Payday Lending

Dana Wiggins of the Virginia Poverty Law Center says the high-interest loans are designed to trap borrowers in a cycle of debt, adding, “If the interest charged was less, it would be easier for people to pay back the loans and I wouldn’t have to run a hotline for people who have lost homes or gone into bankruptcy because of these loans.” Legislation passed in 2008 did help reduce the damage caused by payday and car title loans by preventing borrowers from having more than one loan at a time, creating new repayment stipulations, and lowering maximum annual percent rates on loans to 391 percent. Still, Elder says he hopes the upcoming legislative session will bring “true reform,” which the general assembly failed to accomplish in 2008. He says, “When we achieve a 36 percent cap, we’ll have won the battle here.”

Three years after theVirginia General Assembly issued mandates restricting short-term, high-interest loans, new bills to further regulate the industry are proposed for the upcoming legislative session. Bills prefiled by Sen. Mamie Lockeand Del. Glenn Oder seek to cap at 36 percent the annual interest rate that payday, car title and open-end line of credit lenders can charge.

This crisis of the past year has clearly touched us all at every economic level but it has done something else. It has gotten us all thinking not just about issues but about who we are as a country and who we would like to see—what we would like to see for our children and our children’s children. When people from other countries arrive here and in our background unless we’re Native Americans that goes to all of us in our gene pool, they arrive with the expectation of justice, equality and opportunity. It’s an expectation that we all want to see fulfilled but too often it isn’t. So, returning to Ted Kennedy’s words, there is a moral imperative to strive toward social justice. In other words, when we, as a political body, move toward those in need, we find ourselves. Our topic today we believe addresses these concerns. We’re going to explore predatory lending practices as exemplified by payday lending and car title loans. Welcome again, Bruce to our program.

Bruce Elder: Thank you so much for inviting me, Jan.

Jan Paynter: I noticed in your bio that it was rather brief and when I discussed it on the phone you said you felt that you didn’t—you had a—didn’t need to talk about the gold star that you got in school which I completely identify with and I think it’s great. In 2007 you drafted a resolution with the Stanton City Council to cap payday lending at an interest rate of 36% and you were quoted as saying, ‘This is the pebble in the pond and the ripples, by the time they reach Richmond, will be a tidal wave’, which I think came to pass. First of all, Bruce, I want to ask you, where does your passion, where does your commitment to this issue come from? And then we can get into what payday lending is.

Bruce Elder: I think for a lot of people who are involved in politics, particularly at a local level, there is something deep in their heart, a passion they have for making their community, their commonwealth, a better place. For me, I was drafted to run in 2005 for the 20th House district seat on the Democratic side. And it was a challenge. It was a challenge to do such a thing. I had never attempted any formal politics before and I find it very engaging. It exposed me to many, many different people and many different issues that I perhaps had never given any thought to. I’m a person who believes in proactive solutions rather than reactive solutions and having been a small business person for a long time, a self employed person, perhaps some of these things really touched me because I had experienced them myself. Every one of us has had a time in which they were short of money, they were broke, they were stressed, they had an unexpected expense. It was under those circumstances that the original Payday Loan Act in 2002 got passed and—and for good reasons. The people were sold—people in the general assembly were sold this as an emergency situation, a way to deal with that moment in their lives when they had no money. What they didn’t realize was the predatory nature of this type of loan product. It’s become a hydra. Now it’s a very, very large industry, $1.4 billion a year industry in the Commonwealth of Virginia. Now this went largely below the radar for most of us. It was only when I got a questionnaire from AARP, like many candidates do, regarding this issue that I started to explore a little bit. It was only then that I found out what those interest rates were, how difficult this debt trap was for so many people and the predatory nature of this type of loan product.

Jan Paynter: So for people who don’t know much about exactly what it is, how do we define payday lending and who is likely to need these loans, what are the logistics of the loan process? Where do the lion’s share of the profits come from?

Bruce Elder: Well, this is—these are all good questions. The background of this is that it starts out as a $300 loan. It’s good for two weeks. You’re going to pay $15 a $100 defined as a fee, so $45 interest on a $300 loan for two weeks. It sounds fairly benign. The problem is if you’re short of 300 bucks right now, probably two weeks from now you’re also going to be similarly short. So the people who would go in and get that loan would roll it over and pay another $45. The effective interest rate is 391%. Now when you ask people about payday loans or these quick loan places, they say, ‘Oh, the interest rate has got to be outrageous, probably it’s 35% or 40%’. When you tell them that it’s nearly 400%, their reaction is, ‘That can’t be legal’. Well, this was a universal reaction. No one said, ‘Oh, well, I can see that. That seems perfectly reasonable to me’. They said, ‘This cannot be legal. How can the general assembly allow that? That’s loan sharking’. Well, because of that act, because of the act that allowed payday lending in the state and allowed these predatory practices and relatively unregulated practices, this grew into a giant industry. It affects—as your second part of your question, it affects a very broad spectrum of people but generally they are working people. They have jobs, they have families. Many times they’re just caught with an unexpected expense, they’re short of money at the end of the month, they have a water heater that goes, they have an automotive problem and they get panicked. They are people who are used to paying their bills and they make sadly a very bad choice and they go to one of these places, they get caught in a cycle of debt and it crosses a broad spectrum of—demographically in our communities from just general working folks and working families to the retirees, people on Social Security. And this is why AARP was such an advocate for a loan rate cap. NAACP saw that minorities were being targeted by this very same form of predatory lending. So we’ve seen tremendous support from that community as well.

Jan Paynter: Are borrowers subject to criminal prosecution if they get into trouble with these loans? This is something I think a lot of people wonder about and there have been some threats to people.

Bruce Elder: There have been abuses of people by predatory lending. It is a criminal act in this state to intimidate on any grounds. The problem is that no matter how you structure it, unless you work towards a cap instead of this patchwork of laws, you never have enforcement enough. It has to reach a civil suit situation. There really isn’t enough manpower for investigation. At this point in the Commonwealth we are looking at cutting back essential services, schoolteachers, fire fighters, police officers, even here in Charlottesville, significant cutbacks. Having people as regulators to go around and check on every payday lender is an impossibility.

Jan Paynter: When—in talking to a few politicians coming up and running now, one of the things that I’ve heard is a certain finessing of the subject of lending. ‘Well, it’s something that we need. We don’t want to chase everyone out of the state. People need these loans’, and so forth and so on. What do you think the reticence by certain politicians is about?

Bruce Elder: The—very much like our healthcare discussion, there’s been a great deal of obfuscation of the basic fairness of what I was after. To go back to my own frustration with the general assembly, I went to—shortly after I came in second in the delegate contest, I was persuaded to run for Stanton City Council. The way I persuaded myself to do that was that I was going to do as much as I could to fulfill the promises that I had made to run as a delegate. One of them was to crack down on this industry, if anything, in my own town. My naiveté was met by a wonderful city attorney in Stanton who said, ‘Well, we’re a Doan’s Rule state. You really can’t shut down this type of activity in this town without going through the general assembly. You are a city councilman, that’s what you were elected for’. I sat down and I researched the Talent Nelson Amendment which was a federal law. It was a federal law that prohibited this type of predatory lending to members of the military and their families and I realized that with the proper promotion perhaps the communities that were so affected, little towns like Stanton, Waynesboro, Harrisonburg, Bristle, Winchester, all who have the same—on their Main Streets—this same form of predatory lending, that maybe if their voices were heard at the general assembly we could make a difference. Based on the Talent Nelson Amendment which passed the United States Senate and got the President’s signature, I was able to craft a similar measure for my city. Stanton was the first to unanimously adopt this. It was followed by 60 localities. Every major city in the Commonwealth of Virginia—Winchester, Richmond City, Newport News, Virginia Beach, Alexandria—the entire state, every major city and many counties signed onto this. In fact as that pebble hit the water, as those ripples moved outwards, 22 faith-based organizations representing every faith practiced in Virginia, most every editorial board of every major newspaper in the Commonwealth and the Washington Times and the Washington Post endorsed a 36% cap.

Jan Paynter: So going back to what I was curious about in terms of political hesitance to come onboard, is this an issue of contributions, what—is this simply good business on their part to want to keep things open, what do you think is going on?

Bruce Elder: When this tidal wave hit Richmond, when the NAACP, AARP and the Black Legislative Caucus all endorsed this, it was met obviously with some opposition. The opposition came from these companies that offer this product. After all, at nearly 400% interest, they were not going to give up that wonderful cash cow easily.

Jan Paynter: Of course.

Bruce Elder: In fact, during the 2008 political season, over $470,000 of campaign contributions flooded into candidates for the general assembly and the Virginia Senate.

Jan Paynter: It’s always about money, isn’t it?

Bruce Elder: I’m not saying that that would influence the vote of anyone but perhaps they did allow them to read some of the literature they had produced. At the same time, a lobbying effort began in Virginia that was unprecedented. And I don’t say that lightly. There have been many, many hot button issues in this state. But the most amount of money ever spent on a single lobbying effort by any company, by any organization, was the $3.8 million that was spent by this industry on television ads, direct mail, radio, newspaper advertisements to maintain the status quo. I think this had some influence on our lawmakers.

Jan Paynter: Yes, it would appear so. In looking and reading a little bit on payday lending, one thing I noticed is that there’s a concentration of lending in particular geographical zip code areas and although there is the cap of 36% for—to protect military people and their family—nonetheless it appears down the line that the largest number of stores set up for payday lending occur adjacent to military bases. In fact I believe 14 in Oceana Naval Base to date. That’s a lot. Even with that cap and in discussing with a military friend of mine who’s an Air Guard, he said, ‘One of the reasons they put it there is because military people are going to be accountable’.

Bruce Elder: There’s a reason why Senators Talent and Nelson pushed that 36% limit and the history of that’s very interesting. What they found was there were people in our United States military fully trained that were unable to be deployed to Iraq and Afghanistan because their security clearances had been compromised by judgments from payday lenders. This had happened nationwide and this is why that 36% cap went in for military personnel and their families. Now, have there been ways that that can be circumvented? Apparently so.

Jan Paynter: Well, that’s what I was—the next question I had, open ended loans. Would that be one way to get around this cap?

Bruce Elder: Open ended loans or these high interest credit card type loans which were created by the industry as a way to circumvent the laws that came into being in the general assembly of 2008 were fairly disingenuous and they have worked their way to a methodology to still create high profits for these industries. This is the same thing with car title lending, also quick refunds on your income tax. When you see that, when you drive down the road and see ‘instant refund’, oftentimes those loans, which are the same type of unregulated loan, you are paying for that privilege in fees as much as 400% interest.

Jan Paynter: Wow!

Bruce Elder: Yes. So all forms of predatory lending were covered in this resolution by the City of Stanton.

Jan Paynter: What are some of the signs for people who are considering and needing a loan to be aware of, indications that this might be a potentially predatory loan situation for them and therefore that they should steer clear?

Bruce Elder: The wisest—there’s a twofold thing why I’m here today and one of them is to talk about financial literacy, that more and more people need to know that if they don’t read the fine print—and it doesn’t matter if it’s check overdraft charges or credit card charges or predatory loans like payday loans or car title loans—they can get in over their head very, very quickly. There are bear traps all over the place. The thing that I would insist on getting across today is to talk to your children about this type of loan, particularly college students. Talk to them about credit cards, talk to them about automobile loans, tell them to take their time. That old ‘marry in haste, repent at leisure’.

Jan Paynter: Sure. That’s helpful. Let’s get in a little bit now as you brought it up to car title loans. What is—what is different from payday lending in terms of the way car titles might affect the people taking them out? I’m assuming it’s around 300—rate of 300% interest, there abouts.

Bruce Elder: It’s as high as 360%. Essentially you bring in your automobile, which is a fully paid for, clear title vehicle, and the car title lender puts a lien on it. The most amount of money they will loan generally is about half the wholesale value of the car. You have one month to pay it. If you don’t, the fees start adding up, it becomes an extraordinary amount of money and oftentimes people lose their cars. In my hometown of Stanton, there is a lot. This lot is empty every weekend or every—mid week of every week. By the next Wednesday it has 20—15 to 25 cars in it. These are cars that are harvested each week from my area by car title lenders

Jan Paynter: Yeah, if you lose your car, you can’t get your mother to the hospital when she’s sick, you can’t get your kids to school, you can’t get to your job so from some certain point of view it strikes me as actually more devastating than the payday loan. Is this—do we look for some change in the laws going forward? I know in 2010 there is a studying of the issue which is sometimes code for putting it off a bit. Do you feel that there will be a change and some capping of car title?

Bruce Elder: I think it’s a remarkable amount of activity that occurred after this resolution in 2007. This was in September of 2007, the general assembly meets of course in January. There was no interest in pursuing anything of this nature in the fall of 2007. By January, there were 22 bills related to usury caps, related to the regulation of high interest loans. Right now there is a great deal of interest in car title lending. It is—it crosses all political lines too, Jan, and I think this is important. Both Republicans and Democrats have sponsored bills to not only investigate this but perhaps to cap it, to look into all forms of predatory lending. They have seen the effects in their hometowns, they have seen the economic devastation that occurs when a family loses the family car. Virginia’s still a very rural state. You still need to get back and forth to work.

Jan Paynter: Well, in that regard, what kinds of solutions—because we are a solution-oriented program, not just finding what’s wrong cause that’s—we can watch television for that every day. And what kinds of things, what kinds of loans, where can people go, can they go to credit unions, faith-based organizations, other places? I know our mayor in Charlottesville has a town credit union arrangement for city employees so that they can get low interest loans. Tim McCain, has—our governor has sponsored a program to help both university people and state employees with 25% interest loans. However, if you’re not among that group of people, where do you go?

Bruce Elder: I think that—if the laws change and eliminate these highly profitable but highly predatory loans, there exists a huge business vacuum here. We’re talking about bringing it back to 36% interest which is a remarkable amount of interest.

Jan Paynter: It’s huge.

Bruce Elder: It’s huge. When you consider that a stockbroker works on 4% to 6%, that a real estate broker works on 6% or 7%, that we finance houses at 4%, 5%, 6%, the opportunity for a company to get into a legitimate loan operation that provides emergency financing at 36%, you would think that would be mighty attractive. But so long as we have open ended credit, as long as we have the opportunity for people to get 400%, they’re going to have their entire business model built around that.

Jan Paynter: Some of the places online that people can go to find out information, cause most people are online all the time, do you have some suggestions for that? I know when I was looking through I saw the Center for Responsible Lending which is excellent, Consumer Federation of America, National Consumer Law Center, the Woodstock Institute. But I know there are others and more local places where people can get help.

Bruce Elder: Well, you’ve certainly named some of the biggest activist organizations who are looking into this and taking this nationwide. Dick Durbin introduced a bill in the United States Senate, Senate Bill 500, that would create this cap on all consumer loans. Certainly the thing that you can do to influence this in the greatest possible way is to get hold of Senator Webb, Senator Warner, explain to them that this is a priority for you, priority for your community in a sense of social justice. The Center for Responsible Lending probably has the greatest archive of the progress of many states and also the history of how this has gone in places like North Carolina, Georgia and so forth. John McCain’s state, Arizona, will have a ballot initiative in 2010. They are quite confident that payday lending will be eliminated in the State of Arizona. The attorney general’s office in Arkansas brought the payday lenders to court saying that their fees were in fact interest and broke the basic usury law in the State of Arkansas. New Hampshire and Ohio were also successful in removing predatory lending.

Jan Paynter: Well, sadly this is a topic that I think bears more discussion but as usual time is moving faster than I would like. I noticed just as an aside that—tell me about your business in Stanton.

Bruce Elder: Well, I do have an unusual business. I have been in the antique automobile business for 36 years.

Jan Paynter: Well, I was thinking as a metaphor it’s an interesting one because you have classic and antique cars and you work on engines which take people moving forward and this is something that you have surely done with this bill. I’d like to thank you very much, Bruce, for being here today.

Bruce Elder: Thank you so much, Jan, for having me.

Jan Paynter: Jefferson seeds from the 18th century garden were planted in the 20th and they sprout like all good ideas as we have heard from Bruce today. Our guest today clearly believes that politics matters and it’s an impressive example of how what happens locally translates to the state level and beyond. When politics matters and citizens take action, the results can astonish us all. Thank you for sharing your time with us today and please come back to join us for another conversation on Politics Matters. Our website politicsmatters.org. Thank you very much.

Bruce Elder: Thank you, Jan.