Predatory lending

 

Recent media coverage has been filled with stories about the meltdown of America’s lending institutions, stories that frequently have focused on interest rates, loan fees and other charges that have been extracted from borrowers.

However, another lending industry, the so-called payday lending industry, charges interest and fees that are even higher than those usually associated with “loan sharks,” whose rates are said to be as much as 250 percent per annum. Loan sharking is a felony in California.

At what point does the interest rate on a loan become excessive? Is it 10 percent per annum? Twenty percent? Thirty percent? Fifty percent? One hundred percent? Just how high is up?

 

Usury is the legal term for excessive interest, specifically the amount of interest in excess of the legal rate. The concept dates back to around 325 BCE, when the First Council of Nicaea “forbade clergy from engaging in usury.” (Wikipedia.org)

Most states regulate interest rates, which vary widely around the country. In California, “…for loans that are made primarily for personal, family or household purposes,” usury laws limit interest rates charged by individuals who are not licensed by the state, as banks, mortgage lenders and real estate brokers are, to 10 percent per annum. (“Consumers Usury,” http://www.ag.ca.gov).

California’s legal interest rate for loans that are made for purposes other than personal, family or household purposes is the “higher of 10 percent or 5 percent over the amount charged by the Federal Reserve Bank of San Francisco for advances to member banks.” However, usury laws do not apply to loans that are secured by real estate, if they are made by real estate brokers. Legal interest rates are also higher for most lending institutions, that is, banks, credit unions, finance companies and pawnbrokers, and they do not apply at all to retail installment contracts (charge accounts). There’s more, but the foregoing should serve to illustrate the complexities of lending in general.

 

Payday loans are, undoubtedly, the most egregious of all, with annual interest rates that range upwards of 700 percent or 800 percent, or higher.  If you are not familiar with this type of lending, here’s how it works: The borrower simply goes to the lender’s place of business, writes a personal check for the amount they wish to borrow plus the finance charge and are given the cash they need. Loans generally range from $100 to $1,000, and the term of the loan is usually about two weeks, for which the finance charge is $15 to $30 per $100 borrowed. This translates to annual interest rates between 390 percent and 780 percent, sometimes higher for shorter-term loans. And, with late fees, penalties and collection costs, rates on those loans that default can be as high as 2,000 to 3,000 percent. (“Payday Loan Consumer Information,” http://www.paydayloaninfo.org/facts.cfm)

 

The only requirements are that the borrower has “an open bank account in relatively good standing, a steady source of income, and identification. Lenders do not conduct a full credit check…” (http://www.paydayloaninfo.org)

By any standard, payday lending is big business. PayDay Loan Consumer Information reports that (in 2006) there were “about 25,000 payday loan outlets in the United States and annual loan volume of at least $28 billion, with almost $5 billion in loan fees paid by consumers. Industry analysts estimate annual loan volume of more than $40 billion, with over $6 billion in loan fees paid by consumers.”

 

You may wonder who would knowingly borrow on such unfavorable terms. The obvious answer is anyone who lives from paycheck to paycheck and has no other source for a short-term loan. Unfortunately, this includes the elderly and disabled (who can always count on receiving their Social Security checks every 30 days) and military personnel, who may become enmeshed in successively rolling over loans in an effort to just get by to the next pay date.

To get a sense of how pervasive the payday lending industry has become, a study by http://www.csun.ed compared the number of payday lenders with the number of McDonald’s restaurants in the 50 states. Not surprisingly, California led, with 1,286 more payday lenders than McDonald’s stores. Tennessee was second, with 1,059 more payday lenders than McDonald’s outlets. Only nine states had no payday lenders.

In 2006, “The nonprofit Center for Responsible Lending, based in North Carolina, found that the average person borrowing $325 ends up paying $800.” (http://www.pliwatch.org/news), and Brendan I. Koerner, writing in http://www.motherjones.com (“Preying on Payday”), noted that interest rates on payday loans average nearly 500 percent and “one study in Indiana found that more than 75 percent of payday borrowers rolled over at least once, and some rolled over dozens of times…” and can “end up spending hundreds, even thousands, without ever paying down the principal.”

Sounds like legal loan-sharking to me. But, that’s just my opinion.