Collaboration Will Bring Solutions to Payday Lending Debt Trap
For Families Caught Up in the Stark Reality of Payday Lending, There is Hope in Reform
BY MARY LEE HARVEY DIRCKS
From left to right:
Aubrey Mancuso, Executive Director, Voices for Children
Renee Fry, Public Policy Chair, Women’s Fund of Omaha
Jennifer Creager, Director – Public Policy, The Greater Omaha Chamber
Abby pulls up to the payday lending storefront she frequents far too often for what she hopes is the last time. She finally pays off her “short-term” loan that has now cost her more in fees than the original $425 she borrowed to avoid eviction from her apartment months before. Now, she faces a full week with no money at all. “I’m afraid to say I’ll never do it again, but I am willing in this moment not to,” she says. In the past, Abby juggled as many as seven payday loans totaling $1,700. Fortunately, this time she didn’t go to other lenders for additional funds. Abby is well aware the $15 fee she pays for every $100 borrowed can equate to 460 percent APR, and that it only increases from there. “Even though I know it’s bad, at the time it feels like I don’t have a choice,” she says. “There’s always a lion at the door.”
Initially, Abby wrote two checks for $250 each (this payday lender only holds checks for $300 or less). Every two weeks, she scrapes $500 cash together by not paying other bills that are due, takes it to the payday lending store and pays off the debt. They shred her original checks; she writes two new checks for $250 each and leaves with $425 in cash just like she did the first time. She uses that cash to pay a few bills. Every two weeks she does it again; pays $500 and leaves the store with $425. She has repeated this cycle of debt for three months, spending $450 in fees to borrow $425.
Anyone, at any age, living in any neighborhood can fall into this payday lending debt trap. But studies indicate a large number of customers are women between ages 25 and 44 who rent rather than own their homes and earn less than $50,000 per year, with children living at home. Single moms, living paycheck to paycheck, fall prey to payday lenders’ offerings of fast, easy cash in times of shortfall or crisis. The problem is, it often comes at a price far larger than the original loan. The average borrower ends up paying $793 on a $325 loan, according to the Center for Responsible Lending. With such devastating fees for two-week term loans, what’s the attraction?
Julie Kalkowski, Executive Director, Financial Hope Collaborative
“When your hair is on fire, you can only deal with one thing and that’s getting that fire out,” says Julie Kalkowski, executive director of Financial Hope Collaborative, housed in the Heider Business College at Creighton University. “When all your options are bad, you make bad choices.” People living in poverty with low credit scores and limited networks to solve financial disaster—or just make ends meet—turn to payday lenders for lack of other options. You walk in with proof of an open checking account, current employment and place of residence and you walk out with the cash you need by the end of the day, Kalkowski explains. “Payday lenders are focused on convenience and ease of use. If you meet those requirements no one is ever turned away.”
AWARENESS OF PAYDAY LENDING AS A COMMUNITY PROBLEM
The demand is high in the metro area, with more than 100 store locations serving an estimated 46,000 customers in Douglas and Sarpy Counties. A study conducted in 2008 revealed that more than $19 million in excessive fees paid to payday lenders were lost to the community. “Just think what it would do for the local economy,” Kalkowski says, “if the fees people are paying to payday lenders and fringe financial providers could go back into supporting local businesses that provide goods and services that enhance the quality of people’s lives.” The 2008 study indicated total foregone economic impacts equating more than $26 million in annual output, $6.5 million in earnings and 180 jobs lost in the Omaha metro area alone. “Houston, we have a problem!” she exclaims. On the upside, though, “I think there is finally enough awareness in the Omaha community that this is an issue that is not good for our working families and is not good short-term or long-term for the community. So I think the awareness has finally been raised enough that we will find a solution,” Kalkowski says.
A community forum aimed at providing open discussion between representatives from area financial institutions and non-profits drew a crowd of more than 60 participants in November. Three committees formed out of that exchange to investigate possible remedies to lending gaps in Omaha. “I don’t think we’ll find the perfect solution quickly, but the fact that so many are now aware of it and working on it as a community is huge,” Kalkowski says, adding she was thrilled to see such a turnout from Omaha area banks, credit unions and non-profit providers. “We need people from different disciplines and different fields coming together to say, ‘How can we solve this?’ We can do better in Omaha. We can create a national model and make it work for people,” she says. “The trick is finding a balance between cash flow for the lender while providing a feasible repayment schedule for the borrower.”
WOMEN’S FUND OF OMAHA COLLABORATES FOR POLICY CHANGE
On the public policy side of the solution, the Women’s Fund of Omaha leads the challenge by collaborating with the Greater Omaha Chamber, Voices for Children Nebraska and Nebraska Appleseed to propose legislation that will strike a balance between maintaining access to small loans and added parameters for consumer protection. “Each of these organizations has been looking into the impact of payday lending on individuals and families within our community,” says Michelle Zych, executive director. “We realize that any potential policy solution must be comprehensive, and we have come together to ensure that we have varied perspectives. Our research continues to show that consumers need these credit options. Our goal is to help create a structure where the repayment of fees is reasonable for the borrower.” This task force has been working with national experts to draft legislation that will strike that balance.
“Often, people seeking short-term lending are unable to secure a loan from a traditional financial institution, so it’s true that many payday lenders fill a gap in the market,” says Jennifer Creager, director of public policy for the Greater Omaha Chamber. “We see a need to balance the availability of such loans while addressing industry practices that have become predatory in nature.” She adds that some borrowers become caught in a downward spiral, making repayment of the loan difficult. “High levels of consumer debt disproportionate to income can negatively impact the consumer and our local economy.”
In 2010, Colorado lawmakers successfully passed legislation that extended payment schedules for payday loan consumers at lower rates without debilitating the payday lending industry. PEW Charitable Trusts, a global research and public policy organization, suggests that Colorado should be a national model for payday loan reform. “It is important that we look to states like Colorado to understand the implications that any policy solution might have on both the industry and the consumer,” Zych says. “Knowing that our neighbors have enacted legislation to ensure a fairer product for consumers helps us identify best and promising practices.”
Both Zych and Creager report that Nebraska state senators appear to be generally favorable to payday lending reform thus far. Some are eager to enact stronger consumer protections while others will not be in favor of additional regulation, according to Creager. “Finding the right middle ground is usually essential to any legislation’s potential for success,” she adds.
In 2012, former State Senator Danielle Conrad introduced legislation that increased licensing fees for payday lenders and used those funds to create the Financial Literacy Fund, which provides financial literacy to Nebraska elementary students. This bill, LB269, passed unanimously. Attempts by former State Senator Amanda McGill to initiate legislation that would create a payday lending database, aimed at providing a tool to enforce payday loan limits, have not prospered.
Sixteen other states with similar legislation to Nebraska’s have payday loan directories that keep borrowers from going from payday lender to payday lender, covering one loan by taking out another, according to Kalkowski. “Our limit is two in Nebraska. But we can’t enforce it because we won’t set up an online directory,” she says. “It would cost the payday lenders each about $100 a year to support it.”
ALTERNATIVE LOAN OPTIONS
“We’ve seen people with as many as 12 to 19 payday loans at one time,” Kalkowski says. But effective financial literacy education seems to encourage people to limit themselves. “Outcomes from our Financial Success Program (FSP) prove that education works,” she contends. Surveys show that FSP graduates are less likely to take out payday loans, decreasing from 37 percent to 4 percent after completing the program. Other improvements include fewer utility shut-off notices—from 50 to 27 percent—and the tendency to pay bills late dropped from 72 to 38 percent, resulting in an average monthly savings of $78 in late fees. This program includes nine weeks of instruction and one year of personal coaching. “I call it kind of the weight watcher’s model of financial education. It is support with accountability,” Kalkowski says. The program structures in opportunity for participants to track expenses, save for emergencies and repair credit reports. Instructors discuss matters on taxes, insurance and legal issues as well as predatory lending and the psychology of money.
Initially, FSP was tailored specifically for low- to moderate-income single mothers, but it now opens enrollment to others who live in poverty and are seeking a way out of perpetual downward financial spirals. People qualify by wanting help. “You have to be ready,” Kalkowski says. Word of mouth from previous participants and non-profit service providers is the program’s only recruitment tool. So far, 400 people have benefitted, with a current waiting list of 75. This year more classes were offered, allowing enrollment of 120 people. Graduates are eligible for debt consolidation loans at low interest rates offered through Creighton’s FHC. The program has financed 56 loans since 2008, totaling approximately $250,000. The default rate is at 14 percent, but with low capitol loss at only 7 percent. “That’s not bad; in fact, it’s pretty good,” Kalkowski says.
“What we’re doing is a pilot, it’s a drop in the bucket,” Kalkowski says about the loan alternatives. “You have to start small and see what works and what doesn’t work.” She started with the long-term solution first—debt consolidation loans at about 4.99 percent APR for a term of three years. “I wanted to prove that it worked. And I proved it enough that Omaha now has three credit unions offering debt consolidation loans to their members,” she says. Now, FHC is experimenting with offering a payday loan alternative that again is only available to FSP graduates. It is a $750 loan at 4.99 percent APR for a one-year term, with saving incentives built in. Recipients receive $500 to remedy the immediate need, but $250 goes directly into a savings account. The incentive is to match that $250 with savings throughout the year. The goal is for clients to add $10 to the savings account each month to accumulate $120. Then FHC pulls from the $25,000 Excellence in Service to Women Grant they received from the Women’s Fund in 2014 to augment individual savings to $250 by adding $130. “So they will end up with $500 in savings and will have paid off an installment loan, which bumps up their credit score,” Kalkowski says.
Kalkowski says that in her experience, people want to pay their bills. “We are hard-working people in Nebraska. We have one of the highest percentages of people in the workforce in the country. Many people are working hard but they still aren’t making it,” she says. “We need to have viable financial products that will work for the working poor.”
She estimates that FSP graduates who consolidate high-interest debt with low-interest loans end up saving $400 a month in interest payments that had previously been swallowed up by car loans at 26 percent, credit card debt at 39 percent and excessive payday loan fees. One couple, Robin and Joe, who recently participated in Creighton’s FSP, exemplifies the difference availability to low-interest financial products can make.
The couple was desperately trying to stay in a larger home to accommodate fostering five to six children in addition to their own child, Robin says. She had been let go by her place of employment but didn’t expect it would take 11 months to find a new job. So when rent was due and they came up short, they turned to payday lenders as a temporary fix. The fees quickly multiplied to $1200 a month, and they found themselves carrying six payday loans at one time as the lapse in employment continued. “We’re just regular working people,” she says. “We weren’t in huge trouble before. We pretty much were able to keep it together like most people do.” But when financial disaster hit, their options were limited.
She likens their payday loan nightmare to taking a first step into quicksand. “At first, you don’t think it’s that bad, but before you know it, you’re three steps in and sinking so fast. You had no idea the trap you were getting set for.” They battled this debt for nearly a year before being referred to FSP classes by a Heartland Hope Mission staff member. “It saved our marriage and has given us a future,” Robin says. “My husband and I were fighting all the time. We were seriously close to divorce. We just didn’t see any hope.” She credits FSP with giving them tools to take small steps in the right direction. FHC helped them to secure a debt consolidation loan that took their monthly payments from $1200 to $250. “I can breathe now. I can pay my rent again. I can buy food,” she says with relief. Now, Robin and Joe put money in savings regularly and have a retirement plan for the first time in their 10-year marriage.
“You know, it was just a simple thing, someone giving them credit with affordable terms, and it made all the difference in that family’s life,” Kalkowski says about Robin and Joe’s financial recovery. “Financial institutions could do this on a much bigger level. Just think how much impact that would have on Omaha families and local businesses,” Kalkowski says. “Reduced financial stress equals more productive workers, healthier families and more engaged parents. More disposable income means more customers for businesses. Seems like a huge payoff for such a nominal investment.”
Kalkowski says she is more hopeful about the issue of payday lending now than she ever has been. And Zych vows that the Women’s Fund will continue to advocate for policy solutions that benefit women and their families. There is hope that a community solution is within reach. W