The postcard seemed harmless. The little cartoon money man with a dollar sign magic wand promised a “pay day advance” (up to $500) interest free. First-time customers only.
But what would that card mean in the hands of an elderly person trying to make ends meet on their Social Security check? What happens when she cannot repay her “payday loan”? Because payday lenders cannot extend the loan and generally won't create payment plans, she would likely take out another loan. And probably another.
“If you can pay back the loan in two weeks, that's wonderful, but the average borrower gets 13 to 14 loans over seven or eight months,” explains Dana Wiggins, the responsible lending coordinator for the state-wide coalition Virginia Partnership to Encourage Responsible Lending (VaPERL).
This vicious debt cycle becomes insurmountable because the average interest on a payday loan is 390 percent APR. While other lenders may generally not charge more than 36 percent APR, a 2002 exemption granted by the General Assembly allows short-term “payday” loans in Virginia.
Increasingly faith-based organizations are raising their voices against these usurious (exorbitant interest) loans that perpetuate poverty and violate Scriptural mandates to protect the poor. Recently, the Web site faithfulpledge.org was launched by the Virginia Interfaith Center to encourage people of faith to sign a petition to end payday lending in Virginia.
C. Douglas Smith, executive director of the Virginia Interfaith Center, said that while people of faith often reject getting involved in political issues, payday lending is clearly a violation of Jewish, Muslim and Christian teachings, and it undermines their charitable work.
“If we're not addressing payday lending, it doesn't matter how many soup kitchens we run or how many Habitat houses we build,” Smith says. “All we're really doing is putting a Band-Aid on a bullet hole as [General Assembly] Sen. Mamie Locke says.”
The Bureau of Financial Institutions reports nearly 3 million payday loans were made to more than 445,000 Virginia borrowers in 2005. When the General Assembly passed a bill authorizing payday lending in 2001, it prohibited payday lenders from renewing, refinancing or extending a payday loan. It also prohibited lenders from making more than one loan at a time to a borrower. However, many Virginia borrowers are, in effect, renewing their loans and getting more than one loan at a time.
During the 2007 General Assembly session, 12 bills pertaining to payday lending were introduced: five bills to repeal the Payday Loan Act and seven bills to “reform” the industry. None were passed.
Through political maneuvering, both the Senate and House Commerce and Labor Committees silenced discussions of repeal, and passed industry-backed “reform” bills. The payday issue took a turn when the House bill was read for the second time and was amended to include a 72 percent interest rate cap. The industry would not support such a cap and led the bill's patron to pull the bill before the third reading. The Senate bill met a similar fate fearing that the Governor would amend the bill with a 36 percent interest cap.
Delegate Jennifer McClellan, who patroned one of the bills to repeal payday lending, wrote passionately about her stance.
“While an occasional payday loan used for a financial emergency might seem reasonable and perhaps even worth the high interest rate, studies have shown that more than 90 percent of payday loans go to repeat borrowers who have become caught in a vicious cycle of debt,” McClellan wrote in February.
All loans should be capped at 36 percent, McClellan urged. States that have “reformed” payday lending without placing a cap on interest have seen few substantive results.
“The industry argues that it is providing a service to needy citizens who might have no other option for low-dollar, short-term loans,” she said. “However, in a House committee meeting [in January], the industry admitted that only 6 percent of its customers say that using a payday lender is their only option.”
Wiggins says it's important to remember that people paid bills before payday lending by finding alternatives — and much less costly ones — to make ends meet. Credit unions, paycheck cash advances from employers, cash advances on credit cards, emergency community assistance plans, and small consumer loans are just a few examples.
“Your average person doesn't even know what a payday loan is,” Wiggins says. So when offered a quick payday loan cash advance versus one of the alternatives, the payday loan may appear more attractive. Yet, even an advance on a credit card, a seemingly expensive way to get cash, would probably charge no more than 30 percent APR, Wiggins explains.
Wiggins says the industry has grown from its start in 2001 to having more than 800 locations in Virginia today. There are two payday lending institutions for every McDonald's in the Commonwealth.
“It doesn't have to be usurious, you could offer a short-term loan for a much lower interest rate and still make a profit,” she said. “Payday lending should not exit as it does now, but it could still exist in a different form to help people in emergency situations.”
Many payday lenders target borrowers by locating in low-income areas. Lee Parker, Virginia regional minister of the Disciples of Christ , says he's seen how “those victimized by it are usually the ones who can least afford it.” The first time he went into such a business he saw a poster with the actual APR — it was 500 percent.
“When you start as a pastor to interfere with the free market system, you make yourself vulnerable, but some issues are so filled with inappropriateness … that a person of conscious has to stand up and say this is wrong,” Parker says.
Wiggins believes that if more people of faith would stand up, the payday lending industry could be changed.
“We would appreciate prayers as we all move forward on this issue,” she said. “The faith community has a very strong voice and they can move mountains and stubborn people when they really want to.”
Smith urges individuals to sign the petition on faithfulpledge.org, call a legislator or write a letter to protect those who are vulnerable.
“We know at the end of the day that the voices of people matter and the voice of the faith community matters because we speak with a moral and just voice,” Smith says.
He says the lending industry is spending millions — hiring 17 lobbyists just in the last session — to convince legislators that the status quo should remain.
“The payday lenders make big bucks and for anyone to threaten the money they can make on the poor means they're going to do all they can [to retain the current system],” Smith says. “There's no way we could ever afford what this industry is spending to buy the attention and to sway the legislators … but we answer to an authority that is higher than the dollar.”
Some have called the payday lending issue a David and Goliath battle. Smith likes the analogy.
“We know how that one turned out.”