Predatory Lending in Alabama Fixing the Law to Stop Unethical Rip-Offs That Impoverish Communities Alabama Organizing Project - 2/16/13

HISTORY Informal lending Rise of bank lending “Black market” lending and loan sharks The rise and fall of reform Alabama Organizing Project - 2/16/13

General Stores and Credit Alabama Organizing Project - 2/16/13

Emergence of Bank Lending Alabama Organizing Project - 2/16/13

1959: Reform Comes to Alabama Already had usury law (8 percent) The Small Loan Act (Act ) Sets a rate “not exceeding three percent a month” on loans for less than $1,000 (Sec (a) Quadruples allowable interest rates, from usury law (8 percent) to 36 percent Alabama Organizing Project - 2/16/13

The Legislature finds as facts and determines that: (1) There exists among citizens of this state a widespread demand for small loans. The scope and intensity of this demand have been increased progressively by many social and economic forces; (2) The expense of making and collecting small loans, which are usually made on comparatively unsubstantial security to wage earners, salaried employees and other persons of relatively low incomes, is necessarily high in relation to the amounts lent; (3) Such loans cannot be made profitably under the limitations imposed by existing laws relating to interest and usury. These limitations have tended to exclude lawful enterprises from the small loan field. Since the demand for small loans cannot be legislated out of existence, many small borrowers have been left to the mercy of those willing to bear the opprobrium and risk the penalties of usury for a large profit; (4) Interest charges are often disguised by the use of subterfuges to evade the usury law. These subterfuges are so complicated and technical that the usual borrower of small sums is defenseless even if he is aware of the usurious nature of the transaction and of his legal rights; ALABAMA’S SMALL LOAN ACT (1959) Alabama Organizing Project - 2/16/13

(5) As a result, borrowers of small sums are being exploited to the injury of the borrower, his dependents and the general public. Charges are generally exorbitant in relation to those necessary to the conduct of a legitimate small loan business, trickery and fraud are common and oppressive collection practices are prevalent; and (6) These evils characterize and distinguish loans of $ or less. Legislation to control this class of loans is necessary to protect the public welfare. (b) It is the intent of the Legislature in enacting this law to bring under public supervision those engaged in the business of making such loans, to eliminate practices that facilitate abuse of borrowers, to establish a system of regulation for the purpose of insuring honest and efficient small loan service and of stimulating competitive reductions in charges, to allow lenders who meet the conditions of this chapter a rate of charge sufficiently high to permit a business profit and to provide the administrative machinery necessary for effective enforcement. Source: Section : Legislative Findings of Fact Alabama Organizing Project - 2/16/13

Not regulated by the SLA Loans larger than $1,000 Banks and credit unions Pawn transactions Deferred presentment (2003) Alabama Organizing Project - 2/16/13

Blame Tennessee Check Cashing, Inc. – 12/2/91 – Johnson City, TN Check Into Cash – first chain – Cleveland, TN In 1997, Tennessee became the 19 th state to explicitly legalize payday lending, which before then had operated in a legal gray area. Source: Harper’s Magazine; April 2009; “Usury Country: Welcome to the Birth of Payday Lending” by Daniel Brook Alabama Organizing Project - 2/16/13

HOW IT WORKS Payday loan: Must have a checking account Present a check post- dated for the amount borrowed (>$500) 10 to 31 day loan term Laden with fees; encourages rollover Alabama Organizing Project - 2/16/13

HOW IT WORKS Title loan: Must own vehicle title No cap on loan amounts Usually half amount of vehicle value 30 day loan term Alabama Organizing Project - 2/16/13

Payday Loan Legitimation The 1990s: Payday industry grew significantly in Alabama, and across the nation. Flying largely under the radar, storefronts quietly charged interest rates far beyond the then-allowable 36%. July 7, AG opinion: Payday loans are covered by the SLA. No action to enforce until : Legislature modified the SLA to allow loans to approximately 190% APR. 2003: Legislature carved out additional exceptions. Deferred Presentment Services Act passed, allowing 456% APR. Alabama Organizing Project - 2/16/13

Payday Loan Legitimation 2005: Alabama Supreme Court held that deferred presentment services were subject to the SLA, but only prior to the passage of the DPSA. Austin v. Alabama Check Cashers Assoc. Only two attempts to address the DPSA. In 2007, the session ended without any movement on either bill. Alabama Organizing Project - 2/16/13

Title Loan Legitimation 1993: the Alabama Supreme Court classified title lenders as pawnbrokers, which allowed them to be covered under the Pawn Shop Act. as a “pledged good,” making title loans subject to pawn transaction rules. Floyd v. Title Exch. & Pawn, Inc. In 2006, a Circuit Court judge in St. Clair County ruled that parts of the Pawn Shop Act were unconstitutional, holding it violated the Equal Protection Clause to allow title loan companies to charge up to 300% interest while restricting other lenders to much lower rates violated the equal protection clause. The Alabama Supreme Court has not readdressed this issue since Floyd. Alabama Organizing Project - 2/16/13

WHAT’S WRONG? 1. The Cost 2. The Cycle 3. The Moral Argument Alabama Organizing Project - 2/16/13

The cost of predatory loans Simply costs too much: Think about other interest rates Strips wealth out of communities Prevents asset building and savings Prevents people from paying bills Domestic strife Property values from payday storefronts Alabama Organizing Project - 2/16/13

The dangers of cyclical borrowing Average borrower takes out 8 or 9 payday loans per year 212 days out of the calendar year in debt Designed this way: repeat borrowers are repeat profits Debt treadmill and financial quicksand Not using them as emergency sources of credit Alabama Organizing Project - 2/16/13

The moral case For a thousand years, debates over usury, were “arguably the marquee intellectual struggle in Western commercial history.” Lunar cycles to measure loan terms Babylonians (33%, payable in grain); Romans (12%) Records of high cost, abusive loans in ancient Mesopotamia. Loan terms in cuneiform. Alabama Organizing Project - 2/16/13

I have to pay it back … WHEN?

But if we’ve had usury for so long… The fact that most ancient society’s debated it and got rid of it suggests that we’re now moving backwards. States and cities are only banning it. Almost no jurisdiction is passing new laws to allow it, or to bring it back once it is forbidden. Alabama Organizing Project - 2/16/13

The Bible on Usury: “If thou lend money to any of my people that is poor by thee, thou shalt not be to him as a usuer, neither shall thou lay upon him usury.” – Exodus 22:25 (King James) The only recorded act of violence from Jesus was against money lenders at the temple Alabama Organizing Project - 2/16/13

The Bible on Usury: Leviticus, 25:35-37 Ezekiel 18: 8-17 Ezekiel 22:16-16 Proverbs 28: 6-9 Luke 6:33-35 Matthew 5:42 Alabama Organizing Project - 2/16/13

Secular moral objections 29 states and D.C. have laws prohibiting the excessive pricing of motor fuels and other commodities during periods of abnormal supply disruption (normally triggered by a declaration of emergency by the President, the governor, or local officials) Alabama Organizing Project - 2/16/13

Additional issues with title loans The risk of repossession The windfall of selling the car without refunding the profits to the borrower Alabama Organizing Project - 2/16/13

REFORM The Military Lending Act of States Cities, states, federal Alabama Organizing Project - 2/16/13

ALABAMA Wild, Wild West Law limits number of loans, but no database Minimal action at the Statehouse since 2007 Alabama Organizing Project - 2/16/13

ANSWERS “These are needed sources of credit.” 1) Alternatives exist (provide examples) 2) Other states show – no push to resume payday lending once they are gone 3) Isn’t how we’d respond to other defective products – Toyota brakes fail: “But people have to get to work!” Toxic meat: “But people are hungry!” Alabama Organizing Project - 2/16/13

ANSWERS “They’re only used for emergencies.” Factually un-true Look at other states: A UNC study of former payday customers in North Carolina concluded “the absence of storefront payday lending has had no significant impact on the availability of credit for households in North Carolina.” Alabama Organizing Project - 2/16/13

Source: Alabama Organizing Project - 2/16/13

ANSWERS “Government shouldn’t ‘Interfere’” 1) Already have the Small Loan Act 2) This isn’t an anarchy. We regulate toxins in food, land mines, meth labs, child porn. 3) Anti-gouging laws. 4) Payday loans only exist because of a government carve-out. The playing field isn’t level now. SLA lenders should be treated fairly. Alabama Organizing Project - 2/16/13

ANSWERS “People are making their own decisions.” 1) People also want to make their own decisions about how fast to drive, where to shoot guns, etc. We regulate behavior that hurts society. 2) Competition fails. Loan officers vs. TV commercials 3) Coercion: emergency = desperation, not rational choice 4) Generational borrowing habits – requires cultural change Alabama Organizing Project - 2/16/13

ANSWERS “Alternatives don’t exist.” 1) Yes they do. (provide examples) 2) More will flourish when predatory loans vanish. 3) No risk of return to illegal loan sharks or shift to online Internet lenders Alabama Organizing Project - 2/16/13

Payday Protections Don’t Lead to a Surge of Online Loans In states that restrict storefront payday lending, 95 of 100 would-be borrowers elect not to use payday loans at all. What would-be borrowers say about borrowing online: “I won’t leave my information there.” “It’s too risky, in my opinion.” “With the identity theft the way it is … who’s going to see it?” “I’m not going to put [my] information out there.” Source: Pew Safe Small-Dollar Loans Research Project, Alabama Organizing Project - 2/16/13

ANSWERS Borrower stories: “Grandpa smoked for 45 years and died healthy.” “I drove here drunk and arrived just fine.” The plural of anecdote is NOT evidence. Alabama Organizing Project - 2/16/13

Questions? Stephen Stetson, Policy Analyst Arise Citizens’ Policy Project Alabama Organizing Project - 2/16/13