Why payday predators aren't following the 'Year of Mercy'
In imitation of our Master, we Christians are asked to confront the poverty of our brothers and sisters, to touch it, to make it our own, and to take practical steps to alleviate it.” —Pope Francis
Pope Francis designated 2016 as the Jubilee Year of Mercy, urging the church to move the alleviation of poverty to the heart of our efforts with renewed zeal. In response, the bishops of Kansas, along with the staff of the Kansas Catholic Conference, undertook a careful survey of the more pressing social issues of our state. We concluded that among the structural evils affecting the poor, predatory lending—also known as payday lending—stands out as especially cruel. Like a cancerous tumor, it has grown swiftly, and it is dehumanizing to its victims—all while creating barely a ripple of public interest or concern.
To understand how we got to this point, first recall that from the beginnings of civilization, there have been teachings and laws against usury. Abusing the poor by lending money to those in crisis at astonishingly high interest rates is a practice that has been restricted or condemned by every civilization. Such behavior was rightly recognized as destructive and corrosive for communities and society. Moreover, from biblical times, one of the hallmarks of a jubilee year has been the cancellation of debts that were beyond the ability of the poor to pay. Liberation from the psychological and material “prison” of indebtedness is the perfect metaphor for God’s mercy.
Even given our nation’s secular history, legislation preventing usury was a natural part of our legal system until very recently. It was only in the 1990s that subtle changes in the law quietly and quickly eroded legal protection from usury. The result is a billion-dollar industry now advertised as friendly, safe and legitimate; indeed, it is actually presented as an altruistic financial service. The fact is that nothing could be further from the truth. So what is the truth?
Here are the facts. Payday lenders take advantage of a state of desperation experienced by those in dire financial circumstances. It is this sense of crisis that causes those (often with little financial understanding and few other options) to initiate an unseen cycle of debt from which it quickly becomes virtually impossible to escape. In 1995, there were 37 payday loan entities in Kansas; by 2014, this number had grown to 347. Sadly, Kansas has one of the highest payday loan use rates in the country: 8 percent of the adult population. This means that 175,000 of our family, friends and neighbors are ensnared by payday debt.
Unlike more mainstream and regulated financial products (like loans from banks or savings and loan institutions), most payday loans provide scant consumer protection. The average loan is $300 and must be repaid within two weeks, when the borrower receives his or her next paycheck. The fees charged for the loan are equivalent to an annual percentage rate of over 300 percent. More than 80 percent of loans cannot be repaid within this time period. The result is typically a loan that ends up with doubled or tripled fees. The initial sum constitutes more than a third of the average borrower’s disposable income, leaving even less money to pay for basic human needs such as food, housing, transportation to the place of employment and utilities.
Who is most at risk? No one is more vulnerable to the catastrophic consequences of “ballooning” fees than those who live on fixed incomes or who have been designated by social services agencies as highly at risk and unable to secure additional income because of advanced age, disability or some other critical circumstance. In 2014 there were 1,006,388 payday loans made to Kansans, totaling almost $392 million. Based on national averages, tens of thousands of these loans were made to Kansans who earn less than $20,000 per year. Roughly 30,000 of the poorest borrowers depend upon Temporary Assistance for Needy Families, disability benefits or Social Security as a major or even the primary source of income. What this means is that a substantial number of our Kansas tax dollars are being funneled through the poor and into the pockets of the payday loan industry!
Moreover, 53 Advance America outlets in the state of Kansas alone are owned by Salinas Pliego, a Mexican billionaire. Not only are Kansas tax dollars being funneled through the poor and into the pockets of the payday loan industry, but a significant amount is going to a billionaire in a foreign country. More disturbing is that our poorest neighbors and co-workers, who legitimately depend upon every penny of public assistance to care for their children or sick family members, would have been required to pay an estimated $10 million in interest and fees on those loans made in 2014. Each borrower paid an average of $325. As the yearly limit for TANF is $1,300, nearly one-fourth of this crucial, fixed income would be required just to service a loan.
While our research focused on the state of Kansas, it is worth noting that 14 states and the District of Columbia have outlawed predatory (payday) lending. The New Economy Project of New York estimates that these laws have saved $3.5 billion annually that payday lenders would otherwise siphon in fees. It is also worth noting that the federal government has imposed an annual interest rate cap of 36 percent for military personnel and their families, after concluding that predatory lending was harming them to the point of undermining military readiness.
The same protection should be given to all U.S. citizens, but the predatory loan industry’s lobby is powerful, and legislation is often gutted of any real power to protect the vulnerable. In Kansas, for example, it is illegal for a borrower to take out multiple, simultaneous payday loans, but with no structure in place to track payday loans, this law is entirely ignored. This already catastrophic situation is compounded by the ease with which predatory lenders now offer their services over the internet. And there is little relief from the federal regulatory agencies tasked with supervising the industry. This May, the Consumer Financial Protection Bureau published preliminary new regulations of the industry, but they have numerous deficiencies, particularly concerning the verification of a customer’s ability to repay loans while affording household necessities.
The Catholic dioceses in Kansas are taking steps to alleviate some of the damage caused by this structural evil. Catholic Charities of the Diocese of Salina and the Archdiocese of Kansas City in Kansas have initiated programs that provide financial mentoring for those who have become ensnared in predatory lending. These programs help victims to transfer predatory loans to legitimate banks and savings and loan institutions; the new loans, with drastically lower interest rates, are backed by Catholic Charities. Those previously trapped in predatory loans now have a realistic possibility of becoming debt-free. But we have hit two roadblocks. The first is that we obviously do not have the assets to back an unlimited number of these crippling loans. While making a difference, we can never alleviate so massive a structural evil on our own. The second roadblock, which was not anticipated, is the challenge of actually paying off the balance of a payday loan. The director of Catholic Charities in Kansas City in Kansas has spent hours struggling to pay off loans in person, only to encounter resistance from the payday lenders. When staff members attempted to handle these matters over the phone, they were repeatedly misdirected, placed on hold or given what was determined later to be inaccurate loan balance amounts. The industry seems to make every effort to prevent the loans from being paid in full. It’s how they make their money.
If you’re asking yourself, “What can I do?” my response is to look again to the words of Pope Francis, who asks us to confront and to touch poverty. To confront this situation begins with resisting the temptation to turn our eyes away from the suffering of our neighbors, or shrugging it off as the result of financial irresponsibility that has “nothing to do with me.” The predatory lending industry very much wants us to look the other way—not to notice Lazarus at the gate. But confronting poverty like this begins with shining a light upon it. Then there are many ways to touch this particular poverty and to take practical steps to alleviate it. One is for faithful Americans to call upon national and state legislators to initiate true reforms providing the same consumer protections afforded to those who use banks and savings and loan institutions. We must ask for a special focus on those who are already considered particularly vulnerable to the false security advertised by predatory lenders on virtually every street, but primarily advertised in our poorest neighborhoods.
In doing so you will be taking part in our Year of Mercy effort to fulfill Pope Francis’ request that we take practical steps to alleviate the unjust poverty that literally surrounds us. Surely this corporal and spiritual work of mercy is a perfect participation in this Holy Year of Mercy. What a fitting conclusion it would be if we could initiate the liberation of our poorest neighbors from this cruel shackle of crushing debt.