Sunday, March 18, 2007

In California and across the nation, reforms aimed at African-American and Latino payday loan borrowers seek to educate customers about the use of such loans, while also offering a once-a-year break to borrowers who don’t pay back loans quickly.

Critics say the $40 billion payday industry which crowds the streets of California’s lower income neighborhoods is the greatest obstacle to creating and retaining wealth for many African-American and Latino families.

About 13 states have banned payday advance loan lending arguing the interest rates are exorbitant and often trap financially strapped borrowers into a cycle of paying additional “rollover” fees to renew the same principal.

Against this backdrop, the Community Financial Services Association of America (CFSA), a trade group that represents about 60% of the nation’s payday lenders says it will band advertising loans for “frivolous” purposes such as gambling, entertainment or vacations and will warn borrowers that “payday advances should be used for short-term financial needs only, not long-term financial solutions.”

The biggest change would give customers more time to pay back a loan with no financial penalty. This “extended payment plan” would be available at least once a year and provide borrowers between two and four extra months to pay off loans.

The industry has launched a $10 million media advertising campaign on BET, Telemundo and Univision targeting African-American and Latino audiences.

Consumer advocates call the move “a public relations gimmick aimed at heading off more regulation.”

The cash advance payday loan industry is under intense pressure from state legislatures and Congress. “This is an attempt to stay ahead of the regulators. This does not solve the problem of triple digit interest rates for payday loans that traps borrowers into a vicious cycle of debt,” said Jean Ann Fox of the Consumer Federation of America.

Millions of Americans take out small loans from so-called payday loan shops and then find themselves paying sky-high interest rates that can soar to 500 percent a year. But making loans for people who live paycheck to paycheck has become a multi-billion dollar enterprise with more than twice the number of stores as Starbucks.

Here’s a borrowers profile: Credit constrained, and/or working but low income, young female head of household African-American, Latino, renter. African-American households are 2.5 times more likely to use payday loans than whites. Cash loan lenders are more prevalent in low income communities. Borrowers are typically 3 times more likely to be burdened with debt or been denied credit.

“Traditional mainstream banks have abandoned lower-income communities and communities of color while their role is being filled by predatory check cashers, payday lenders and finance companies that prey on consumers with few financial alternatives,” said Alan Fisher, executive director of the California Reinvestment Coalition. “Millions of dollars are being taken out of the pockets of the working poor in predatory fees.”

“Payday lenders make it easy for poor people to keep borrowing money,” said Elizabeth Dixon, a Riverside CPA who specializes in building and managing wealth among African-American families.

“The lack of bank and savings & loans branches in neighborhoods of color has created a price gouging opportunity.” Dixon recalls a client who borrowed $225 in cash. The man wrote a post dated check for $300, paying a fee of $45 for the transaction. “His check bounced when the payday lender cashed it. He was charged $28 dollars. For this one payday loan he ended up paying $118 in fees - almost 50 percent of what he borrowed,” said Dixon.

Payton Brown started borrowing money from a pay day loan lender when he was in college at Cal State San Bernardino, and said he quickly became addicted.

“I started going there literally every week,” said Brown, now a 29-year-old retail manager. “Eventually my world crashed. I borrowed from one lender to pay off another. When I graduated I was completely broke. You don’t have to be poor and ignorant to get caught up in the payday loan spiral,” said Brown.

Darrin Anderson, president of CFSA, who also serves as president of QC Holdings, Inc. a Kansas payday lender, defended the groups reforms saying the changes are meant to help the 5% to 10% of borrowers who don’t pay off their personal loans.

“My hope is these reforms really do solve a problem for the small percentage of our customers who have trouble meeting their obligations to us.”

This entry was posted on Sunday, March 18th, 2007 at 11:51 am and is filed under National.