Issue: Payday & Title Lending Reform

Broke: How payday lenders crush Alabama communities

By Alabama Arise

Alabama Arise and Alabama Appleseed Center for Law and Justice teamed up to produce this report on the history, financial effects and human impact of high-cost payday lending in our state.

The report highlights and executive summary are below. Click here to read the full report, or click the “Download” button at the top of this post.

Report highlights

  • Under state law, payday lenders can charge up to 456 percent APR.
  • More than 1.7 million payday loans were taken out in Alabama in 2018. Averaged out, that’s more than 32,000 payday loans per week.
  • More than 200,000 Alabamians take out a payday loan every year.
  • Every year, Alabama borrowers pay more than $100 million in payday loan fees that do not decrease the principal amount owed.
  • About 85 percent of payday loan borrowers in Alabama take out multiple loans in a year.
  • 16 states and the District of Columbia have passed APR rate caps that keep pay­day lenders out, meaning that 95 million Americans live in communities without pay­day lending. Follow-up studies have shown that access to credit was not significantly impacted for former payday borrowers in these states, who have turned to other means of credit at lower cost.
  • More than half of Alabamians support banning payday lending (52.5 percent).
  • 73.6 percent of Alabamians support a 36 percent APR cap on payday loans.
  • 74.1 percent of Alabamians support extending payday loan terms to 30 days.

Executive summary

There are more payday and title lenders in Alabama than hospitals, high schools, mov­ie theaters and county courthouses combined. Their business model depends on churning a profit out of desperate, finan­cially fragile customers. Alabama provides them with plenty. About 18.5 percent of peo­ple in Alabama live at or below the poverty line, which is $24,257 for a family of four, making us America’s sixth poorest state.

More than three-fourths of American workers report living paycheck to paycheck with little or no savings, making payday lenders a tempting option for many people with financial emergencies. But in Alabama they hurt more than they help. Payday lenders are responsible for bringing financial hard­ship to hundreds of thousands of Alabami­ans and their families every year, swooping in to extract profits from the struggles of hard-working people. Unless the state Leg­islature decides to act, the scourge of preda­tory payday loans will continue to decimate family budgets and local economies.

The Consumer Financial Protection Bu­reau defines a payday loan as “a short-term, high-cost loan, generally for $500 or less, that is typically due on your next payday.” These loans are not hard to get: all a prospective bor­rower must do is provide proof of income and not exceed $500 in total payday loan princi­pals at any given time. There is no assessment of the borrower’s ability to repay the loan, nor are there credit checks. Borrowers are asked to write a post-dated check for the full amount of the loan plus $17.50 per $100 bor­rowed. Once they sign the check and a con­tract, the deal is done — sometimes in mere minutes. Across Alabama, nearly 5,000 pay­day loans are taken out every single day.

Though made out to be easy and fast, for most borrowers, these loans create long-term damage. The loans are not designed to be used as advertised. The fine print on pay­day loans includes annual percentage rates (APR) up to 456 percent. With astronom­ical rates like that, “small-dollar,” “short-term” loans frequently become expensive, multi-year burdens for Alabamians. And because we know that 85 percent of payday loans are taken out to cover emergencies or bills like rent, groceries or utilities, we know that these long-term burdens are only mak­ing hard times harder for families across the state. When these lenders sap our neigh­bors’ household budgets and drain money from our local economies, we all lose.

In 16 states and the District of Colum­bia, rate caps prevent payday lenders from operating. This includes our pro-business, Southern neighbors of Georgia, North Car­olina and Arkansas. There are 95 million Americans who live in communities where payday lending is no longer permitted, and if current trends continue, that number will only grow as more states protect their residents from these deceptive financial products. So far, Alabama has not. As a result, the state has the third highest concentration of payday lenders in the nation, and the payday lending industry extracts more than $100 million from the pockets of low- and middle-income Alabama borrow­ers every year in loan fees.

Predatory lending is a highly prof­itable activity. Over the next decade, lenders are on pace to take more than a billion dollars out of Alabama. Most of that total will be siphoned out of neighborhoods and communities bad­ly in need of those dollars. The money will flow to out-of-state companies headquartered in states like Ohio, Illi­nois, Kansas and South Carolina, and it will deepen the economic difficulties of the Alabamians left behind.

This report brings together pay­day loan usage data for the state of Al­abama (2015-2018), statewide public opinion polling data, and interviews with borrowers, direct service providers and faith leaders across the state. We found a lending system that has harmed tornado victims, families with disabled children, vet­erans, and a mother with a good job who just needed her car repaired.

The overwhelming majority of Alabam­ians want to see payday lending either sig­nificantly reformed or banned from our state entirely. It is time for lawmakers to listen to the voices of their constituents and address the harms caused by predatory payday lenders.

Full report

Click here to read the full report, or click the “Download” button at the top of this post.

The CFPB should keep protections for payday borrowers

By Dev Wakeley

Borrowers across the country deserve stronger protections, not weaker ones. Unfortunately, the Consumer Financial Protection Bureau (CFPB) recently decided to reopen its 2017 rulemaking on payday lending. And that move would put the financial health of hundreds of thousands of people at risk.

The CFPB director seeks to eliminate a requirement for payday lenders to determine whether borrowers have the ability to repay before lending to them. Abandoning this protection will leave borrowers at the mercy of high-cost lenders across the United States.

It’s time to speak out. The CFPB’s public comment period on this proposed change is open through May 15. So click here to tell the CFPB that its plan to end this consumer protection is shortsighted, harmful and contrary to the agency’s purpose.

This harmful proposal shows that Alabamians can’t rely on the federal government alone for consumer protection. The hostility to the CFPB’s rule by the very people who should be defending it proves that we need to seek change through the Alabama Legislature.

The 30 Days to Pay bill, sponsored by Sen. Arthur Orr, R-Decatur, and Rep. Danny Garrett, R-Trussville, would be a good start. This plan would extend the repayment period for payday loans to at least 30 days, up from the usual two weeks now. That would reduce the maximum annual percentage rate (APR) by roughly half, from 456 percent to about 220 percent.

We need you with us this year as we work to change policies that leave thousands of struggling Alabamians in a cycle of deep debt. Together, we can build a better Alabama for all!

30 days to pay: A simple but important step forward on payday lending reform in Alabama

By Alabama Arise

Alabama borrowers pay interest rates of 456 percent a year on payday loans. These high-cost loans trap thousands of struggling Alabamians in a debt cycle that deepens poverty and hurts the state’s economy.

SB 75, sponsored by Sen. Arthur Orr, R-Decatur, along with a House version sponsored by Rep. Danny Garrett, R-Trussville, would extend the time that payday borrowers have to repay to 30 days, up from as few as 10 days now. This one step would reduce the maximum annual percentage rate (APR) on payday loans in Alabama from 456 percent to about 220 percent. This bill would ease financial pressure on Alabamians who are struggling to make ends meet, letting them keep more money to take care of basic needs.

The 30-days-to-pay bill would help borrowers and preserve access to credit. Lengthening the repayment period for payday loans would:

  • Boost Alabama’s economy by reducing the amount of fees (more than $100 million last year alone) taken out of our communities every year to benefit primarily out-of-state corporations.
  • Bring payday loan repayment periods in line with repayment schedules for other loans and monthly bills, such as mortgages, rent, car loans, student loans, credit cards and utility bills.
  • Grant needed relief to tens of thousands of working Alabamians and allow them to use their hard-earned money to better their own lives.

BOTTOM LINE: Exorbitant interest rates on payday loans are devastating for families and communities across Alabama. SB 75 would take a simple, important step to reduce the damage from these high-cost loans. That would be good for consumers, good for the state’s economy and good for Alabama.

Medicaid expansion, end to grocery tax highlight Alabama Arise’s 2019 priorities

By Chris Sanders

Medicaid expansion and legislation to end the state sales tax on groceries are among the top goals on Alabama Arise’s 2019 legislative agenda. More than 200 Arise members picked the organization’s issue priorities at its annual meeting Saturday, Sept. 8, 2018, in Montgomery. The seven issues chosen were:

  • Tax reform, including untaxing groceries and closing corporate income tax loopholes.
  • Adequate funding for vital services like education, health care and child care, including approval of new tax revenue to protect and expand Medicaid.
  • State funding for the newly created Public Transportation Trust Fund.
  • Consumer protections to limit high-interest payday loans and auto title loans in Alabama.
  • Legislation to establish automatic universal voter registration in Alabama.
  • Reforms to Alabama’s criminal justice debt policies, including changes related to cash bail and civil asset forfeiture.
  • Reforms to Alabama’s death penalty system, including a moratorium on executions.

“Public policy barriers block the path to real opportunity and justice for far too many Alabamians,” Alabama Arise executive director Robyn Hyden said. “We’re excited to unveil our 2019 blueprint to build a more just, inclusive state and make it easier for all families to make ends meet.”

Alabama’s failure to expand Medicaid to cover adults with low wages has trapped about 300,000 people in a coverage gap, making too much to qualify for Medicaid but too little to receive subsidies for Marketplace coverage under the Affordable Care Act. Expanding Medicaid would save hundreds of lives, create thousands of jobs and pump hundreds of millions of dollars a year into Alabama’s economy. Expansion also would help keep rural hospitals and clinics open across the state.

The state grocery tax is another harmful policy choice that works against Alabamians’ efforts to get ahead. Alabama is one of only three states with no sales tax break on groceries. (Mississippi and South Dakota are the others.) The grocery tax essentially acts as a tax on survival, adding hundreds of dollars a year to the cost of a basic necessity of life. The tax also is a key driver of Alabama’s upside-down tax system, which on average forces families with low and moderate incomes to pay twice as much of what they make in state and local taxes as the richest Alabamians do.

Payday lending reform: Ending a debt trap in Alabama

By Dev Wakeley

On busy highways and run-down streets across the state, you can’t miss them: big, bright signs promising easy money. From payday loans to auto title pawns to anticipation loans on tax refunds, Alabamians face a dizzying array of credit services designed to trap consumers in financial quicksand. This fact sheet highlights the pitfalls of payday loans in Alabama and offers policy solutions to address them.

Legalized usury?

Payday loans allow borrowers with a bank account to use a check dated in the future (usually two weeks later) as collateral for a cash loan. To qualify, all a person needs is proof of income (a pay stub or verification of government benefits). Research shows the payday lending business model is designed to keep borrowers in debt. Borrowers who receive five or more loans a year account for the large majority of payday lenders’ business, according to research by the Center for Responsible Lending (CRL).

Most states have laws against usury, or excessive interest, but in some states like Alabama, lawmakers have carved out special exceptions for certain types of loans, including payday loans. The catch, however, is the huge profit that high interest rates pull from the pockets of vulnerable borrowers. Predatory lending promotes poverty by exploiting those caught in the gap between low wages and the real cost of getting by.

Each $100 borrowed through a payday loan in Alabama carries a “loan origination fee” of up to $17.50, and those charges occur with every renewal of the loan. With a 14-day loan period, this works out to an annual percentage rate (APR) of 456 percent. Loans that a customer cannot pay off entirely on the due date are rolled over, with no wait required for the first rollover and only a 24-hour wait required before the second. At triple-digit annual interest rates, even a short-term payoff for a payday loan can take a big bite out of a borrower’s bank account.

Details of the debt trap

Using payday loans doubles the risk that a borrower will end up in bankruptcy within two years, according to the Consumer Federation of America. It also doubles the risk of being seriously delinquent on credit cards and makes it less likely that consumers can pay other household bills. Payday loan use also increases the likelihood that a consumer’s bank account will be closed involuntarily, which may subject the borrower to criminal prosecution under worthless check laws.

Alabama’s payday loan database reveals the depth and details of the debt trap. A meager 22 percent of all payday loans go to borrowers who have more than 12 loans a year. Yet these borrowers are trapped into paying $56 million in fees, nearly half of all fees collected on payday loans in Alabama each year.

Serial borrowers are the bread and butter of payday lending, CRL research shows. Among payday borrowers who conduct multiple transactions, half take out new loans at the first possible opportunity, a process called “churning.” This cycle of deep debt is big business. After six loans, borrowers typically have paid more in fees than the amount of the initial loan.

Struggling Alabamians are common targets of payday lenders. Payday lenders are located disproportionately in low-income neighborhoods, especially ones with large black or Hispanic populations. Lenders often target seniors, people without a high school education, and families who are likely to be living from paycheck to paycheck.

Understanding opposition to payday reform

Alabama’s payday loan industry rakes in more than $100 million a year in fees. Lenders have used a portion of that money to hire a fleet of lobbyists to oppose reform in Montgomery. In 2017, a proposed state constitutional amendment to cap all consumer loans at 36 percent APR failed in the House Constitution, Campaigns and Elections Committee. And in 2018, the House Financial Services Committee killed a bill that would have given Alabama borrowers 30 days to repay payday loans (up from as few as 10 days under current law), even though the Senate voted for the measure by a significant margin.

Lenders’ inflexibility facilitates a status quo that benefits them financially. Many legislators assert that they will not consider a reform bill without input from both consumer advocates and lenders. This allows lenders to preserve their existing advantage simply by opposing even small, reasonable changes.

Straightforward solutions

No state has legalized payday lending since 2005. In fact, 18 states and the District of Columbia essentially have banned payday loans. In 2006, Congress outlawed predatory lending to military personnel and their dependents, capping interest rates at 36 percent APR and barring loans based on holding checks or debit authorization for future payment. And the Consumer Financial Protection Bureau’s new rule requiring lenders to assess consumers’ ability to repay could help prevent defaults (if the agency doesn’t weaken it).

Alabama could build on this momentum for change by enacting several reforms to improve the lending landscape for the state’s borrowers:

  • Capping the interest rates on all consumer loans in Alabama at 36 percent would broaden the protections that now apply to military borrowers.
  • Cutting the fee for originating a loan from the current $17.50 per $100 would lessen the financial burden on borrowers.
  • Restricting the borrowable amount to 10 percent of the borrower’s income would reduce the risk of borrowers becoming trapped because they cannot repay the entire loan amount at once.
  • Allowing borrowers to pay loans off in installments would let people work themselves out of debt gradually instead of making them pay a loan off all at once.
  • Giving borrowers 30 days to repay payday loans would cut the effective APR from 456 percent to about 220 percent. It also would reduce the administrative burden on lenders, borrowers and the state.

Bottom line

Payday lenders are on track to pull more than $1 billion in fees out of Alabama communities over the next decade. Nearly all of their profits will flow to out-of-state companies. Advocates of payday lending reform will have to build massive public support to fight the well-funded lenders, who often target legislative leaders and committee members to help protect the status quo.

The challenges may be great, but real payday lending reform for Alabama borrowers can and will happen. Proof came in 2015, when the state Banking Department responded to years of public pressure by creating a uniform statewide payday loan database and requiring lenders to check it for outstanding loans. That move kept thousands of Alabamians from sinking even deeper into debt by finally enabling the state to enforce its $500 limit on the amount of payday loans that an individual can have at one time.

Now it’s time for Alabama to take the next big step for borrowers by cutting the APR on payday loans to a more reasonable level. This simple but important change would be a great way to keep more money in our state’s economy, encourage household financial stability, and strengthen communities across Alabama.

Senate passes 30-days-to-pay bill that would help Alabama payday loan borrowers

By Chris Sanders

Payday loan borrowers across Alabama would get more time to repay and collectively would save tens of millions of dollars a year under a bill that the state Senate passed 20-4 Thursday. The 30-days-to-pay bill – SB 138, sponsored by Sen. Arthur Orr, R-Decatur – now goes to the House.

SB 138 would extend Alabama’s repayment period for payday loans to 30 days, up from as few as 10 days now. The bill would ease the financial pressure on struggling borrowers by reducing the maximum annual percentage rate (APR) on payday loans in Alabama from 456 percent to about 220 percent. That change would mean a significant reduction in the amount that Alabamians pay each year in payday loan fees, which was more than $100 million last year alone, according to Alabama Appleseed. Click here to learn more about how SB 138 would help Alabama borrowers.

The Senate’s vote for the bill followed an hour-long filibuster by Sen. Tom Whatley, R-Auburn, who claimed the measure would force many payday lenders out of business. Orr denied that closures would be widespread and said that employees of any lenders that did close likely would have little trouble finding a new job, given Alabama’s relatively low unemployment rate.

Arise members played an important role in urging SB 138’s passage Thursday. Numerous Arise members from Whatley’s district quickly sprang into action during the filibuster, calling his office to ask him to allow SB 138 to come to a vote. Reformists from the Alliance for Responsible Lending in Alabama (ARLA), of which Arise is a member, also contacted Whatley with the same message. Near the end of his filibuster, Whatley acknowledged on the Senate floor that he was receiving many phone calls from advocates for payday lending reform.

Senate passage did not come without confusion and tension. Immediately after the 20-4 vote in favor of SB 138, Orr made a procedural motion to try to block a second vote on the bill – but it failed on an 11-11 vote. (“Yes” votes on that list were to prevent the Senate from revisiting its vote to pass the bill.)

The final episode of the vote trilogy came moments later, when an effort to reconsider Senate passage of the bill lost 14-13. (“No” votes on that list were to prevent the Senate from revisiting its vote to pass the bill.) Senate President Pro Tem Del Marsh, R-Anniston, who was presiding over the Senate, cast a dramatic tie-breaking vote to prevent reconsideration of SB 138 and send the bill to the House.

By Chris Sanders, communications director. Posted March 8, 2018.

Senate committee vote for ’30 days to pay’ was a good first step on payday lending reform in Alabama

By Chris Sanders

Arise Citizens’ Policy Project executive director Kimble Forrister issued the following statement Thursday, Feb. 15, 2018, in response to a Senate committee’s approval of a bill that would give Alabama borrowers 30 days to repay payday loans:

“Today’s Senate committee vote in favor of the ‘30 days to pay’ bill was a big win for consumers and communities across Alabama. This common-sense bill would ease financial pressure on struggling families and put payday loans on the same repayment cycle as other debts, such as mortgages, utilities and credit cards.

“This bill would help thousands of Alabamians avoid falling into a debt trap. By increasing the amount of time that borrowers have to repay, it effectively would cut the maximum annual percentage rate on payday loans in half, from 456 percent to about 220 percent. That would boost Alabama’s economy by reducing the amount of fees that are taken out of our communities every year to benefit out-of-state corporations.

“The ‘30 days to pay’ bill is simple but important legislation that would be good for consumers, good for our state’s economy and good for Alabama. We thank Senator Arthur Orr for sponsoring it, the Senate Banking and Insurance Committee for approving it, and the many members of Alabama Arise and the Alliance for Responsible Lending in Alabama who came to the State House to promote it. We urge the Senate to pass this bill in a timely fashion, and for House members to do the same.”

New CFPB rule on payday, title loans is a good first step that should prompt further action to protect Alabama consumers

By Chris Sanders

Arise Citizens’ Policy Project executive director Kimble Forrister issued the following statement Thursday, Oct. 5, 2017, after the Consumer Financial Protection Bureau (CFPB) announced a new federal rule on payday and auto title loans:

“High-cost payday and title loans have sent far too many Alabamians spiraling into a long-term cycle of debt. The CFPB’s new rule is a welcome move to protect struggling families from getting stuck in deep debt. The requirement for lenders to verify borrowers’ ability to repay before lending to them is an important, common-sense step to protect consumers.

“The CFPB rule is good news, but it’s far from a cure-all. The rule will not reduce the extremely high annual interest rates that Alabama allows on short-term loans: up to 456 percent a year for payday loans, and up to 300 percent a year for title loans. The new safeguards also don’t apply to many high-cost installment loans.

“Alabama needs to build on these new federal protections by capping interest rates at a reasonable level and ensuring borrowers have a reasonable amount of time to repay what they owe. These changes would be good for consumers and good for Alabama’s economy.”

Medicaid funding, public transportation highlight Arise’s 2018 priorities

By Chris Sanders

New Medicaid revenue and creation of a state Public Transportation Trust Fund are among the goals on Alabama Arise’s 2018 legislative agenda. Nearly 200 Arise members picked the group’s issue priorities at its annual meeting Saturday, Sept. 16, 2017, in Montgomery. The seven goals chosen were:

  • Tax reform, including untaxing groceries and closing corporate income tax loopholes;
  • Adequate funding for vital services like education, health care and child care, including approval of new tax revenue to prevent Medicaid cuts;
  • Consumer protections to limit high-interest payday loans and auto title loans in Alabama;
  • Dedicated state revenue for the Alabama Housing Trust Fund;
  • Reforms to Alabama’s death penalty system, including a moratorium on executions;
  • Creation of a state Public Transportation Trust Fund; and
  • Reforms to Alabama’s criminal justice debt policies, including changes related to cash bail and driver’s license revocations for minor offenses.

“All Alabamians deserve equal justice and an opportunity to build a better life for themselves and their families,” Alabama Arise state coordinator Kimble Forrister said. “We’re excited to continue our work for policy changes that would make it easier for hard-working Alabamians to get ahead.”

More than one in five Alabamians – almost all of whom are children, seniors, pregnant women, or people with disabilities – have health coverage through Medicaid. That coverage plays an important role in keeping hospitals and doctors’ offices open across the state, especially in rural areas.

“Medicaid is the backbone of Alabama’s health care system, and we must keep it strong,” Forrister said. “The Legislature needs to step up and approve new, sustainable revenue for Medicaid in 2018. It’s time to stop the annual funding battles and ensure all Alabamians have access to health care.”

Lack of adequate transportation is another major challenge that limits economic growth and erects barriers to daily living for many low-income residents and people with disabilities across Alabama. Arise will push for creation of a state Public Transportation Trust Fund as a step toward closing that gap. A bill to create a trust fund passed the Senate this year and has momentum heading into 2018.

SB 284 offers Alabama consumers protections from high-cost loans and moves lending reform forward

By Alabama Arise

Most states have laws against usury, or excessive interest. Alabama’s Small Loan Act of 1959 caps the interest rate on traditional small, short-term loans at 3 percent a month, or an annual percentage rate (APR) of 36 percent. But more recent laws covering payday and auto title lenders allow APRs many times higher than that. For payday loans, the interest rates can go as high as 456 percent a year. Today, 20 states either have banned high-cost payday lending or strictly regulated the practice.

Alabama lawmakers have granted exceptions for certain products, including payday and auto title loans, claiming these are emergency loans for those who can’t get conventional credit. These high-interest loans take as much as $100 million annually in fees from vulnerable Alabamians, trapping many borrowers in a debt cycle that exacerbates poverty and hurts the state’s economy. More than 54 percent of payday borrowers pay more in fees than the original loan amount, a state database shows.

SB 284, co-sponsored by Sens. Arthur Orr, R-Decatur, and Rodger Smitherman, D-Birmingham, would strengthen consumer protections while preserving the availability of “emergency” payday loans. The bill would:

  • Allow 30-day (rather than 14-day) payday loans at the existing fee, reducing the APR to 213 percent while limiting borrowers to four loans in a 12-month period.
  • Protect consumers by creating a seven-day “cooling-off” period between payday loans to eliminate rapid re-borrowing at high interest rates.
  • Create an “off-ramp” by automatically converting unpaid loans to a three-month installment loan with equal payments at a 3 percent monthly interest rate.
  • Allow Small Loan Act lenders to continue charging a 10 percent non-refundable “upfront” fee on small loans, while prohibiting such fees on rollovers.
  • Cap interest rates at 60 percent APR for all loans of more than $2,000 to guard against higher-cost online “payday”-type installment or revolving credit loans.
  • Remove auto title loans from the Alabama Pawnshop Act and allow them under other consumer credit laws.

BOTTOM LINE: SB 284 would protect consumers and make loans more affordable while preserving small, short-term credit options for Alabamians.