Eliminating predatory lending

Referring to the plethora of predatory lenders that line Sixth Avenue in Decatur, City Council President Gary Hammon gave a blunt assessment:
“It’s hurting low-income residents and irritating the rest of us.”
The problem is not unique to Decatur. The best solutions require action by the state Legislature.
The prevalence of predatory lenders in Decatur seems puzzling. With so much competition, why have the interest rates not come down? More pertinent to Sixth Avenue, why has there been no consolidation? The expectation in a normal market would be that some lenders would charge lower interest and drive others out of business. The result would benefit low-income borrowers and reduce the number of payday lenders lining the city’s main corridor.
Speaking to Decatur City Council on Monday, Stephen Stetson, a policy analyst for Arise Citizens’ Policy Project, solved the puzzle.
A state law passed in 2003 purported to prevent payday lenders from lending to a borrower who already has outstanding payday loans, which are limited to $500. A last-minute amendment to the law eliminated a central database. Lenders must “use a database” to confirm the borrower does not have an outstanding payday loan, according to the law, but there are many private databases.
The result is that both borrowers and lenders understand they have to spread loans across multiple private databases. A person who needs to borrow more — often to repay a previous loan that is accruing interest at more than 400 percent annually — simply stops by a different payday lender that uses a different database.
The payday lenders, it turns out, are not competing with each other but complementing each other. A virtual strip mall of predatory lenders is the result. By using different databases, each lender can make exorbitant profits while benefiting the lender next door.
Bankruptcy records suggest the typical borrower does not have one payday loan — as contemplated by state law — but up to a dozen. What may have started as a single loan to borrow enough to pay for a visit to the dentist quickly becomes unmanageable. Saddled by interest rates more than 10 times those the state imposes on conventional small loans, the borrower goes deeper in debt. The end result for many is bankruptcy, but not before multiple lenders have extracted a terrible financial price.
The roots of the problem are in the state law passed by a Legislature that was, in 2003, controlled by Senate President Pro Tem Lowell Barron. The Democrat from Fyffe owned many payday loan operations.
Decatur has 20 licensed payday lenders and 27 pawn shops, many of which serve a similar lending function. Most line Sixth Avenue. The clustering of predatory lenders is not unique to Decatur. It is the natural result of a bad law.
The Decatur City Council has a few options, but the solution should come from the Legislature. Fixing the 2003 law to create a central database would help. Better yet would be a solution that also capped interest rates at a morally defensible level.
A Democratic legislature caused this problem. By solving it, a Republican legislature could — to paraphrase Hammon — help low-income Alabamians and end an irritation for many cities in the state.



Filed under Alabama politics, Poverty

5 responses to “Eliminating predatory lending

  1. Karen Bailey Gearhart

    I recall Legal Services doing all it could in the early ’80s to intervene on behalf of the victims of “Rent-to-Own” companies, which are absolutely in the same category. Now we also have the payday/title loan originators and with the same target audience. The ugliness of this industry is disheartening. Further, the willingness of property owners to rent to these folks demonstrates a lack of social conscience. I feel helpless to do anything about it. I had once thought of seeking a resolution — if they could not be eliminated altogether — from the city limiting the number of lenders on any one thoroughfare/street to one per 25 blocks, either side. That was, again, after a drive down 6th Avenue, which is beyond glutted with this particular example of urban blight.

  2. Thanks for the revelation about Sen. Lowell Barron. Not all Dems are angels, huh? His Senate replacement in 2010 was Shadrack McGill, who was not an improvement. There must be a demand for this usury, else it would not proliferate. A decent economy would help, but I’m not holding my breath for this in Alabama. When I was a teen in the late 50’s, my father started (’53), owned, and grew a legit finance company. It seems there was at the time a cap by law on the interest rate in Alabama, maybe at 18 or 20%. If my recollection is correct, what happened to that? All of his company’s loans (for cars, furniture, boats, mobile homes, and the like) were secured by things of value, and the borrower had to be credit-worthy. His default rate was low, but repossessions were made. There were no small loans. Dad’s business was successful, though not wildly so. He also lamented that Alabama did not at the time have a car title system.

    • mile304

      There is still a Small Loans Act with a 36% cap. It does not apply to deferred presentment loans or title pawns. Arise is pushing for a bill with a 36-percent cap on these loans, too, which would eliminate most of them. I suspect the cap should be higher than 36 percent for deferred presentment and title pawn loans, which have high default rates. There’s a lot of room between 36 and 456, the effective annual rate of some.

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    very helpful. Many thanks for sharing!

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