Community groups help borrowers out of payday loan debt traps

Community advocates (from left): Rafael Morales,Wendy Ho, Gabriel de la Cruz and  Fahad Qurashi. 

MOUNTAIN VIEW, California – Deadlier than a loan shark is the predatory payday lender. Both offer short term loans at extremely high interest rates, target the low income and keep them in a cycle of debt.

But only the payday lender operates with varying degrees of legality, depending on which state they do business.

Silicon Valley Community Foundation (SVCF) Economic Security Program Officer Rafael Morales said, “To give you a sense of this: there are more payday lenders in the US than there are McDonalds and there are more payday lenders than there are Starbucks. In California alone, the payday loan industry is about $3 billion a year.”

Morales also said, “Until several years ago, the major banks were essentially funding a lot of these payday lenders. But most of the banks have gotten out of the payday lending business because of federal regulations.” Morales added that it grew out of the check-cashing model, and the SVCF didn’t tackle the issue until 2009.

United Way Silicon Valley Advocacy & Public Policy Manager Wendy Ho, a Filipino-Chinese stated, “I think payday loans really came about in the 1990s with the downturn of the economy when people really started looking for quick cash fixes. Desperate times called for desperate measures to make ends meet.”

Morales explained that some immigrants, not necessarily undocumented, bring their grave mistrust of banks when they come to the US and prefer to stash their cash under the mattress.

“The majority of folks who get payday loans don’t have banking relationships because they feel uncomfortable using the bank so they’re outside the financial mainstream,” he said. “Sometimes they’re the ones who have imperfect credit so they don’t qualify for a checking account. Sometimes they’re the ones who have no other option or they have already exhausted their options at the bank.”

Some of these cash-strapped borrowers, already suspicious of hidden and other undisclosed fees, get even more suspicious of the solicitous attention from well-dressed bankers. What the payday lender offers is not dressed up and is more direct.

‘No cash, no credit no problem, it’s easy’

According to an October 2014 analysis by the Center for Responsible Lending (CRL), “for a 2-week loan of $255 (the max allowed in California) the borrower writes a $300 post-dated check ($255 loan plus $45 interest) to the lender. This provides the lender with direct access to the borrower’s checking account. Payday lenders do not assess whether the loan is affordable to the borrower in the light of their income and expense. Payday loans essentially require only proof of income (from work, Social Security or even unemployment insurance) and a checking account to qualify for a payday loan.”

But then “with direct access to the borrower’s checking account, a lender can cash the post-dated check on the borrower’s next payday, amounting to an annual interest rate of 459 percent (credit cards charge from 17 to 25 per cent).

“The payday lender is then first in line for this new income and the money it takes from the borrower’s account before they can make their car payments, buy groceries, pay the utilities and other expenses. This practice leaves most borrowers deeper in the hole than when they started.”

Morales said, “On the average, across America, payday loan borrowers have six loans per year and actually, some of the data that the California Department of Business Oversight last year showed 80 per cent of payday loan customers have more than one loan per year and a full third of all payday loan customers are taking out 10 or more,”

The CRL research also found that “37 percent of payday borrowers experience default in the first year of borrowing and 44 percent within the first two years.” So payday loan borrowers are more likely to incur overdraft charges, bounced check fees, lose their bank account, default on their credit card and file for bankruptcy.

The situation gets worse because many payday lenders target the low-income (making less than $50,000 a year) communities, those who don’t own houses and those who are not native English speakers. Youth Leadership Institute (YLI) Senior Director Fahad Qurashi said, “Payday lenders are eight times more likely to be found in communities of color.” The quick injection of fast cash is easily seen but nobody bothers to do the math.

Ho said that although payday lenders do not use strong-arm tactics like some loan sharks, “they can be very aggressive in terms of making lots of phone calls and sending letters to collect debts.”

When the harassed borrower tries to lie low, “the payday lenders may put a lien against the borrower’s account, continue to draw out funds and leave a negative balance.”

Damage to local economy

This takes out some hardworking, contributing members to the community. But there’s more damage done. Said Qurashi, “Payday loans cripple the local economy as the dollars from the high APR never goes back to the community. Many Daly City payday loan customers take out $255 with a $45 interest. For each $45 interest, $10.80 is drained from the Daly City economy. If the same resident takes out 10 consecutive loans to pay the previous loan, then he would have paid that $ 450 in interest which would be a $108 loss for Daly City.”

“According to a report from the Insight Center for Economic Development, 5-day payday lending establishments drain $272,845 from the community annually. This means reduced sales and receipts to Daly City businesses. Also, lower tax revenues for the City. Daly City lost $1.36 million due to payday loans during the previous five years at the time of the recession.”

To YLI Program Coordinator and Filipino-American Gabriel de la Cruz, the loss is personal. “There are five payday lenders within a 2-mile radius of each other in a predominantly Filipino neighborhood. Most of the Filipinos residing in Daly City are working class families who are vulnerable to the payday lending businesses that litter Mission Street.”

De la Cruz added, “As a Filipino, my experience with payday lending debt is culturally related to the value of hiya (shame). I turned to payday lenders to avoid the stigma of shame. I was embarrassed for myself for not having the means to survive. In fear of what others might think, I could not let my family and friends know that I was struggling financially. In secret, I took out a short-term loan. I feel that the stigma of shame and debt would force some Filipinos to turn to payday loans.”

De la Cruz explained that payday loans can be done in secret, “there’s no credit check and one can easily go to several payday lenders in one day and receive multiple loans. As a college student, I took the loan to help pay for school and rent. For struggling Filipino families in today’s housing market and gentrification in areas like SoMa in San Francisco paying rent could be a reason.”

Moreover, he said, “We live in a consumer society and buying power is a measure of success. We look up to the American Dream and keep up with the lifestyle, trying to get the newest smart device, car and fashion. Many Filipinos aspire for the Dream to show family members in the Philippines that we got it made, even as we work on three jobs and take out payday loans.”

Always skirting the law

Ho said California state regulations are “a bit more lax in terms of the traditional storefront payday lenders. Both state and federal government have regulations but it’s really the local (city) government that is responsible for payday loan regulations. They set the terms for re-payment and interest rates. At the Federal level it’s really more of consumer protection.”

Qurashi specified that YLI works with the Consumer Financial Protection Bureau.

Both YLI and United Way Silicon Valley can count some victories. Qurashi explained, “the ordinance developed and passed through the leadership of YLI states that payday lenders can no longer open a shop 2,000 feet from each other in the Mission Boulevard area (the most and only saturated area with payday lenders in Daly City), making it virtually impossible for new payday lenders to open. This momentum led to a similar ordinance campaign, making a second policy victory in South San Francisco.”

For United Way Silicon Valley, Ho said, “We work with the city government to develop ordinances which restrict payday loan activity within their city boundary. It basically establishes caps for the number of payday loan outlets in their cities. San Jose established distance requirements between payday outlets. Santa Clara City actually issued a moratorium on payday lenders in their unincorporated areas.”

But the battles won don’t win the war. Said Morales, “We’d love to see movement at the State level because it’s actually the State that can regulate interest rates. At the State level there has been very little appetite by legislators to really champion this issue. Partly because the payday loan lobby is very strong and very well financed.

“Our ultimate goal is to enact the 36 percent interest cap which other states have done. That effectively ended the payday loan traps because the most they could charge with the cap is small dollars on any loan, short-term or otherwise. Actually, some of our colleagues and advocates still think 36 per cent is predatory.”

But payday lenders, unlike most loan sharks, make up in brains what they lack in brawns. Morales revealed, “Payday lenders are constantly looking at ways to avoid state laws. A lot of them have gone to the internet rather than be just the traditional storefront. Now some states are starting to prosecute on-line payday lenders, too. But payday loans are still widespread.”

A more recent challenge we have now is payday lenders approaching destitute American Indian tribes saying to them: “We’ll give you half or one per cent of our income in return for you being the subsidiary of our payday loan store” so they can get native American sovereignty to avoid compliance with state laws. And at the Federal level, they would get no interest rate cap and even few caps on installment on loans. Our grantees are working on this,” Morales said.

For now, all agree that correct information and education are still the best ways to combat payday loans. Ho said United Way Silicon Valley set up a hotline and are offering sessions on financial skills and managing debts.

They teach desperate borrowers things like closing compromised bank accounts and requesting their utility companies for payment extensions or installment schedules. YLI gives out similar instructions to the youth.