The U.S. economy is recovering and unemployment is at its lowest since the Great Recession. But such declarations givex little comfort to the many Americans — nearly half according to recent reports — who are “liquid asset poor” and living paycheck to paycheck.
Many people needing quick cash turn to short-term, high-interest payday loans — write a personal check for the amount borrowed plus the finance charge and get cash. The lender holds your check until next payday, when the loan and finance charge is paid in one lump sum.
In the 2014 legislative session, Rep. Patricia Todd, D-Birmingham, sponsored a bill to cap the payday loan annualized percentage rate (APR) at 36 percent. Although other Southern states, including Georgia, have banned consumer lending at triple-digit interest rates, Alabama law allows payday and car title lenders to charge an APR of 456 percent. Todd’s bill also includes installment payments over a five-week period instead of the current two-week standard to pay back the loans.
Todd’s effort to cap the payday loan APR was dropped during the last session. But the House Financial Services Committee did approve a compromise payday reform bill to establish a statewide database to track loans.
Supporters say a central database is needed because the Alabama law prohibiting people from borrowing more than $500 in payday loans at a single time is difficult to enforce. Borrowers can currently visit several lending stores, racking up multiple loans and high debt. The statewide database, operated by the Alabama Banking Department, will notify lenders when a customer already has received a $500 loan.
The database, which could be in use by early 2015, has faced obstacles. Several payday lending companies filed suit against the Alabama Banking Department, claiming the state lacked the authority to create the database. The suit was dismissed in Montgomery County circuit court.
Todd says the database is a move in the right direction, particularly since payday stores have proliferated during the past years, as a result of the recession. She’s hopeful her bill will pass when reintroduced in the 2015 session.
“The prospects are excellent, because the majority of legislators and the public want reform. We’re way behind other states in reform, ” says Todd. “The industry has lots of money and has hired lobbyists who have impeded our efforts to pass legislation. But more and more people are realizing the predatory nature of the business.”
Veteran Alabama sportscaster Herb Winches is now a lobbyist whose clients include Check Depot, which operates 13 payday loan stores in the Birmingham area. Winches says owner Jay McDuffie has never been opposed to a statewide database, as long as smaller companies like Check Depot are included in the database. Check Depot was not a plaintiff in the suit against the Alabama Banking Department.
“With a single database, we’ll see some payday lenders stay and some go, ” he says. “It will shake up the industry dramatically and hold everybody accountable. It’s going to be a big adjustment.” Winches believes both a central database and APR cap are too much for the industry to absorb at once, making changes to the APR difficult to pass in the next session.
Montgomery-based Southern Poverty Law Center Attorney Sara Zampierin says there’s never been a better time to reform payday lending in Alabama. In addition to the banking department’s legal win to move forward with the database, reform momentum is building.
“Over 20 cities and towns in Alabama have passed moratoriums or zoning ordinances to stop the spread of these destructive lenders and to protect the local economies, ” says Zampierin. “The people of Alabama are calling for change, and I believe the Legislature is ready to deliver it.”
Lax regulations and a high poverty rate make Alabama fertile ground for payday lenders. According to the Southern Poverty Law Center, Alabama has four times as many payday lenders as McDonald’s restaurants and more title loan lenders, per capita, than any other state.
Yolanda Sullivan, CEO of YMCA Central Alabama, says payday and car title loans are “sinking so many families into debt and cluttering up our communities with bright-light storefronts selling empty promises.”
Sullivan says many people come to her agency after losing their home because they couldn’t pay the 456 percent on their payday loan. And many have had their car repossessed after taking out a title loan because they couldn’t pay the 300 percent APR that Alabama lets auto title lenders charge. Since most Alabama communities offer limited public transportation, losing a car often results in losing a job.
Rep. Rod Scott, D-Fairfield, sponsored a bill in the 2014 session similar to Todd’s — to cap interest rates charged by car title lenders at 36 percent and set up a central database. Scott’s bill also failed to pass in the 2014 session. Yet Shay Farley, legal director of Alabama Appleseed Center for Law & Justice in Montgomery, a nonprofit public interest advocacy agency, says there is a “strong chance” for title loan reform passage.
“The members seem to understand how egregious those high risk loans are and how little justification there is to overcharge on a loan that is more than fully secured by the cost of the vehicle.” Farley adds that Alabama law does not require lenders, following repossession, to refund the surplus if the vehicle’s value exceeds the amount of the loan.
Alabama Appleseed has identified credit unions across Alabama that offer reasonably priced personal loans. While you must be a member of the credit union to qualify, the typical membership fee of about $35 is nominal compared to the cost of payday loans.
Farley says the most significant benefit to the borrower is that the term is significantly longer, at least six months compared to the 14-day payday loan, and reduces the APR to less than 36 percent. And unlike payday lenders, credit unions report timely payment to credit bureaus, which helps build the borrower’s credit.
Birmingham-based Gateway Financial Freedom — a nonprofit program helping people get out of debt and manage their money — plans to make alternatives to payday loans available in early 2015. These personal loans will be for a maximum of $750, repayable for up to one year with monthly payments with interest at 15 to 28 percent.
“That may not sound like low interest, but compared to 456 percent it’s quite a change, ” notes Gateway’s Program Director Doug Horst. Gateway will provide financial counseling and education and refer eligible clients to its local credit union lending partners. The program will begin in the greater Birmingham area but could possibly expand.
Regions Bank, along with other major banks, offered payday-like loans but withdrew the products in early 2014 after federal regulators cautioned that they would investigate whether such loans violate consumer protection laws. Regions declined to comment on the decision to drop its high-interest loans.
Three Auburn University finance professors, James Barth, Jitka Hilliard and John Jahera, recently published “Banks and Payday Lenders: Friends or Foes?, ” which examines the different business characteristics of payday lenders operating in the United States.
“We don’t know why regulators are discouraging banks from getting into this business, ” says Barth. He says Regions might get back into serving some payday customers, and is possibly declining comment until it gets regulatory approval before announcing any new products.
Along with banks being unduly excluded from entering the payday market, Barth says another problem is a lack of disclosure for payday lenders. Alabama state regulators can obtain only the name and location of payday lending businesses.
“Banks are heavily regulated, so why not allow banks to offer these products? You can get a lot more information about banks with no comparable information on payday lenders. Why should payday lenders be exempt? McDonald’s discloses the nutritional content of its food. We need the same for payday lenders.”
Jessica Armstrong and Art Meripol are freelancers for Business Alabama. Armstrong is based in Auburn and Meripol in Birmingham.
text by jessica armstrong • photos by art meripol