The menace of payday lending [Michigan Chronicle (MI)]

Predatory payday and deposit advance lending is a major area of concern for consumers across the country. Although there have been many policy advances in this area over the past decade, predatory lending promotes a vicious economic cycle that especially hurts low-income Americans.

There must be a discussion about how predatory lending affects the safety and economic security of some of society's most vulnerable groups - including domestic violence survivors - and how to stop such practices. While there is no formal legal definition of predatory lending, the Federal Deposit Insurance Corporation, or FDIC, broadly defines the practice as "imposing unfair and abusive loan terms on borrowers."

These could include underwriting that does not take a borrower's ability to repay the loan into account and large prepayment penalties. Predatory lending takes many forms, including payday loans and deposit advances - an emerging form of predatory payday loans, this time made by banks. In 2012 payday lending made up approximately $29.8 billion of storefront paydays and $14.3 billion of online lending.

Predatory lending has damaged the national economy and individual households. Even before the recession, U.S. borrowers lost $9.1 billion annually due to these practices. This harm is disproportionately concentrated, with twothirds of borrowers taking out seven or more loans per year.

The consequences of this constant borrowing are stark. Households that utilized "deposit advances" - an emerging form of payday loans - were in debt more than 40 percent of the year, far more than the FDIC maximum limit of 90 days. In addition, many payday loans are used for common household expenses. Sixty-nine percent of borrowers, for example, used loans to pay for recurring expenses.

This high level of debt and nonemergency usage encourages a vicious cycle of dependency on payday lenders.

Predatory lending, especially in the form of payday loans, undermines economic security by forcing borrowers to sell necessary assets. More than 50 percent of loan recipients defaulted on their loans, placing existing bank accounts at risk. Borrowers also could have their debts sold to a collection agency or face court action. These assets are essential to household economic security. Payday lending and other forms of predatory lending are antithetical to this goal; 41 percent of borrowers require a cash infusion to pay a loan, which could force them to sell possessions or request money from friends and family. This is even more troubling because fewer than half of the recipients have savings or assets from which to draw.

Payday lending is especially harmful because it disproportionately takes place in vulnerable communities. Seventy-five percent of payday-loan borrowers had incomes that were less than $50,000 per year in 2001, and payday lenders are concentrated in low-income areas.

In Texas, for example, more than 75 percent of stores are located in neighborhoods where the median household income is less than $50,000. Moreover, many recipients of payday loans are desperate; 37 percent of borrowers stated that "they have been in such a difficult financial situation that they would take a payday loan on any terms offered."

Unchecked predatory lending in the form of payday loans currently occurs in 26 states. Fifteen states and the District of Columbia ban the practice entirely, and nine states allow it in limited form.

These nine states use varying combinations of restrictions, such as limits on loan amounts, interest rates, loan terms, and the number of loans. Colorado, for example, caps annual percentage rates, or APRs, at 45 percent, and in Washington state, the number of loans a borrower can receive is capped at eight per annum.

A comprehensive 36 percent cap on APRs more or less represents a ban on predatory payday lending. Policies that ban renewals, institute payment plans, limit loan amounts, and limit the number of outstanding loans have proven to be ineffective.

Another ineffective strategy is to narrowly target payday loans, which allows lenders to alter their products to avoid compliance without changing their predatory nature.

In contrast, states and the District of Columbia that have the 36 percent cap save their citizens more than $1.5 billion each year. Supporters of high-cost payday loans claim that increased regulation of payday lending will decrease access to credit for needy families in cases of emergency.

In North Carolina, however, the availability of small-dollar loans at or below the 36 percent interest-rate cap has increased by 37 percent. In fact, the absence of payday lending had no significant impact on credit availability within the state.

Still, among the 50 states, expensive lending persists due to loopholes and out-of-state lenders' ability to occasionally evade restrictions. Payday lending in Virginia provides a strong example of how this happens.

Oregon and Virginia do not ban payday loans entirely, but they cap APRs at 36 percent. Virginia state law, however, allows two fees in addition to interest rates, and as a result, there is an average annual rate of 282 percent in Virginia, despite its 36 percent cap.

Furthermore, in Ohio, payday lenders were able to recharter themselves and add fees to skirt the state's voter-approved 28 percent APR cap.