Talking to a Payday Lender

This semester, I am teaching a class entitled Statutory Interpretation--Consumer Protection. It is a required course in our first-year curriculum. The idea is to teach skills lawyers need to have in an age of statutes. My pedagogical goal is to make students more effective advocates when dealing with statutory issues. Toward that end, we are conducting a semester-long simulation of a legislative process. I am trying to be as "hands off" as possible, letting the students take over the conduct of our classroom legislative assembly. Right now, the students are working on drafting amendments to either the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, or the Illinois Payday Loan Reform Act. At the end of the semester, the class will vote on one of the proffered amendments. A few extra credit points are scattered here and there to give the students some incentives to act real legislators.

Three of my students (Brian Nisbet, Steve Serajeddini, and Yeny Estrada) are working on improvements to the Illinois Payday Loan Reform Act. To learn a little bit more about the subject they were trying to regulate, they called a local store for one of the state's biggest payday lenders. They talked to a sales rep named Mary (not her real name), and I asked my students to write up what they learned. Here is what they wrote me:

"I called Payday Lender [also not the real name] in Decatur, Illinois, and I mentioned that I needed some cash, that I had called a few other places, and that I wanted to get some information about what they had to offer. The person who answered the phone, Mary, was very helpful.

Payday Lender offers only two types of loans, payday loans and installment loans. Payday loans are fourteen day loans for which Payday Lender charges $15.50 for every $100 loaned. The $15.50 is a flat fee, but as Mary was quick to point out, "That is only a $1.11 a day!"  I then asked Mary what would happen if, at the end of the 14 days, I was not able to pay my loan back. She was quick to point out that my check would be cashed, I would be sent to collections, and in order to get out, I would still have to pay my $115.50 to Payday Lender, $25 to my bank, and an additional $28 fee to Payday Lender to get back into 'good standing.' There is no chance to renew a payday loan and I could not get another payday loan from another lender to pay that payday loan back. I know, I asked. Mary was quick to point all this out because, for all of those reasons, she encourages people to sign up for their installment loan.

Payday Lender's installment loan is a whole other animal. It is a 140 day loan and works the same as the payday loan with respect to the postdated check. Every 14 days and for every $100 loaned, I would have to make an interest payment of $15.50. I can pay the principal back at any time over the course of my 140 days. Once I have completed payment of the principal, the interest payments stop, which was big selling point for Mary. So long as I came in and put something down toward interest, I would not be sent to collections. If, however, I missed an interest payment, I would be sent to collections immediately and be forced to pay all of the additional fees associated with getting back into 'good standing.'  If at the end of the 140 days I was short on my principal payment, I could default, or rollover the loan for another 140 days at no additional cost. But the great thing about that was, according to Mary, all I would have to pay back is the remaining amount on the principal and whatever interest that would accrue. 'It is not like they start you all over.' Phew. While none of this sounded like a good deal, Mary assured me that their rival charges 'like a lot more.'

Three things alarmed me most about this experience. First, there was the length these payday lenders take to skirt the statute and their ability to avoid any real regulation.  Second, I must have said fifteen times that I was worried something would happen or that I did not think I would be able to pay any loan back, and Mary was totally unfazed. She did not hesitate when selling me on the advantages of their installment loan. There was no talk of financial responsibility, no talk of how much I would be spending in total, and certainly no caution about collections. Third, I could not believe the ease with which I could take out a loan. Mary told me all I needed was a driver’s license, bank statement, pay stub, and postdated check, and that I could start the set up process over the phone. I declined."

As the students alluded to, this whole setup was to evade Illinois state law, which defines payday loans as a loan of less than 140 days. The 140-day installment loan conveniently falls outside the statutory mandate and excuses the lender from complying with the rules for payday loans. Note the installment loan functions economically like a series of payday loans--$15.50 per $100 loan (same interest charge) for every 14-day period (same term)--that just rollover for 140 days. Under the Illinois Payday Loan Reform Act, it would be unlawful for the payday lender to allow the consumer to be indebted to the same payday lender for 45 days. After the expiration of the 45-day period, there is then a seven-day grace period during which no payday lender may extend another payday loan to the consumer. By structuring the loan as a 140-day installment loan, the lender avoids these regulations.

As an instructor, of course, nothing is better than when your students come to you with information they have taught themselves. It also has the happy effect of making it that much less you have to teach them--something I am always looking to do! My suspicion is that my students' experiences would be typical for many customers of a payday lender. Fortunately, they were in economic circumstances where they could walk away from these onerous terms. The simple interest rate alone works out to be something like 403% on an annual basis. Because those of us who think about credit issues at a policy level do not not often have the time to hear about what it's like for persons who deal with these payday lenders on a daily basis, I am glad my students took the time to do and share their experiences with us.

Comments

[Greg]

That's very interesting. Your students did a good job. I am curious as to what their suggested amendments will be.

[Chris Peterson]

Excellent blog post. Very interesting.
-Chris

[Chuchundra]

That's just amazing. 15.50 per hundred is seven and half points per week. You can get a better deal from your local loan shark.

[jm]

One thing that puzzles me is why none of the organizations claiming to be working on behalf of the poor and downtrodden bothers to start up an alternative payday lending operation that treats the borrowers fairly? If this business is as indecently profitable as it appears on the surface, would not a nonprofit organization be able to offer loans at much lower cost, and provide genuine credit counseling in the package?

Is the reason just that it would be too much like real work, as opposed to feel-good posturing and organizing social-event demonstrations? Or is it that so many borrowers default on the loans that the business isn't really all that profitable, and the high interest and penalty rates are needed just to get sufficient return on investment to attract investors, managers and workers into what must be a very difficult business?

[Bob Lawless]

Jim writes, "One thing that puzzles me is why none of the organizations claiming to be working on behalf of the poor and downtrodden bothers to start up an alternative payday lending operation that treats the borrowers fairly?"

Actually, that is happening. My colleague, Cindy Gerdes, has been working with local credit unions to offer much, much lower cost products that provide the same type of function as a payday loan. I understand that these loans are profitable for the credit unions that offer them. It's not just central Illinois where this is happening. See here for just one example of another program: http://www.pliwatch.org/news_article_061114A.html.

[jcj]

Prof. Lawless,

Thanks for your research on payday lending here in Central Illinois. One regional group working on the payday lending issue here is the Central Illinois Organizing Project (CIOP) (www.ciop.org). CIOP is working to raise awareness of how bad a deal payday loans are, and then is working to partner with credit unions to offer affordable alternatives while also making credit union locations more accessible in Decatur, Champaign, Bloomington, and Peoria. As you know, payday stores cluster in neighborhoods lacking bank access and are often located near strip malls and the like. Access to credit is a huge issue.

[OkieLawyer]

Bob:

Your link does not work because of the extra period at the end. If you remove that last period after the letters "html" then the link will work just fine.

[jm]

It's heartening to read that CIOP is taking some practical action. It's a bit disappointing to go to their web site and not find an easy-to-follow link by which someone needing a payday loan could click through to get help. But I'm now a "Charter Member" even so.