Payday loans: credit option or debt trap?
Missouri is fertile ground for payday lenders. With some of the loosest regulations in the nation, we are among the states with the most payday lending stores per capita. In this Health & Wealth report, the payday lending industry in Missouri fights for its life, as activists aim for the November ballot to try to rein in these lenders they say trap the working poor in a cycle of debt.
Activists around the state are gathering signatures for a ballot initiative that would cap APR on payday loans at 36 percent. That might sound high if you're used to getting credit card offers in the mail, but to get a payday loan, you don't need good credit, or any credit. Your collateral is your next paycheck.
For this service, payday lenders in Missouri can legally charge up to almost 2000 percent APR. The average loan in Missouri is $307, plus $52 in interest, which adds up to 444 percent APR, about 30 times the average interest rate on credit cards.
The payday lending industry argues that APR, or annual percentage rate, is the wrong way to measure these short-term loans, since the average term is just two weeks. But consumer advocates point to evidence that the average payday borrower will stay in debt for at least six months.
For Fenny Dorsey, it was more like 15 years. She took out her first payday loan back in the early 1990s.
"It was for social. Enjoyment. I wanted to play bingo." She didn't have any money, and a friend said suggested she take out a quick $100 loan.
"Honestly, I thought I was going to take this loan, go play some bingo, and win. But I lost."
Two weeks later she renewed the loan, adding another $15 or so in interest. Soon she was taking out loans to pay for other expenses and loans to pay the interest on earlier loans.
"I had more loans than anybody would ever believe. Loans in Columbia, loans in Fulton. I mean I just had them everywhere. Every time I had a financial problem, I always say to myself, 'Aw, I'll go get a loan tomorrow.' And it just spun out of control."
While Dorsey was busy taking out loans all over Missouri, Graham McCaulley was working at a payday loan shop in Columbia. He said part of his job was getting people to renew loans week after week – in fact, he said, this was business model.
"We would get calls twice a day from our corporate person, and we would have to call in the numbers each night. And I thought the numbers that would look great is the percentage of people who came in and paid off their loans. But the main percentage they cared about was this buyback percent. And that was the percentage of people who either renewed their loan, or immediately took it back out."
McCaulley and Dorsey now work with Grass Roots Organizing, one of the advocacy groups trying to cap payday loans at 36 percent.
According to the Center for Responsible Lending, the average payday borrower who takes out a $325 loan renews it eight times (or takes out other loans), eventually paying more $468 in interest. In other words, paying $793 to borrow $325.
But supporters of the industry say capping the interest rate would hurt the state's economy.
"If it was at 36 percent, you couldn't stay in business at all," said State Representative Don Wells, a Republican from Texas County. "If the law passed, everyone would immediately have to close down." Wells is chairman of the Missouri House banking committee, and he also owned a payday lending store until just a few years ago.
"When you do the arithmetic, you'll see that the profits aren't there that everyone thinks people are making. And that's one reason I sold my business. I seen I could do better in something else. So I sold out. I let someone else worry about it."
Joseph Haslag, an economist at the University of Missouri, agreed with Wells' assessment. Haslag was hired by payday supporters to analyze the effect a 36 percent cap would have on the payday loan industry in Missouri.
"From an economic standpoint, that's a pretty easy decision. It matches what's called a 'shutdown condition' -- businesses go out when they can't afford to continue operating. And that's what would happen under this regulation, as far as I could tell."
He found it would cause all 1,066 payday shops in Missouri to shut their doors. The state economy would lose 2,665 jobs, and $57 million in GDP. This, in turn, would cost the state $2.17 million in lost tax revenue, plus $8 million in unemployment benefits to laid off workers. Haslag's analysis was adopted by the state auditor as part of the official ballot summary.
But supporters of the rate cap say the industry does far more harm to the state economy than good, noting that eight of the ten largest payday lending companies operating in Missouri are headquartered in other states.
Representative Mary Still, a Democrat from Columbia, has introduced a bill to cap payday loans every year since she was elected to the General Assembly in 2008.
"A lot of money is siphoned out of Missouri to out-of-state companies that own the payday lenders. This is money that could go to pay rent, or to buy groceries. And when you can't pay rent, you get kicked out of your apartment, you move, your children change schools. There's just a growing social impact to the problems caused by these predatory lenders."
This year, Still has introduced her payday lending bill as usual, but is trying a different route as well, supporting the ballot initiative. She is not optimistic about getting her legislation through the House.
Banking committee Chairman Don Wells said he will not hold a hearing on Still's payday lending bill.
"I told my committee, that we're not going to hear junk that just consumes your time and has no benefit for your constituent or the state."
In fact, Still's legislation has not been referred to any committee, and it probably won't be. It's languishing on the desk of the speaker of the House, Republican Steven Tilley.
Tilley has supported past efforts to reform the industry by limiting the number of renewals allowed on loans, but said he's not a fan of any interest rate cap. At 36 percent APR, a two-week $100 loan would cost just a little over $1 in interest.
"If somebody walked up to you right now, and said, 'I want to borrow $100, and I'll pay you back in 2 weeks' -- you didn't know them -- would you loan the money to them for $101 dollars? Most people wouldn't."
The payday and short-term loan industry has spent around $1.4 million dollars in campaign contributions in Missouri over the past ten years. Tilley's campaign has received around $70,000 from the industry since 2006.
I asked him whether the industry money floating around Jefferson City has an impact on the legislative process.
"Not at all," he said. "I've got a long record of not telling small businesses what they should do and I had that record before I got here."
Tilley refers to payday lenders as small businesses, but the biggest one in the state, Quick Cash, reported $123 million in revenue last year, according to its most recent filing with the Securities and Exchange Commission. Nearly one-quarter of that revenue came from its 102 stores in Missouri. In that same report, the company noted it has spent "substantial amounts" to keep the rate cap off the ballot in Missouri, and will spend "substantial additional amounts" if the question does go to voters in November.
A campaign committee called Missourians for Equal Credit Opportunity, which opposes the interest rate cap, has raised $1.1 million so far to fight the ballot initiative -- almost ten times what the other side has raised.
I asked spokesperson Eric Banks where that money is coming from.
"That's not an important issue. The important issue is, should we not continue to have opportunities for people to get credit on an emergency, short-term basis."
So I rephrased the question and tried again. I said, you're spending all this money to influence voters, and you don't think they have a right to know where the money's coming from? And his answer, again:
"No. The public has no more right where the money is coming from, nor to know where the money is being spent."
Actually, under Missouri law, campaigns do have to disclose who is funding them. It's public information. But campaign reports filed by Missourians for Equal Credit Opportunity show every cent comes one group, a non-profit that doesn't have to report its funding, thereby concealing the ultimate source.
While Missourians for Equal Credit Opportunity is fighting to defeat the 36 percent cap, it is supporting two other initiatives with strikingly similar language, but that would have no effect on the industry.
Activists say it's a tactic to confuse voters.
I found two women gathering signatures for these initiatives recently in Columbia. I didn't tell them right away that I was a reporter, but asked what they were gathering signatures for.
"It's to allow voters to be able to decide whether or not they want a cap put on payday loans. It's an initiative to get on the ballot so we can vote on it."
"What's the payday loan cap?" I asked.
"Right now it's at 41, they want to put it at 36," she said.
She made it sound like I would be signing up for capping interest rates on payday loans. But the petition she showed me would instead amend the state constitution banning any such interest rate cap. When I told them I was a reporter and asked who they were working for, they said they couldn't talk to the press.
So far, 17 states and the District of Columbia have capped payday loans. Most recently, in 2010, Montana and Arizona voted by wide margins for a 36 percent cap.
That's why the payday lending industry wants to make sure this doesn't get on the ballot here. In its 2011 annual report, Quick Cash noted that ballot initiatives are, quote, "expensive to oppose and are more susceptible to emotion than deliberations in the normal legislative process."
Activists need to gather at least 92,000 valid signatures to qualify for the November ballot. The deadline is May 6.