The big payback 

Do “payday loans” keep borrowers at the bottom?

One sure way to get thrown out of a business that makes money granting payday loans is to ask too many questions about payday loans. You will be invited to leave. Or given the silent treatment. Referred to a manager in Alabama or Delaware, perhaps. Be assured that no one will invite you to stay for the slide show or the PowerPoint presentation. Inquire about the loans politely (“I’d like to find out about how payday loans work, really”), or add a little abrasion (“I hear payday loans screw customers—is this really true?”) and the reaction from business managers is the same: hardly anyone wants to talk.

In 1999, Montana legislators passed the Deferred Deposit Lending Act (DDLA), which made payday lending legal in the state. Here’s how the loans work: Lenders grant small loans—anywhere between $50 and $300—for short periods of time—two to four weeks. The lender does no background checks and requires no collateral.

The only requirement is that the borrower have an active checking account. As a loan guarantee, the recipient writes a check to the lender for the total loan amount, plus a finance fee. The lender agrees to cash the check at a later date—typically, on payday. A benign arrangement? Business as usual? A magnanimous offer by a selfless creditor? The Montana Public Interest Research Group has done the math, and the answers are no, no and no.

“This type of lending has been outlawed time and time again,” says Josh Davis, a consumer advocate with MontPIRG. “Every time we pass a new law, the lenders come up with a new name for the loan and some new paperwork to get around the law.”

For multiple reasons, the loans are as lucrative for lenders as they are deleterious to borrowers. For one, the 25 percent finance fee allowable in Montana is one of the nation’s highest, says Davis. With this fee, a two-week loan can translate to the equivalent of a 650 percent APR. This may explain why 88 Montana businesses now offer payday loans. Missoula is graced with 11 of them—alluring lights flashing along Brooks Avenue.

At one such business, “Title Cash,” the manager smacks her gum and answers a question about payday loans with a couple of her own: “Why are you doing this?” and, “Can’t you go somewhere else?” There are many places that offer payday loans in Missoula, she points out. Plus, “If this is going to give us bad publicity, we probably don’t want to interview.” Another employee says payday loans aren’t really a large part of their business anyway—they have only 70 payday customers, she says.

Regular customers?

“Oh, yeah.” Subtext: stupid question.

How long have their most regular customers been taking out loans? The employee eyes the manager. No answer. But the manager herself isn’t finished: “People do have choices when they come in here. They read the rules.”

Ed Higgins, managing attorney for Montana Legal Services in Missoula, has a different perspective on choice. “A lot of these folks are in the category of just scraping by, living paycheck to paycheck,” he says. “It’s their only choice. It’s not like someone else would loan them money.” This year, Higgins’ colleague Clowse Sitte, Executive Director of M.L.S., says he has received about twice as many calls this year as last from people drowning in payday loans. Usually, the call comes too late.

“Most of the time, when folks have trouble with the quick-check places, we really don’t hear about it until collections are after them,” Higgins agrees. “A lot of the times, there’s nothing we can do.”

Payday customers are also likely to take out loans from multiple lenders and fall deeper into the trap, says John Heenan, a legal intern at Montana Legal Services who is specializing in consumer law.

“It’s a black hole. Once you get roped into that first one, you need a second one,” says Heenan. “It’s a vicious cycle.”

The model Deferred Deposit Lending Act is a consumer-friendly act, says Heenan, but interest groups—the lenders—have dismantled Montana’s version and put it back together minus a few vital clauses. A couple of missing pieces that Heenan has noticed: a requirement that lenders not have criminal convictions, and a 36 percent cap on interest rates.

In the coming legislative session, MontPIRG will lobby for a cap on interest rates and a minimum loan term. If they are successful, businesses that make payday loans will go out of business, says Dave Hall, regional manager for “Title Cash.” “Everybody would close up,” says Hall, “so you’re putting people out of business.”

He’s crying wolf, says Davis, who cites statistics from the Montana Division of Banking and Financial Institutions: only 1.3 percent of payday loans are reported unrecoverable.

Hall, along with his Missoula managers, sidesteps various questions—like what the profit margin on payday loans is. He knows he’s not alone in keeping quiet. “We don’t want to hurt our chances,” he says. Hall is honest about his instinct for self-preservation. It’s hard to tell whether he believes the business philosophy he voices: “We’re helping people that need help.”

Is he sure that payday loans don’t entrap those already at the bottom of the financial food chain? “It’s a high risk business that we’re dealing with,” says Hall, “and I’m not really gonna say, because I’m going to get myself in trouble.”

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