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Payday Lending

Every year, over five million families are victimized by predatory payday lending.1
Payday loans are short-term loans for immediate cash, typically secured by a borrower’s post-dated check or authorization for automatic withdrawal from the borrower’s bank account on a certain date. In exchange for a post-dated $300 check, a consumer typically pays $45 in fees and receives $255 in cash. The annual percentage rate (APR) for an initial payday loan usually ranges from 391 percent to 443 percent. The charges often result in a loan’s renewal—which means the borrower pays additional fees on the same loan.
Payday lenders make most of their profits by trapping borrowers in a cycle of revolving debt.
Because payday loans are typically due within two weeks, many borrowers find they cannot repay them on time. To avoid default, they must renew the loan and pay another high fee. Pressures to renew the loan include the prospect of multiple bounced check fees from the bank and the lender—who may pass the check through the borrower’s account several times—and the explicit or implicit threat of prosecution for writing a bad check. Borrowers get caught up in "loan flipping," a cycle of expensive refinancing of loans. In fact, 91 percent of payday loans are made to borrowers who take out five or more such loans per year. Thirty-one percent of payday borrowers receive 12 or more loans per year. Only one percent of payday loans go to first-time borrowers. Predatory payday lending fees—those extracted from borrowers caught in a cycle of repeated transactions—cost American families at least $5 billion each year.2
Predatory payday lending disproportionately impacts women and African Americans.
A national survey found that two out of three payday borrowers were women.3 An Illinois study found that over 60 percent of payday borrowers sued by a major payday lender were women.4 An industry newsletter describes the customer base as being over 60 percent women.5 In fact, one payday lender’s business plan declares that “welfare-to-work mothers” are an “excellent opportunity for check cashing and cash advance businesses.”6 A March 2005 study found that African American neighborhoods in North Carolina had three times as many payday lending stores per capita as white neighborhoods—even when income and other demographic factors were controlled.7 Another North Carolina study found that African American households are almost twice as likely as white households to borrow from a payday lender.8
In recent years, the payday lending industry has quadrupled in size.
Payday lending sales volume grew from $10 billion in 2000 to more than $40 billion in 2003. By 2004, approximately 22,000 payday offices generated 100 million transactions. Sixty Minutes reported that across the nation, payday lending shops now outnumber McDonald’s restaurants.
State laws generally fail to stop predatory payday lending practices.
Thirty-five states (AL, AR, AZ, CA, CO, DE, FL, HI, ID, IL, IN, IA, KS, KY, LA, MN, MS, MO, MT, NE, NV, NH, ND, OH, OK, OR, RI, SC, SD, TN, TX, UT, VA, WA, WY) have laws or regulations that specifically permit payday loans. In addition, Wisconsin has no small loan usury caps that apply to payday loans, effectively authorizing payday lending practices. Of the states that allow payday lending, only seven (CA, CO, IN, LA, MT, OK, VA) have statutes that prohibit local companies from partnering with out-of-state banks to evade state restrictions.9
Thirteen states prohibit payday loans with increasingly effective enforcement.
Thirteen states (AK, CT, GA, ME, MD, MA, MI, NJ, NY, NC, PA, VT, WV) prohibit payday loans through interest rate caps, usury laws, or specific prohibitions on check cashing.10 However, most of these states still have some payday lending, largely due to local companies that partner with out-of-state banks to evade prohibitions. In March 2005, the Federal Deposit Insurance Corporation (FDIC) cracked down on the practice by forbidding payday lenders and their partner banks from making payday loans to customers who have had such loans outstanding from any lender for more than three of the previous 12 months. Subsequently, banks ended a substantial number of their partnerships.
The federal government has taken action on payday loans to military families.
A study for the Center for Responsible Lending found that military personnel are three times more likely than civilians to be payday borrowers.11 Another study found that payday lending stores were clustered around military bases.12 In response, the 2007 Defense Authorization bill, passed in September 2006, contained strong limits on payday loans, including a 36 percent cap on interest.
Georgia’s model law has cleared its last legal hurdle.
Georgia’s law caps small loans at 60 percent APR, prescribes harsh penalties for violators, and explicitly bars non-bank lenders from partnering with out-of-state institutions in order to avoid the state usury limit. Soon after the law’s 2004 enactment, several payday lenders and their bank partners sued the state, claiming it was unconstitutional. However, their effort failed and the 11th Circuit Court of Appeals eliminated the last legal threat to the Georgia law in April 2006.

This policy summary was based in large part on information from the Center for Responsible Lending.

Endnotes
  1. Keith Ernst, John Farris and Uriah King, “Quantifying the Economic Cost of Payday Lending,” Center for Responsible Lending, February 2004.
  2. Ibid.
  3. Patricia Cirillo, “Payday Advance Consumer Satisfaction Survey,” Cypress Research Group, May 2004.
  4. Monsignor John Egan Campaign for Payday Loan Reform, “Greed: An In-depth Study of the Debt Collection Practices, Interest Rates, and Customer Base of a Major Illinois Payday Lender,” March 2004.
  5. Trihouse Enterprises, “Payday Loan Industry Newsletter,” Issue 3-10, 2003.
  6. “A Business Plan for The Cash Exchange,” on file with the Center for Responsible Lending.
  7. Uriah King, Wei Li, Delvin Davis and Keith Ernst, “Race Matters: The Concentration of Payday Lenders in African-American Neighborhoods in North Carolina,” Center for Responsible Lending, March 22, 2005.
  8. Michael Stegman and Robert Faris, “Payday Lending: a Business Model that Encourages Chronic Borrowing,” Center for Community Capitalism, University of North Carolina, 2003.
  9. Jean Ann Fox, “Unsafe and Unsound: Payday Lenders Hide Behind FDIC Bank Charters to Peddle Usury,” Consumer Federation of America, March 2004.
  10. Ozlem Tanik, “Payday Lenders Target the Military; Evidence Lies in Industry’s Own Data,” Center for Responsible Lending, September 30, 2005..
  11. Steven Graves and Christopher Peterson, Predatory Lending and the Military, March 2005.
  12. “Unsafe and Unsound.”
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