09 Apr Payday Lending and the Blob
The 1958 film The Blob is a cult classic starring Steve McQueen and a predatory, amoeba-like creature from outer space. In the movie, the Blob starts out as a small lump brought in by a meteor. A curious farmer encounters the Blob and picks it up with a stick. The Blob latches itself on to the farmer’s hand and eventually consumes him whole. The Blob consumes nearly everything, and everyone, it its path. The townspeople finally defeat the Blob by freezing it in its tracks, but the movie ends ominously, hinting that the blob could one day return.
Payday lending shares many of the Blob’s menacing features. Like the Blob, a payday loan may start out small, but it quickly becomes much larger than anticipated, often consuming its borrower’s every last dime. North Carolina thought that it “froze” the Blob out nearly a decade ago, but the Blob could soon return if some legislators get their way.
The FDIC defines payday loans as “small, short-term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income payments.” A borrower will usually write a post-dated check for the amount of money needed plus the fee charged by the lender. The lender gives the borrower the cash requested (minus the fee) and keeps the check. In theory, the lender will cash the check on the borrower’s payday, since the borrower will have the funds to cover the loan in his or her account at that time.
Unfortunately, reality usually doesn’t mirror theory in the case of payday lending. Many borrowers cannot afford to pay back the loan by the time their payday comes around. Then they will go back to the lender (or a different payday lender) and ask for another loan or an extension on their original loan, all for an additional fee. The payday loan then becomes like the Blob, growing larger and larger as time passes and fees add up. Many borrowers who needed “quick cash in a fix” find themselves swallowed in debt.
Why are payday loans so hard to pay off? To start, most payday loan borrowers are already in the midst of tough economic situations. Because of this, they are often denied more traditional forms of credit, such as bank loans or credit cards. Payday lenders know this, and they charge exorbitant fees because of it. The “beauty” of payday lending (from the lender’s perspective) is that the fees don’t look as high as they really are because they are shown as predetermined fees rather than an annual percentage rate (APR).
For example, a payday lender could charge $17 to loan a borrower $100 for a two-week term. A one-time, $17 fee may not sound like much, but if calculated as an APR, it would amount to 443.21%. Lenders argue that the fees are fair because their clients are higher credit-risks, but there is little question that rates so high are predatory, especially since many of the loans do, in fact, end up as long-term loans.
Payday Lending in North Carolina
North Carolina has a long history with payday lending. Because of the state’s strong military presence, many payday lenders saw North Carolina as a fertile place to do business. Service members are often targeted by payday lenders because they know that service members are young, get a consistent paycheck, and are often unfamiliar with other available credit options. Payday lending shops sprang up around the state even though, prior to 1997, they weren’t expressly allowed under state law.
In 1997, North Carolina passed the North Carolina Check Cashing Act (NCCCA), which permitted payday loans under a few conditions: (1) they could be for no more than $300, including fees; (2) their maturity date could not be more than 31 days after the loan was issued; (3) the total fees could not exceed 15% of the face value of the check; and (4) payday lenders needed to be licensed by the state as check cashers.
The NCCCA expired in 2001, meaning that payday lending should have ceased to exist in North Carolina, at least according to the law. It didn’t. Payday lenders were incredibly creative and used all manner of schemes to make loans disguised as other services (such as internet cafes, leasing agreements, etc.). Payday lenders also used National Charter Banks, which aren’t subject to state interest-rate laws (known as “usury” laws), to originate their loans, thus exempting them from state regulation.
Fortunately, North Carolina’s Commissioner of Banks at the time, Joseph Smith, declared in 2005 that “rent-a-charter” payday lending violated North Carolina’s Consumer Finance Act. His decision was affirmed the next year by the North Carolina State Banking Commission. With a few exceptions, the declaration put an end to payday lending in the state.
The New Bill
Like the Blob, however, payday lending is threatening to return to North Carolina. On February 14, 2013, Senators Jerry Tillman and Clark Jenkins proposed a new bill that would reintroduce payday lending to North Carolina. The senators claim that payday lending provides important, short-term credit to those who need it most. They also claim that the bill provides adequate protection against the “debt-cycle” that payday lending often creates. Let’s take a look at exactly what the new bill purports to do.
Senate Bill 89 is “an act to allow and regulate the business of providing deferred presentment services to certain persons,” also known as payday lending. Like the 1997 NCCCA, the new bill requires that payday lenders be licensed and regulated by the state. Lenders would need to maintain records and carefully keep track of customer information. They would also need to provide the borrowers with a written disclosure of the costs in “clear and understandable language.”
Under the bill, lenders would not be allowed to charge interest that exceeds 15% of the cash advanced, and they could not lend more than $500 to a customer. While that may sound good, it could still result in borrowers being charged up to $75 for a $500 loan. A 15% interest rate over two weeks would still equal 300% if calculated as an APR.
The bill would also require loans to reach full maturity within 35 days. Its proponents say this would solve the problem of creating a debt-cycle, because even if the loan isn’t paid off, it will not continue to grow. Lenders are supposed to ask borrowers whether they have any other loans outstanding (presumably to prevent them from going from one payday lender to pay off another), but other than a promise by the consumer, the bill provides no means for the lender to verify the information. Additionally, lenders are not supposed to lend to members of the Armed Forces, but again, there appears to be no way for them to verify the information.
Consumer advocates, including Attorney General Roy Cooper, have criticized the bill as a rehash of the same problems that plagued consumers
before. Without stronger protections, most consumer advocates believe that payday loans will still be bad for consumers because they are still very expensive and still risk trapping consumers in a debt cycle.
If the bill does pass, consumers in the state should be wary of payday lenders and avoid them at all costs. Even now, some payday lenders have found loopholes through online lending. If you are considering one of these loans, you would be well-advised to look at your other options first.
Perhaps the bill will be modified to provide additional protections, but it is our hope that our General Assembly members come to their senses and keep payday lending out of the state. Many of our clients ended up in bankruptcy because of payday loans that drained their bank accounts; even a more regulated version of payday lending makes us cringe.
Unfortunately for film buffs everywhere, The Blob was followed by a sequel, Beware! The Blob in 1972. It was a disaster. With payday lending – like The Blob – no sequel is needed.