When does lending money become usury? What do various faith traditions have to say about the prominent practice of payday lending in the United States?
These and other issues were examined in Washington, DC, this fall when the Center for Responsible Lending sponsored an Interfaith Roundtable on Lending. Women's Voices Board member Barbara Paulus participated in this event as a representative of Metropolitan Congregations United in St. Louis.
"All faith traditions have teachings related to just and fair lending practices, and the Christian, Jewish and Muslim traditions explicitly prohibit usury," Paulus said.
An overview of payday lending in the United States revealed the following:
16 states currently have payday usury caps
6 states have enacted significant reforms to curtail the debt trap
29 states (including Missouri) have little to no regulation
80 per cent of payday borrowers say they need the money just to meet everyday living expenses
The U. S. Conference of Catholic Bishops is beginning an aggressive program to call attention to the problem of payday loans, and is encouraging regulators to use their authority to protect consumers and families living in or near poverty from predatory financial products.
The Consumer Financial Protection Bureau is being asked to limit the number of loans to six per year for each borrower, to establish guidelines for lenders to consider the borrower's ability to repay, and to deny lenders the right to use post-dated checks as collateral.
"I am encouraged by the number of bright, committed people who are working on this problem together," Paulus said. "Members of Women's Voices played an active role two years ago when we tried to get an initiative on the ballot that would limit payday lending interest rates in Missouri to 36 percent. Unfortunately, this initiative failed, but I'm sure we will be able to advocate for changes in the payday lending industry in the future."
Member Testifies About PayDay Lending Efforts
May 13, 2013
Barbara Paulus, a member of the Women's Voices board of directors, and the Rev. David Gerth, executive director of Metropolitan Congregations United (MCU) in St. Louis, recently traveled to Washington, D.C., to talk about payday lending at a meeting of the United States Conference of Catholic Bishops committee on domestic justice and human development.
Barbara testified about the work in Missouri last year to raise the minimum wage by $1 per hour and cap the interest rate on payday loans at 36 per cent.
The committee is gathering information about income inequality and predatory lending for possible use in its annual Labor Day statement. Several speakers discussed 'wage theft' and income inequality; other discussion centered on the "formal" vs. "informal" economy; economic social sins; and the need to determine "who are we as a nation" so that people understand why everyone should care about these issues.
Barbara told stories of three people she encountered in the campaign who were caught in the debt trap of payday lending. Statistics she shared with the group:
While the average APR for payday loans in Missouri is 455 per cent, Missouri law allows rates as high as 1,950 per cent on payday, car title and other consumer installment loans.
There are currently more than 975 licensed payday lenders in Missouri, not to mention the hundreds of car title lenders and pawnshops-more than McDonald's and Starbucks combined.
The predatory lending industry drains more than $317 million from Missouri's economy each year, since most of the establishments are owned by out-of-state businesses.
Hundreds of thousands of signatures from registered voters throughout the state were gathered in the 2012 effort to cap the payday lending rate at 36 percent. Even though enough signatures were obtained, the opposition's legal team challenged each and every move possible, and time ran out to quality for the ballot, Rev. Gerth explained.
"Even though we failed to qualify for the ballot, this campaign most assuredly promoted a revived sense of political responsibility and many St. Louis area residents answered the call to be informed and active citizens, participating in the debate over the values and vision that guide our communities and nation. Their voices were heard on behalf of those who suffer at the hands of predatory lenders," Barbara said.
Will The Consumer Financial Protection Bureau
Tackle Payday Lending Abuses In Missouri?
Two members of Women's Voices attended the inaugural meeting of the Advisory Board of the Consumer Financial Protection Bureau in St. Louis on Sept. 27, 2012. Mary Clemons and Barbara Paulus joined representatives from Jobs With Justice, GRO (Grass Roots Organizing), Metropolitan Congregations United, Missouri Faith Group, and others as the director of the CFPB, Richard Cordray, swore in the 25 member board. A round table policy discussion followed and covered topic such as access to credit, the housing market and mortgages, financial literacy, the role of small banks, regulation, and predatory lending practices.
The audience broke into applause when an advisory board member responded to a discussion concerning the need for financial literacy education by saying that people, when desperate, will take a payday loan even though they know it is risky. He said we need enforcement, not just education. Another member received applause when he said the CFPB needs a hammer to eliminate the sale of bad products. Bad home improvement loans, he said, weren't just "bought," they were "sold." One board member, a judge in Philadelphia, commented that the people who come before her in court are people with stories. They don't just need access to credit, they need justice. And a representative on the board who works with veterans talked about the pain felt by the consumer and said that no pain is felt by the lenders who break the law. One of the board members called for more small-dollar lending in order to eliminate the need for payday loans. It's critically important to understand what's working and not in consumer financial assistance, one member added, saying, "we know where to go when we're sick or our car needs repair, but not when we need to learn how to raise our credit score."
Several members of the audience addressed the board. One of them, Father Richard Creason of Most Holy Trinity Catholic Church, described how a Texas law firm wrote faith leaders in Missouri, threatening that their places of worship were risking their tax-exempt status by collecting signatures on the petition to cap payday loan rates. Rev. Jim Hill from Faith Voices spoke of the successful volunteer effort to collect 350,000 signatures on initiative petitions to cap the rate of payday lending, and expressed his frustration that workers were not able to overcome repeated legal challenges. A young man from GRO said he had worked in a payday loan shop for a year, and every day the owners questioned employees about how many customers renewed their loans. The owner wasn't interested in knowing how many loans were paid, he said.
The deputy director of the bureau closed by summing up three themes that will be the focus of future efforts of the organization: access to credit; financial education/literacy; and the value of a level playing field for consumers.
The evening before the public meeting Director Cordray met with a group of social justice leaders. Barbara Paulus, who attended this meeting, reports that she learned that the Consumer Finance Protection Bureau is not authorized to cap loan rates. She believes that the bureau's leaders are aware of Missouri's status as having one of the highest interest rates in the country, and they came to St. Louis for their inaugural meeting to hear and learn more and to investigate predatory lending practices.
(The central mission of the CFPB is to make markets for consumer financial products and services work for Americans. Congress established the CFPB to protect consumers by carrying out Federal consumer financial laws in 2010, and President Obama appointed Richard Cordray to be the first director of the CFPB in January, 2012.)
Payday Lending, Minimum Wage Issues Fail to Make November Ballot
For more than two years, members of Women's Voices have campaigned for a change in the way payday loan outlets operate in the state of Missouri. (See the history of this effort in the articles below). We also worked hard to submit a proposition to increase the minimum wage in this state. We learned about the issues. We called and wrote our legislators. We studied various proposals. We stood outside in all kinds of weather to collect signatures for ballot initiatives. We spent hours at computers to make sure that those who signed petitions were registered voters. We failed.
It was ironic that members of the umbrella group overseeing these ballot initiatives selected Labor Day, a day specifically set aside to honor workers, to announce that the legal obstacles thrown in the path of these initiatives were too great to overcome. Read the press release issued on Sept. 3 by Missourians for Responsible Lending and Give Missourians A Raise.
Members of Women's Voices will be working with Missourians for Responsible Lending, a new statewide organization, in an effort to curb predatory lending practices in the state.
Missouri has more payday lending outlets than almost any other state in the country, and the average APR on loans issued by these outlets is 445 percent. Car title loans, some consumer installment loans and other small loans often charge usurious rates.
Since efforts to cap these interest rates in the Missouri legislature have been futile, Missourians for Responsible Lending is spearheading a campaign through a citizen's initiative on the 2012 ballot. Members of Women's Voices and other progressive and faith-based organizations will be collecting signatures for a ballot initiative that will cap the interest rate at 36 percent. Voters in Arizona, Ohio and Montana recently approved similar ballot initiatives.
Predatory Lending in Missouri: It's Got to Stop!
If an average APR of 445% interest is too high, then work with us to cap the rate at 36%.
While the average APR for payday loans in Missouri is 445%, Missouri law allows rates as high as 1,950% on payday loans, car title loans, and other consumer installment loans. In 2002, the Missouri Legislature passed a law that allows lenders to charge fees and interest up to 75% of the amount of the loan. On a two-week loan, that translates into a 1,950% APR, the highest allowed among the states that have set APR caps on payday loans. These predatory loans carrying triple-digit interest rates create a long-term cycle of debt, exploiting a family's budget crisis, not solving it.
There are more of these predatory lenders in Missouri than there are McDonald's and Starbucks combined. Let's read that again...there are more predatory lenders in Missouri than McDonald's and Starbucks combined!! They saturate our urban centers and surround our rural small town squares. A report by the St. Louis Better Business Bureau found payday lenders even setting up shop in nursing homes, targeting the hardworking caretakers of our elders.
These payday, car title, and other high cost lenders drain millions of dollars annually from our communities. Missouri loses an estimated $317 million each year in payday loan fees. That's a lot of money that could be spent investing in our neighborhoods, building savings accounts, meeting basic needs, and rebooting our economy.
Lenders' high rates create a spiraling cycle of debt, where families pay fees upon fees upon fees. At these rates, a typical payday borrower will pay more than $700 for a $300 loan. Where do these fees go? Mostly to out-of-state lenders, who send some of that money right back to Missouri legislators who protect the lenders' ability to charge exorbitant interest rates. Missouri's legislature has repeatedly failed to act, so it is time for Missouri voters to make our voices and values heard.
It's time for voters to say "yes" to end this predatory lending.
This is exactly what the ballot initiative will do by limiting interest rates to 36% annually - a reasonable, proven approach to halt pervasive abusive lending for small dollar loans. This restores a responsible lending landscape for Missouri, just like its had for most of its history and just like that which exists in other states. It ends the state's role as a beacon for the highest-cost loans in the country. Title and payday lenders estimate that 70% of their borrowers earn less than $25,000 annually. Capping the rate at 36% ends the debt trap, puts money back into families' pockets, and protects local resources so that we can begin the important work of helping our communities recover from the economic recession. In short, it will help to restore economic dignity to our Missouri families.
Myth Vs Reality
The Truth About Payday Lending In Missouri
There are more payday lenders in Missouri than almost any other state of the union. They are most often found in low-income neighborhoods, small towns and rural communities. Payday lenders entice people to borrow small amounts of money; the average loan is about $300. But the cost of paying back these loans is HUGE. In Missouri, payday lenders charge borrowers an average annual percentage rate (APR) of 445 percent.
This excessive interest rate results in great financial distress for citizens of moderate means. They get trapped in a cycle of debt that can, and often does, destroy families. Most borrowers get stuck in eight transactions a year, typically taken out back-to-back, before they can exit the loan. This means that on a loan of $300, they pay a $57 fee for the first two weeks, and another $57 fee over and over again. None of this money ever goes to pay down the original loan. If a borrower engages in eight repeat transactions, that's $456 in fees alone---and he or she still owes the original $300!
The federal government has passed legislation that caps the interest rate for payday and car title loans to members of the military on active duty at an APR of 36 percent. Efforts are now underway in Missouri to get an initiative on the ballot that, if passed, would limit loans to all Missourians to an APR of no more than 36 percent.
Payday lenders get their money from big banks and large financial institutions. Because of this backing and their ability to charge excessive interest rates, they are able to promote many misconceptions about the practice of payday lending. Following are some of those myths, balanced against the realities of the practice of predatory lending.
It makes perfect sense to take out a payday loan when you need a short-term cash advance. It will be cheaper to repay the loan than it will be to incur fees for late payments or bounced checks at a bank.
Very few payday loans are repaid in the initial two-week lending period, and lenders do not allow partial payments to pay down debt. This means that borrowers continually re-borrow, paying hefty fees and more interest charges every time they do this. This keeps borrowers trapped in a cycle of debt that can take years to pay off.
Because they are trapped in an ongoing cycle of debt, payday borrowers frequently default on other bills and obligations, such as rent and utilities.
Capping the interest rate on payday loans makes it impossible for small-dollar lenders to operate, and eliminates consumer credit opportunities for those most in need. In states where small-dollar interest rates have been capped, people have no safe, legal credit options, and turn instead to loan sharks and high-cost internet lenders.
Until the early 1990s, small-dollar lenders operated in Missouri at our historical usury cap of 28 percent APR.
In other states that have capped interest rates on small-dollar loans, lenders are able to operate at a healthy profit margin and consumers are better off. North Carolina, for example, saw a 40 percent increase in responsible small-dollar lending when the state restored its uniform 36 percent rate cap, just like we're trying to do in Missouri.
Today, 17 states, plus the District of Columbia, cap the rates of payday loans at or about 36 percent. Arkansas, our neighbor to the south, enforces a 17 percent usury cap. Voters in Arizona, Ohio and Montana recently voted to cap rates at 36 percent. Collectively, these states save their citizens more than $2 billion a year.
Capping interest rates on payday, car title and consumer installment loans will hurt local tax revenues and eliminate jobs in Missouri.
Officials with numerous agencies in Kansas City, St. Louis and St. Joseph, plus several county officials, are on record stating that the proposed reform would have no fiscal impact on them.
The thousands of predatory lending storefronts in Missouri employ a relatively small number of workers.
Studies show that high interest rates drain hundreds of millions of dollars from Missouri families each year. Capping interest rates at an affordable level will have a positive impact on the state economy and help communities recover from the economic recession.
Annual percentage rate (APR) is not an appropriate term to use in connection with payday loans, because payday loans are so short-term. It's misleading to talk about an APR for a loan offered for only two weeks.
To help borrowers decipher the real, actual cost of a loan (including fees) and compare various credit options, Congress developed the APR as a standard measure that accounts for the amount of time the borrower has to repay the loan and most fees.
The federal Truth In Lending Act requires lenders to post the APR for all products that carry interest. Consumer lending law applies APR across the board, whether for car loans, mortgage loans, cash advances on credit cards, or payday loans.
Any reform in Missouri is better than current law. Florida legislation is a good model for Missouri, because it balances the needs of consumers with the needs of the industry.
Although Florida consumer law codifies "best practices" for the loan industry, it does not significantly lower interest rates. This keeps borrowers stuck in long-term debt. A recent report showed that the average borrower in Florida had more than eight loans a year, and 76 percent of these loans were taken out within two weeks of a previous loan being paid off.
Taking out a payday loan and re-paying it will help a borrower's credit rating.
Payday lenders typically do not report borrowing history to the major credit rating agencies. Furthermore, studies show that payday loans lead to increased likelihood of bankruptcy, delinquency on other bills, and often, to the closure of a borrower's bank account.
The Solution To The Problem Of Predatory Lending In Missouri
The proliferation of payday lenders in Missouri, the number of residents they trap into a cycle of debt each year, and the unconscionable interest rates they charge, demands immediate intervention. Predatory lending practices destroy family economic stability every single day, and prevent Missourians from maintaining their incomes and building wealth.
Members of Women's Voices Raised for Social Justice are pleased to be partnering with Missourians for Responsible Lending to support an initiative petition to be placed on the Missouri ballot in November, 2012. This initiative, if passed, will limit the amount of interest payday lenders can charge to an APR of 36 percent.
Your signature on the initiative petition will help bring economic justice to the people of Missouri.
As a result of the Women's Voices program in February 2011 dealing with predatory lending, members have continued to follow this issue as HB 132, sponsored by Rep. Mary Still, tries to gain traction in the state legislature. Several of our members attended a meeting on this issue on Feb. 24, sponsored by State Rep. Rory Ellinger. On March 9 the Financial Services Institutions Committee in the House held a hearing on payday lending. WV member and past President Barbara Finch submitted testimony in support of this legislation.
If you are interested in becoming involved in any of our advocacy efforts, email us at