Payday Lending Reform
News, Winter 2017
Legislation, Research and Nonprofit Efforts Lead the Way
BY MARY LEE HARVEY DIRCKS
A mother of four picks up her children from school, makes three necessary stops at three different payday lenders, and then heads home to give after-school snacks and hear about the day. Maria Hill, a Public Policy Intern at the Women’s Fund of Omaha, remembers these payday loan storefront tours that occurred two or three times a year throughout her childhood in Omaha. “She’s strong, but being strong isn’t always enough,” Hill says about her mom, a divorced single parent who does whatever is necessary to provide for her family. Health problems and unreliable fluctuations in income set the stage for Hill’s mother to resort to payday loans to meet the needs of her family in times of shortfall. “Emotional and mental stability doesn’t take care of the bills and doesn’t feed your kids or pay your car payment or your insurance,” Hill says.
Hill’s family is representative of the typical payday borrower, according to Nick Bourke, director of consumer finance for PEW Charitable Trusts. “Fixing the payday loan problem is important for all kinds of people but especially for mothers with children who need help staying afloat,” he says. Many payday loan consumers are women between ages 25 and 44, earning less than $40,000 per year with dependent children. Often, people who seek this type of loan have volatile incomes (hourly wages with unpredictable schedules) and an average credit score of 517, knocking traditional lending opportunities out of reach, he adds.
“PEW has done a lot of research in the area of household finances,” Bourke says. “One thing that we’ve seen is that for people who are living paycheck to paycheck, credit helps smooth expenses and provides some liquidity, but only if it is structured a certain way. The way payday loans are structured today is not the way to do it.” PEW research shows that consumers spend, on average, $520 in fees to repeatedly borrow $375, burdened by this debt for about five months of the year. Nebraska state law allows $15 charged for every $100 increment, equating to 461 percent APR. “There is evidence from other states like Colorado that shows if you structure small loans to have affordable payments, a reasonable time to pay and a few other simple safe-guards, consumers will still have access to credit but they’ll be much better off,” Bourke says. Bourke has been advising collaborative groups in Nebraska working toward payday lending reform that mimics Colorado’s law, passed in 2010.
“Currently in Nebraska, payday lenders are doing no risk assessment at all and they are charging the maximum amount that the state law allows,” says Traci Bruckner, research and policy director for the Women’s Fund of Omaha. Besides the exorbitant cost, another major problem for the borrower is that repayment is due in a lump sum just two weeks later. “So when they [the borrowers] get paid, they can pay that loan back but they don’t have enough money to make all of their other payments, so they end up re-borrowing and re-borrowing and re-borrowing. That’s what creates that cycle of debt,” Bruckner says. “To simply use the excuse that people need access to this kind of credit, even though we know it’s creating problems for people and making them fail time and time again, is just not acceptable to me.”
Last year, the Women’s Fund of Omaha partnered with other nonprofit groups—including Voices for Children Nebraska and Nebraska Appleseed—to draft Legislative Bill 1036, which was indefinitely postponed, not making it out of committee. But the Banking, Commerce and Insurance Committee’s wait-and-see attitude won’t fly again this year, according to Bruckner. “We’ve had a lot of positive meetings with newly-elected senators and sitting senators, and I think momentum is on our side. I feel really hopeful,” Bruckner says about support for payday lending reform this session.
Senators Tony Vargas and Lou Ann Linehan, who are co-sponsoring the legislative proposal, introduced basically the same bill, which caps the interest rate at 36 percent and limits maintenance fees, extends repayment terms with no penalty for early re-payment, and requires lenders to set monthly payments at 5 percent of the borrower’s monthly income, Bruckner explains. One change from last year is to add a $50 increase to licensing fees to fund state financial literacy programs for students in kindergarten through 12th grade. “Public support and momentum is on the side of reform. Our job is to demonstrate that to the legislature,” she says.
Nebraska’s bill is fashioned after Colorado’s law but with a more simplified fee structure that makes it easier for lenders and more comprehensible for the consumer, Bourke explains. He estimates that Nebraskans will save around $10 million a year if the law is passed. “Consumers in Colorado are saving more than $40 million each year because of this payday loan reform law. Since 2010, that equals almost a quarter of a billion dollars in savings for some of the most financially struggling consumers in Colorado,” Bourke says. “That’s money back in their pockets and back into their local community. The amazing thing about the Colorado reform model is that it keeps access to credit available for people who want it, but it makes the credit safer and lower cost and puts a lot of money back into the community.”
Yes, some payday lending stores will close with increased regulation and lower cost to the consumer. But Colorado surveys show that the typical loan store serves about twice as many people than it did before and that most of the stores that closed were owned by out-of-state interests, Bourke points out. “The increased efficiency the law imposes mainly effects out-of-state companies. And those out-of-state companies are charging fees in Nebraska that are three times higher than what they charge consumers in other states like Colorado,” he says. “Consumers would be better off in Nebraska saving that money and keeping it in the local economy.”
The Consumer Financial Protection Bureau (CFPB) is proposing new rules to regulate payday lending at the federal level. While the CFPB’s federal regulations will push the industry toward offering longer-term payday and other high-cost loans, it lacks the authority to cap interest rates or set limits on payments. “When you’re talking about a payday lender, you are talking about a lender that is licensed by the state according to a specific state law,” Bourke says. “It’s not only possible for states to take action, it’s imperative because no matter what happens, the CFPB is not going to solve all the problems. And state law makers are still going to have to take responsibility for regulating their state licensed lenders like payday lenders.”
The CFPB invited the public to comment on its proposed rules last fall. The Women’s Fund of Omaha joined forces with 25 other non-profits, banks and faith-based organizations to send letters to the CFPB requesting specific changes to the proposal that would ensure the federal rule fosters safe and affordable products at fair prices. The letters also focused on necessary changes to the rule for setting clear product safety standards for small-dollar loans to protect borrowers and make it possible for lower-cost providers such as banks and credit unions to offer small loans on fair terms to their customers.
“The rules proposed by the CFPB move the industry in the direction of installment loans versus short-term lump sum payments,” Bruckner says. “That fact gives us momentum as they [payday lenders] will be seeking a change in the law as well.” She expects opposition to regulation from the industry against the bill introduced at the Nebraska Legislature. “Payday lenders are trying to protect their market,” Bruckner says. “But there may be some things we can agree on, like extending the length of the loan.”
Strong arguments from both sides will be heard at legislative committee hearings. Community groups are using social media and public events to urge people who have suffered from payday lending debt cycles to share their stories and storm the hearing rooms in Lincoln. One such event was a film screening of “The Ordinance,” a documentary about how community groups and citizens in Texas organized to bring about change to predatory lending practices in their towns. The free event was sponsored by ACLU, Anti-Defamation League, Black Men United, Coalition for a Strong Nebraska, Inclusive Communities, Legal Aid of Nebraska, Nebraska Appleseed, Nebraska Families Collaborative, Nebraska Youth Advocates, Urban League of Nebraska Young Professionals and Women’s Fund of Omaha. After the film, Bruckner emceed a panel discussion and question-and-answer session that featured James Goddard, Nebraska Appleseed; Nick Bourke, PEW Charitable Trusts; Pastor Tony Sanders, Koinonia House of Worship; and John Kotouc, American National Bank. More than 100 attendees and the distinguished panelists agreed there is a need for payday lending reform in Nebraska that maintains access to credit while providing specific consumer protection.
“We need your help,” says Goddard about convincing legislators to act. “We got it into committee last year but could not get it out. We need every voice and every story to be able to do that. We encourage everyone here to engage.” In Texas, citizens brought about change by convincing city council members to regulate predatory lending practices through city ordinances after attempts at the state level failed. That route is likely not an option in Omaha, but Goddard and Bruckner encourage people to talk to city council members, the mayor and mayoral candidates, requesting they put pressure on state senators.
It’s also critical for individuals to voice their concerns directly to senators through letters, emails, phone calls and face-to-face meetings so they understand the impact predatory lending practices have in their districts. “We are very lucky to live in Nebraska when it comes to policymaking, because anyone can testify on a bill and every bill receives a public hearing,” Bruckner says. Showing broad public support for payday lending reform with a full hearing room will be important to show the senators that the public has strong enough concerns that they would take time out of their day to show up, she adds. The Women’s Fund of Omaha will provide training to help people formulate their testimonies, and communicate via media in a variety of ways.
“There are some barriers we need to overcome during this legislative session,” says Julie Kalkowski, executive director of Financial Hope Collaborative (FHC) at Creighton University. In the hearing for LB1036, last session, a number of senators commented that nobody had logged complaints against payday lenders. An FHC client who testified at the hearing responded, “When you’re hanging on by your fingernails, you can’t let go with one hand to try and find out how to file a complaint.” The other piece of that is that many people are embarrassed to be in this predicament; they don’t want people to know, Kalkowski adds.
“People are making policy decisions about situations they’ve never encountered before, so it can be difficult for them to understand,” Kalkowski says. “Senators need to realize how precarious the financial situation is for so many Americans.” A 2015 survey conducted by the Federal Reserve Board Division of Consumer and Community Affairs indicates that 47 percent of Americans would not be able to come up with $400 in 24 hours to cover an emergency without borrowing from someone or selling something. “So that means 47 percent of households in this country are really struggling month-to-month without any savings,” Kalkowski adds. Nebraskans aren’t faring any better. Forty-three percent make just enough to cover monthly expenses and 13 percent exceed their income in spending for basic monthly necessities, according to the 2015 National Financial Capabilities Study conducted by the Financial Industry Regulatory Authority (FINRA). “Fifty-six percent of Nebraska households live paycheck to paycheck and/or spend more than they make,” says Kalkowski. “That’s a lot of households who are at risk for a financial disaster.”
FHC offers debt consolidation loans to graduates of their nine-week course for financial literacy instruction, Financial Success Program (FSP). FHC has secured 65 loans totaling approximately $300,000 since 2008. “We’ve shown that it works, so now there are credit unions in Omaha that are offering these types of loans to their members,” Kalkowski says. Her hope is that changes in federal regulation will make it feasible for more banks and credit unions to offer alternatives to the population that currently uses payday lenders. “I want banks and credit unions to see that there’s a great business opportunity here that will not only improve their bottom line but will also improve the financial stability of working families,” Kalkowski says. “When people have one monthly payment at a reasonable interest rate as opposed to four to 15 high-interest payments, they can significantly reduce their debt burden and improve their credit score.”
In November of 2015, representatives from area financial institutions and nonprofits came together to investigate possible solutions to lending gaps in Omaha. Small groups were formed who have continued to meet. The group charged with creating an alternative to payday lending reports progress toward a workable model with tremendous potential, says Sam Hohman, chief executive officer for Credit Advisors Foundation. “Bottom line, we knew whatever we created would require us to understand the appeal and ease of payday lending and not place unnecessary obstacles in the process, no matter how good-intentioned,” she says. “Any alternative product needs to consider the risks to the funders, the need of the community and the mission of the non-profits.” Hohman is confident the group has devised a model that will work and shared their findings with other constituents to move it to the next level.
“There is clearly a problem in the payday lending market, and there is clearly a way to make the market work better at a lower cost while keeping access to credit available,” Bourke says. “With only a 9 percent approval rating, payday lenders are not popular, and a vast majority of both borrowers and the public support reform.”
The facts are in and the CFPB is proposing federal regulations. Many states are seeking reform, lawmakers are becoming informed and Omaha metropolitan and Lincoln area stakeholders are working together. Surely a solution for Nebraska is within reach. W