Predatory Lending Gets a Boost from the NYT

One business that's booming these days is payday lending. As the economy worsens, more people are turning to payday loans to get cash advanced from their paychecks for groceries, gas, and even mortgage payments. They pay fees at astronomical rates of up to 459 percent annual interest, fueling an industry that makes billions in profits each year.

Last week, the New York Times gave a boost to one of these outfits, Nix Check Cashing, with a long profile in the Sunday magazine. The story portrayed a kinder, gentler predatory lender -- a family-owned check cashing operation that grew by responding to the needs of its community in South-Central L.A. But Nix can really only lay claim to being the best of the worst in a loan shark industry. Up until recently, Nix charged the same rates of 459 percent to its customers for payday loans. On an average loan of $255 for two weeks, borrowers pay a $45 fee.

Last year, Nix was bought by Kinecta Federal Credit Union. Their new payday loan has a slightly lower rate, 391 percent for a $400 loan, and a $20 rebate into a savings account if the loan is paid back on time for six months with no bounced checks. This is meant to help ease borrowers into creating savings accounts so they theoretically won't have to take out so many loans.

According to its boosters, the Nix/Kinecta approach is the way to innovatively force banks to reach out to those now left out of mainstream financial services -- the poor and people of color. Maybe the banks will see what a killing Nix is making skinning profits from those living paycheck to paycheck and finally create accessible services and products for all those underserved, "emerging markets" they've neglected.

For anyone paying attention to the subprime mortgage meltdown, this should raise a big red flag. Targeting low and moderate income communities with predatory mortgage lending practices was a primary cause of the mortgage meltdown and our subsequent economic crisis, and it should be a lesson going forward that we require real regulation of the financial industry and protection for consumers from predatory lenders.

The foreclosure crisis and payday loan problem may overlap in more ways than one. We've heard of families, faced with the prospect of defaulting on their homes, who've turned to payday loans. In one case, they were told by their lender to take out multiple online payday loans to meet the mortgage payment.

The New York Times story tried to make the payday loan business sound pretty good compared to banks -- no hidden fees, friendly neighborhood service, unpretentious offices that a blue-collar worker can feel comfortable visiting. This is good enough for the poor and people of color.

"I didn't want to be a loan shark," said Tom Nix, the CEO. "But the reality is, customers wanted it."

This kind of rationale distorts the reality of a predatory industry that takes advantage of poor people's economic vulnerabilities, trapping them in a nearly inescapable cycle of debt. Many borrowers struggle to pay the loan back and have to keep borrowing money, taking out loan after loan or multiple loans from different lenders at the same time. The typical borrower pays back $800 on a $325 loan.

If more banks offered small loans at affordable rates that they marketed to underserved communities, there wouldn't be such a gap that predators could exploit. By all means, let's explore innovative ideas, but don't push Nix Check Cashing as the answer when they have been part of the problem. Payday lending is now spreading to institutions like U.S. Bank and Wells Fargo Bank, which offer a $100 loan at a $10 fee, or 240 percent APR. The California Reinvestment Coalition has been pushing on banks and savings & loans to offer their customers an alternative to payday lending -- a "quick consumer loan" with longer terms and 30 percent APR.

Kinecta, the credit union partnering with Nix, shouldn't be off the hook either. Credit unions, which emerged nearly 100 years ago as a fair lending and accessible banking movement, have prided themselves on providing low-cost loans and banking products at affordable rates to their members. Hank Klein, a former credit union executive and the founder of Arkansans Against Abusing Payday Lending, says, "That's why this is so disturbing. I know we need to adapt to the changing financial environment, but I'm not sure adapting by buying a check casher and making payday loans is the way to do it. I knew the founders of Kinecta, and they would be rolling over in their graves if they knew what was going on."

Besides low-income neighborhoods, payday lenders have traditionally targeted military bases, with their demographic of young, Black and Latino service men and women. In 2006, after the Pentagon documented the adverse impact of predatory lending on military personnel, Congress passed the Talent Nelson Act prohibiting payday lenders from making loans to active duty service members and establishing a 36 percent annual interest rate cap.

This protection against predatory lending should be extended to everybody.

 

 

Follow Tram Nguyen on Twitter: www.twitter.com/tramquang

Comments

[Kinecta]

It is important to note that Ms. Nguyen is on the payroll of the California Reinvestment Coalition (CRC), which actively opposes payday lending organizations and is working for their elimination.

Kinecta Federal Credit Union shares the CRC’s stated mission of “advocating for the right of low-income communities and communities of color to have fair and equal access to banking and other financial services.” Our ground-breaking partnership with Nix Check Cashing provides affordable, alternative financial solutions to communities that have been abandoned by traditional financial services organizations.

Nix customers benefit from lower fees and more services as they transition to become member-owners of the credit union. Our program is designed to build in savings and provide financial empowerment and education to Nix customers.

Our payday loans provide a viable alternative for consumers with few choices. The fee for a $100 payday advance from Nix is $15, compared with typical bank NSF or “courtesy pay” fees ranging from $25 to $35.

I invite Ms. Nguyen to visit our Nix facilities, speak with our customers, and see for herself the service this provides to the community. She just might find our goals and hers are more closely aligned than she imagined.

Simone Lagomarsino, President/CEO, Kinecta Federal Credit Union

[budderbean]

Payday loans are a real scam and the credit card companies are a close 2nd place behind them.. $39 late fee.. you charge $12,000 on your card, then they lower the credit line to $800 and hit you with a over credit charge of $39. then you are late because your
billing cycle was changed. So you get another $39 charge. So a monthly payment of $30 becomes a payment due to close to $100. You are on a fixed income and you are expected to pay the late and over limit fee's upfront.

I don't know much math but if you do it fir me (my brain is hurting) It seems that the 29% interest plus the fee's add up quickly and make it impossible to climb you way out of debt.... No matter if you signed up for the card with the intention of being a good customer.

Then you have to turn to the payday loans to pay off the $100 that the card company wants up front... So I have given up on paying my charge card bills.. Nobody plays fair anymore. I played by the rules but the rule kept changing on me.. Let me have a real chance Mr banker dudes and dudettes. I really want to pay off my debits to you.. But you have to play by my rules now.. The best protection to identity theft is to have no credit to steal..

[rabiddog6708]

People who live at the margins....paychck to paycheck....need some place to turn when life happens and they need cash before the next check. Banks do not care to help these people. And the interest cited is misleading because it is predicated on the short term of the loan. A typical Payday Loan fee is $15.00 for every $100.00 borrowed. Common sense says that is 15% of the loan, but the rates being quoted are factoring in the term of the loan, which is usally 2 weeks. If banks were smart (the curent banking crisis shows that they are not) they would have got in on the action, charges less and run the Payday guys to ground. Millions of small, short-term loans a year add up to big bucks for little risk.

[Intelligentia]

Capitalism at work! Capitalize on anyone you can rip off as much as you can get away with, regardless the immoral consequences of your actions. That's what our pathetic capitalistic system is all about. Americans are paying $50, 000.00 for cars that are worth no more than $20,000.00. Doctors are charging you ten times when you have no insurance but do not mind accepting a lot less from insurance companies for the same treatment, when you have insurance. So, why not the predatory lenders also? Everyone is entitled to the dividends of capitalism, right? I read a post above by a payday employee trying to rationalize why they are performing a valuable service. What about charging 8-10% fee ($8-$10 per $100 lent)? Why $15.00. The payday patrons are already poor.So, why fleece them further with predatory lending? Regardless of how much the Obama administration pump into the economy, if we do not control predatory and fraudulent lending practices, we will always find ourselves in this same situation. From mortgages to credit cards, insurance companies to car dealerships, etc., they are not interested in doing business with you, they are interested in capitalizing on the ignorance of the Americans people in financial matters. It's pathetic!

[cqyates]

The problem is (and I have been here personally) is that major retail banking services are not marketed at or provided to poor people. Why do I have to have as much 500.00 to open a bank account at most major banks...to keep out the poor people. Why does chex systems exists...to keep poor people who have bounced checks out of the major banks. I know tons of poor people who know that check cashing is a rip off but through a variety of methods have been barred from using banks.

[americaforme]

The paydays is small stuff, if you get your math screwed up, and you have an over draft of about $ 100.00, and you written say five small checks, and now behold through their kindness you have to pay the BANK $29.00 per ck, in overdraft. Do the math, Payday is cheaper, and your local bookie, who brakes your legs, is compassionate.

[larry278]

Maybe the author of "Nickled & Dimed", Barbra E.... who blogs on HP will do a book on payday loans or somebody who has the insights & writing skill of Dickens will do a book about a life of constantly resorting to payday loans. What a story it will make if the right writer does it.

[zaz33]

As I understand it, soldiers have been taking re-enlistment bonuses to pay back these usery loans. That's why the Army didn't mind having these predators near the bases. Pay day's were not as common around Marine, Navy, and Air force bases because re-enlistments were not as difficult.

Result !!!

2 winners and 1 loser.

[factsnothype]

Consider this, you need $100 cash and your choices are: bounce a check, overdraft your account, pay a late fee on a credit card, or get a payday loan. The fee for choice one can be as high as $55. Choice two will cost you as much as $35 for the initial overdraft fee and in some cases you will be charged for every day that your account is overdrawn. Choice three will cost you as much as $35 plus additional finance charges. The fee for a payday loan will cost around $15 and does not carry additional fees of any kind. A payday loan fee is just that, a fee. Payday loan fees are posted in poster format and the terms are clearly understood by our customers.

If banks and credit unions were required to do the same for their fees, the APR would be much higher than a payday loan, in most cases triple. Banks and credit unions also do not disclose their fees in poster format but in small print on the back of their statements. Banks and credit unions charge unlimited bounced check charges and overdraft fees.

These are the facts and not hype. Customers that take out payday loans clearly understand the fees and are making a choice. Customers don't want hidden fees or long term debt. They have a need for short term cash and make the choice of a payday loan.

[vladp]

i agree that payday loans should allowed. but the lenders accept a check knowing that it is no good and then use bad check laws to force the borrower, who can't repay in time, to keep extending the loan, with more fees, under threat of arrest for writing a bad check. the public needs to be better educated about financial situations in general. but under some circumstances, i agree that payday loans could actually be a good thing if the consequences are fully understood ahead of time.

[ProfessorDuh]

Consider this, you need a fix and your only choice is your local heroin dealer. Customers who shoot up clearly understand the drug and are making a choice. These are facts, not hype.

[EmilyWinkle]

Factsnothype, You're right, it's less expensive to take out a payday loan than to pay for overdrawn fees, late fees or harming your credit. But they key to using a payday loan to your advantage is responsibility. A person needs to be responsible with a payday loan (knowing fees, payment schedule, etc.) just like they would with a credit card or other type of loan. I work with Check 'n Go, and they have their rates stated upfront. You can view them at https://www.checkngo.com/payday-loan-rates-explained.aspx?Source=NavBar.