Payday Loans

What Rules Should Apply?

What are Payday Loans?

Payday loans are small cash advances based on a personal check held for future deposit (or electronic access to a customer's bank account). These loans of $100 to around $500 are due in full on the borrower's next payday or within a certain number of days. The fees charged result in annual interest rates of 400% and higher.

The design of these loans leads to frequent roll-overs and perpetual debt. The holding of personal checks makes the loans inherently coercive, with over-extended borrowers faced with the choice of allowing the check to bounce, paying to extend the loan or being threatened with "bad" check charges or prosecution.

Who uses Payday Loans?

Any "cash-strapped" person. Yet this industry disproportionately targets vulnerable groups such as low-income people, welfare-to-work women, seniors and members of the military.

In 2001, the Wisconsin Department of Financial Institutions found that the typical customers were female; average age was 39; average individual income was $24,673 gross; and 60 percent were renters compared to 22 percent who own homes.

The Illinois Department of Financial Institutions found in 1999 that their borrowers' median income was $23,690 with 19 percent earning less than $15,000 and 12 percent earning more than $40,000; 62 percent were female; 68 percent were renters; and loans were made in areas with high minority populations. Also, in North Carolina, African-Americans were 2.5 times more likely to use payday loans than Caucasian customers and 40 percent of welfare recipients were chronic users.

A study commissioned by the payday loan trade association identifies the typical customer as young (two-thirds less than 45 years of age), average household income of $25,000 to $45,000, employed at the same job for almost four years and more than half with some college education.

Payday Loans and Alabama

In the mid-1990s, payday loan operations mushroomed in Alabama. The Consumer Federation of America estimates that there are 500 to 700 lenders around the state.

Labeling their transactions as "deferred presentment" or "deferred deposit services" has allowed them to circumvent the Alabama Small Loan Act which prohibits lenders from charging more than 36% APR. Former Alabama Attorney General Jimmy Evans and the current Attorney General Bill Pryor ruled that payday loans are subject to the Small Loan Act.

On July 1, 1998, the Alabama Banking Department issued more than 120 (this number eventually became more than 150) cease and desist orders to payday lenders who, on the same day, sued the Banking Department, requesting a declaratory judgment on whether the Small Loan Act applies to payday loans. Montgomery Circuit Judge Eugene Reese stalled for four years, waiting for the Legislature to legalize the practice. On June 21, 2002, Judge Reese ruled that these lenders are not subject to the Alabama Small Loan Law.

Arise disagrees with Judge Reese. The Banking Department has appealed his decision.

What They Say	What You Can Say
"Judge Reese says this is a matter for the Legislature, not the courts."	We agree with the Governor, the Attorney General and the State Banking Department's appeal of Reese's decision. The best avenue is for the courts to decide that the Small Loan Act applies.
"According to Judge Reese, payday lenders aren't regulated by the Small Loan Act."	We urge you to agree with Arise that these loans are regulated by the Small Loan Act.
"Previous legislation proposed a fee of 16.5% per $100 loaned. That's cheaper than current rates of 20% per $100 loaned."	16.5% per transaction is still more than 36% APR. At that rate, the APR is 429% for a two-week loan. Why carve out an exception for this type of loan company? Other small loan lenders profit at 36% APR; why can't the payday lenders?
"Payday loan customers are high credit risks."	Payday loan customers must have a banking account in relatively good standing and must provide proof of this by showing recent bank statements; they must have a job or a steady source of income and show identification and in some cases show bills indicating their name and address. Some payday loan stores even use specialized credit tracking resources to verify that the customer is not a habitual bad check writer.

A Growing Industry

In a nutshell, payday lending is a highly profitable business that encourages people to "pawn their paycheck" and become trapped in a "downward spiral of debt." In August 2001, the Fannie Mae Foundation estimated that there are 55 to 69 million payday loan transactions a year, with a volume of $10 to 13.8 billion, producing $1.6 to 2.2 billion in fees.