinances, have been enacted to reduce the negative impacts of payday lending in areas within their jurisdictions that are particularly vulnerable. In most cases, payday lending presents a classic example of an industry that creates local community financial drain. The more money that is exported out of the local economy by excessive fees, the less money there is to spend within the local economy. This creates not only individual financial spirals, but community economic spirals as well. The capital that could be circulated within a local economy is lost to outside interests. Payday loans are small cash advances typically ranging from $100 to $500. The average loan amount is nearly $400 and the full amount of the loan plus interest is typically due and payable in full on the borrower’s next payday. Because the borrowers cannot afford to live until the next payday after repaying their high-cost payday loan, they find they must take out another loan to make ends meet. On average, in America borrowers renew their loan 8 times before they are able to pay the loan in full and ended up paying $800 on an original $325 loan.1 Finance charges are generally calculated as a fee per hundred dollars borrowed. This fee is usually $15 to $30 per $100 borrowed. The average interest rate for a payday loan is between 391% and 782% APR for a two-week loan from stores or online. The loan is secured by the borrower’s personal check or some form of electronic access to the borrower’s bank account. These balloon payment loans can equal 50 to 95% of bi-weekly paychecks of the typical borrower. Loans secured by personal checks or electronic access to the borrower’s bank account endanger the banking status of borrowers, facilitate coercive collection tactics, and constitute unfair wage assignments.2 Simply put, payday loans are bad for business because the lender is going to get paid first even if the borrower entered into an obligation with other businesses before getting into a payday loan. The payday lender is going to get paid even before basic living expenses such as rent, utilities and child support payments. This is because the payday lender is holding the borrower’s checking account hostage, thus having the effect of a “super priority lien.” Local economies rely heavily on viable small businesses. Ordinances to restrain the supply of payday loan outlets are not likely to have an adverse impact on the price of loans to consumers. Competition does not drive down the price of payday loans. An FDIC report found “payday advance stores tend to charge an effective APR near the applicable statutory limit”3 . SEC annual filings by publicly traded payday lenders show consistently high rates even in seemingly saturated markets. 1 Center for Responsible Lending, “Modern Day Usury: The Payday Loan Trap,” Nov. 2010 2 Jean Ann Fox, Director of Consumer Protection Testimony before the Subcommittee on Domestic Policy of the House Committee on Oversight and Domestic Reform, March 21, 2007 3 Flannery & Samolyk, “Payday Lending: Do the Costs Justify the Price?,” FDIC, June 2005, endnote 34 at 9 4 Payday lenders, irrespective of the number of storefronts in the local market, consistently charge the maximum interest rates allowed by state law. Tucson, Arizona illustrates the growing interest in restraining high-density payday loan storefronts. The results of a study released by the Southwest Center for Economic Integrity conservatively estimated that $20 million dollars in fees were being extracted annually from residents in Pima County, which includes the City of Tucson. These fees were being extracted from the very neighborhoods where the city and the county were investing approximately $8 million dollars in federal revitalization grant monies. The number of payday loan storefronts in Tucson and Pima County had increased exponentially. In 2002, there were 78 payday loan storefronts in Tucson. By2005, there were 130. Further mapping studies initiated by the Southwest Center for Economic Integrity report that 83% of the payday loan storefronts were located within ¼ mile of low-moderate income neighborhoods. 4 Arizona voters soundly rejected a ballot proposition that would have allowed payday lending to continue charging residents triple digit interest rates in 2008. In July 2010, the payday lending industry lost its exemption from the state’s small loan law capping interest rates at 36%. This hard won policy victory could not have happened without the efforts of advocates at the local level working with their local elected community leaders. The enactment of local ordinances helped raise the state’s collective policy I.Q. on the issue of predatory payday lending. A study by the Center for Responsible Lending found that African-American neighborhoods have three times as many payday lending stores per capita as white neighborhoods. “The findings show that race matters, even when we control for other factors. Variables the payday industry claims are key demographics of its customer base - income, homeownership, poverty, unemployment rate, age, education, share of households with children and gender - do not account for the disparity.”5 Ace Cash Express, a leading nation-wide lender, reported in an SEC filing that its growth strategy is to open new stores, franchise stores in new and existing markets, opportunistically acquire stores, and introduce new services into its store network. This illustrates intent to saturate specific markets and to maintain existing customers caught in the payday loan trap. These storefronts crowd out local businesses such as non-franchised restaurants and cafes. Given that we are able to geographically demonstrate that the payday lending industry continues to expand its storefronts into minority, low-middle income, economically distressed neighborhoods within cities and counties brings us back to the local land use issue. Local governments restrict all types of businesses and enterprises from liquor stores to adult entertainment facilities. Restricting payday lenders through ordinances can be an effective strategy in curbing economic blight while efforts at the state and federal levels to reign in these abusive lending practices proceed. 3 Payday Lending in Pima County, AZ, Southwest Center for Economic Integrity, December 2003 5 "Race Matters: The Concentration of Payday Lenders in African-American Neighborhoods in North Carolina" Delvin Davis, Keith Ernst, Uriah King, Wei Li, Center for Responsible Lending 2005 5 Payday Lenders Cluster in Poor and Minority Neighborhoods Payday lenders cluster in low to moderate-income neighborhoods in urban areas, in rural communities and around concentrations of lower wage workers, and military bases. Steve Graves, a geographer at California State University, Northridge, found in a 2009 study that payday lenders cluster in tight bunches in specific neighborhoods. Several cities, including Denver, Columbus Ohio, Louisville, Phoenix and the Los Angeles’ San Fernando Valley demonstrated similar patterns. The spatial behavior of this industry suggests that there is little price competition and that, as many observers have suggested, payday lenders may generate business for additional payday lenders. In other words, once payday lenders gain a foothold in an economically challenged neighborhood, they tend to multiply as numerous citizens enter a debt spiral. The first map, found on the next page, is of the San Fernando Valley, California which would be Americas’ fifth largest city if it were separate from Los Angeles. What you will see from this map is the concentration of payday lenders in the Latino neighborhoods of the East Valley. Alex Padilla’s 20th State Senate district in the San Fernando Valley has 96 payday lenders and 76 banks, an inverted ratio that is quite rare in California. Padilla’s district, gerrymandered to insure a heavily Latino constituency, also has a very high per capita density of payday lenders, earning it the distinction of ‘worst’ in California. Meanwhile, the adjacent, but largely white and middle class 23rd Senate district has 31 payday lenders and 270 banks, making it 38th out of 40 statewide for payday lending. Other nearby, largely white middle class districts have similar figures6 . In California, the Van Nuys zip code, 91406, also heavily Latino, has eight payday lenders and only one bank. Zip codes in Pacoima, North Hills, North Hollywood, Reseda and Panorama City also have zip codes with badly inverted ratios. Meanwhile, neighboring white neighborhoods have very few payday lenders and many banks. Woodland Hills, in the West Valley, has 27 banks and only one payday lender. Encino has 24 banks and no payday lenders. It is absolutely clear that Latinos are a favorite target of payday lenders. This business robs capital poor areas of the city of precious resources and has been shown to lead to higher crime rates. (see Kubrin, Charis E., Squires, Gregory D, Graves, Steven M. and Ousey, Graham C., Does Fringe Banking Exacerbate Neighborhood Crime Rates? Investigating the Social Ecology of Payday Lending (2011). Criminology and Public Policy, Vol. 10, pp. 437-466, 2011. Available at SSRN: http://ssrn.com/abstract=2028137) Figure 1: This graphic notes that the clustering pattern of payday lenders can not be due to random chance 6 7 St. Louis, Missouri St. Louis is typical of many larger cities in the United States where payday lending remains legal. Missouri, a state with a particularly friendly regulatory environment for predatory lenders, has a far greater number of payday lenders than one would expect for its population. The rural densities in the southeastern part of the state are among the nation’s highest. St. Louis itself has a moderate density of payday lenders, but as is the pattern across most metropolitan areas, the minority neighborhoods host a disproportionate number of high cost lenders. The map shown above demonstrates this condition well. Banks, which indicate the mainstream financial sector, are commonplace and clearly outnumber payday lenders in white neighborhoods. The non-white areas on the other hand have as many payday lenders as banks and in some areas payday lenders clearly outnumber banks. Note how access to banks in the Universal City/Clayton districts stands in contrast to the lack of such access in St. Louis’ near northwest side. 8 Jacksonville, FL In Florida and other parts of the country, payday lenders are disproportionately located in counties with military installations. This phenomenon was amply demonstrated in the 2005 Graves and Peterson study which compared payday lending in military towns against civilian counterparts. This exhaustive study found cities and counties that contain large military installations almost without fail have the highest concentration of payday lenders in their respective states. Typical of this pattern was Jacksonville, Duval County, Florida; home to Jacksonville Naval Air Station and Mayport Naval Base and home of two recently closed facilities at Whitehouse Field and Cecil Field Naval Air Station. Duval County ranked first in the state for payday lending. Hillsborough County, Florida which is home to MacDill Air Force Base had the second highest payday lender density statewide. Professors Graves and Peterson found that ZIP code data confirmed payday lenders disproportionately target sailors and Marines stationed in Jacksonville. For example, out of 916 ZIP codes statewide, ZIP code 32210, which is adjacent to the Naval Air Station in Jacksonville, ranked first in the state for total number of payday lenders (11) and ranked 15th worst in a composite measurement of payday lender density relative to bank density and population. Moreover, ZIP code 32205, which is a commercial district near the base, had the second worst composite density of payday lenders in the state. Together, these two ZIP codes have approximately 87,000 people; 24 banks and 22 payday lenders; 15.2 more than are statistically justified by the local population." Similar patterns were found to hold true for all major military bases in the study, with the exception of Fort Drum in New York where usury laws had not been significantly eroded during the 1980-90s and state regulators remained committed to enforcing the law. 9 A recent update to the original Graves-Peterson study found that even though the federal Military Lending Act had been enacted to protect military families from predatory loans, many military areas around the United States (particularly Florida and Texas) remained awash with payday lenders. See: “Predatory Lending and the Military: The Law and Geography of "Payday" Loan in Military Towns,” 66 Ohio State Law Journal 653 (2005), Stephen Graves, Ph.D., Associate Professor of Geography, California State University Northridge and Christopher L. Peterson, J.D., Assistant Professor of Law, University of Florida College of Law. 10 Ruston, Louisiana Payday lenders have certainly affected many lives in large cities and around military bases, but small towns are where poverty and sluggish economic prospects have created conditions prime for predatory lending. In many small towns, there are significant densities of payday lenders that threaten to disrupt the relatively fragile economic health of such places. The map below shows Ruston, Louisiana, a small college town and regional service center in North Central Louisiana, which had roughly the same number of banks as payday lenders. Most of the payday lenders and only one of the banks were in the largely black southern portion of town. None appeared to be in the college-town area on the western side of the city. Similar densities of payday lenders can be found throughout rural communities throughout the Midwest, Appalachia and the Deep South. (Maps courtesy of Professor Steve Graves, California State University, Northridge) 11 How to Pass an Ordinance This section has been written to educate advocates on how to get an ordinance presented to local government officials and get it passed. A six step process is proposed. Following this section is information that can be given independently to a government official. Step 1 - Learn all you can about payday lenders in your area. Before you can approach an elected official for help in curbing payday lending in your city or town, you will have to do a little legwork and answer a few questions. How many outlets are there within your community limits? Your state licensing agency should be able to answer this question for you. Once you obtain a list from your state licensing agency of all the licensed check cashers/payday lenders in your area (ask for it in city order if possible) you can compare that list to your local government licensing. You will often find that they do not match and local check cashers/payday lenders do not have the required local license. Or you might find that local check cashers/payday lenders have the required local license, but are not licensed with your state licensing agency. This issue will need to be resolved. You may be able to get some outlets closed immediately due to improper licensure. Obtain a map of your local community by district, neighborhood, or other division of your community. This is usually available on-line on your community’s web site. Try to also obtain the population of and income level for each district. This information may be old, dating back to the last census, but may be the best available information in the local community. This will help you understand and show your local government officials the clustering of payday lenders within your community. In what areas of town are most payday lenders located? The easiest way to get addresses for payday lenders is through your local or state licensing agency. As a double check look in your yellow pages. These businesses often advertise under more than one heading. 

Written By:

Kelly Griffith, Co-Director
Southwest Center for Economic Integrity
[email protected]
Linda Hilton, Director
Coalition of Religious Communities
Crossroads Urban Center - Utah
[email protected]
Lynn Drysdale, Staff Attorney
Jacksonville Area Legal Aid - Florida
[email protected]

@consumerfed.org

 

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