Alabama’s high poverty rate and lax regulatory environment make it a “paradise” for predatory lenders that intentionally trap the state’s poor in a cycle of high-interest, unaffordable debt, according to a new SPLC report that includes recommendations for reforming the small-dollar loan industry.
Latara Bethune needed help with expenses after a high-risk pregnancy prevented her from working. So the hairstylist in Dothan, Ala., turned to a title loan shop for help. She not only discovered she could easily get the money she needed, she was offered twice the amount she requested. She ended up borrowing $400.
It was only later that she discovered that under her agreement to make payments of $100 each month, she would eventually pay back approximately $1,787 over an 18-month period.
“I was scared, angry and felt trapped,” Bethune said. “I needed the money to help my family through a tough time financially, but taking out that loan put us further in debt. This isn’t right, and these businesses shouldn’t get away with taking advantage of hard-working people like me.”
Unfortunately, Bethune’s experience is all too common. In fact, she’s exactly the kind of borrower that predatory lenders depend on for their profits. Her story is among those featured in a new SPLC report – Easy Money, Impossible Debt: How Predatory Lending Traps Alabama’s Poor – released today.
“Alabama has become a paradise for predatory lenders, thanks to lax regulations that have allowed payday and title loan lenders to trap the state’s most vulnerable citizens in a cycle of high-interest debt,” said Sara Zampierin, staff attorney for the SPLC and the report’s author. “We have more title lenders per capita than any other state, and there are four times as many payday lenders as McDonald’s restaurants in Alabama. These lenders have made it as easy to get a loan as a Big Mac.”
At a news conference at the Alabama State House today, the SPLC demanded that lawmakers enact regulations to protect consumers from payday and title loan debt traps.
Although these small-dollar loans are explained to lawmakers as short-term, emergency credit extended to borrowers until their next payday, the SPLC report found that the industry’s profit model is based on raking in repeated interest-only payments from low-income or financially distressed consumers who cannot pay down the loan’s principal. Like Bethune, borrowers typically end up paying far more in interest than they originally borrowed because they are forced to “roll over” the principal into a new loan when the short repayment period expires.
Research has shown that more than three-quarters of all payday loans are given to borrowers who are renewing a loan or who have had another loan within their previous pay period.
The working poor, the elderly and students are the typical customers of these businesses. Many fall deeper and deeper into debt as they pay an annual interest rate of 456 percent for a payday loan and 300 percent for a title loan. As the owner of one payday loan store told the SPLC, “To be honest, it’s an entrapment – it’s to trap you.”
The SPLC report offers the following recommendations to the Alabama Legislature and the Consumer Financial Protection Bureau:
- Limit the annual interest rate on payday and title loans to 36 percent.
- Allow a minimum repayment period of 90 days.
- Limit the number of loans a borrower can receive per year.
- Ensure a meaningful assessment of a borrower’s ability to repay.
- Bar lenders from providing incentives and commission payments to employees based on outstanding loan amounts.
- Prohibit direct access to consumers’ bank accounts and Social Security funds.
- Prohibit lender buyouts of unpaid title loans – a practice that allows a lender to buy a title loan from another lender and extend a new, more costly loan to the same borrower.
Other recommendations include requiring lenders to return surplus funds obtained from the sale of repossessed vehicles, creating a centralized database to enforce loan limits, creating incentives for alternative, responsible savings and small-loan products, and requiring education and credit counseling for consumers.
Another woman whose story is featured in the SPLC report, 68-year-old Ruby Frazier, also of Dothan, said she would never again borrow from a predatory lender, even if it meant her electricity was turned off because she couldn’t pay the bill.
“I go by what God said: ‘Thou shalt not steal,’” Frazier said. “And that’s stealing. It is.”