Lender advocates: Education key to responsible lending

June 30, 2010 9:13:00 AM

Jason Browne - [email protected]


In the face of several current and pending moratoriums on payday lenders in the Golden Triangle and statewide, advocate groups are speaking up on behalf of check-cashing services. 


Dan Robinson, owner of Cash Inc. in Columbus and a spokesperson for Borrow Smart Mississippi, says consumer education is the answer to stopping the cycle of high-interest debt experienced by many payday loan customers. Tommy Moore, vice president for the Community Financial Services Association of America, located in Alexandria, Va., argues payday lenders provide a vital service not available through traditional financial institutions. 


But attorney Scott Colom, a Columbus native working for the Mississippi Center for Justice to stop the proliferation of payday lenders, says the advocate groups are comprised of industry stakeholders angling to protect their profits. 


Borrow Smart Mississippi is a federation of approximately 350 payday lenders, including five lenders in Columbus, which have agreed to a code of ethics to prevent customer exploitation. 


"We're advocates for consumers of short-term lending products like payday loans," said Robinson. "We give consumers a voice who otherwise might be reluctant to speak up for themselves." 


The federation formed in November 2008 because "a group of progressive payday lenders saw it was in their self-interest to have enlightened customers. It's no different than a cellular company urging people not to text while driving," he said. 


The Borrow Smart website, www.borrowsmartms.com, states the organization's mission is to "educate the public about short term lending ... to dispel myths about the industry by opening lines of communication with the public." 


Colom is unconvinced by industry appeals for education. He says the claims amount to little more than "smoke and mirrors." 


"It's possible they're doing more than I've seen, but it seems like more talking about (education) than actually doing something," he said. "It's more of a concern about their reputation." 


Scott Hamilton, a public relations spokesperson for Borrow Smart Mississippi, says the organization has hosted multiple seminars for high school seniors in the Jackson Public Schools district, but those seminars focused on general financial principles and did not directly touch on payday lending. 


"The education we're doing is related to budgeting and learning to live within one's budget," said Hamilton. 




Financial literacy 


Moore says payday lenders have spent millions in the past to fund nonprofit organizations to conduct financial literacy programs, but the funding stopped recently because the nonprofits were "attacked by the critics" for accepting lending industry funds. 


Educational materials related to payday lending are available on the Borrow Smart website or at affiliated stores. Hamilton says these are aimed at "helping customers understand the appropriate uses of lending, but not specifically payday lending. (Payday loans) are not to be used for everyday expenses. They're to be used for short-term, unexpected expenses." 


Robinson says public perception of the payday loan industry is skewed by efforts like that of the Center for Justice, which approaches municipalities to request moratoriums on granting business licenses to payday lenders. He says the industry is already subject to more rigorous regulation than traditional banks and approximately 980 licensed payday lenders produce fewer complaints to the Mississippi Department of Banking and Consumer Finance than their financial counterparts. 


Transparency in lending 


"We're required by state law to post all fees charged. We're probably the most transparent of any financial service," said Robinson. "We charge no late fees. If a person doesn't come in for six weeks (after taking out a four-week loan), by law we can't charge another dime. We're examined every two years, and that can be at random, and can be fined $1,000 per violation." 


Furthermore, Robinson says state law forbids rolling over loans or allowing customers to pay just the interest. Loans must be paid in full.  


Colom says lenders get around the rollover laws by allowing lenders to take out another loan immediately after paying off their previous loan. In one scenario, a borrower paying off the maximum $300 loan with the $66 fee may deplete his or her checking account. He or she may immediately take out another $300 loan to replenish the account, paying $66 for each transaction. 


"Payday lenders like to argue their loans are only intended for a short period of time. Yet nine out of 10 borrowers in Mississippi are unable to pay off a payday loan by their next pay period without taking out another payday loan," said Colom. "The average borrower takes out eight to 13 loans annually. This means the average borrower pays a minimum of $528 to continue borrowing $300 every two weeks. 


"There's (no law) to force payday lenders to have you pay them back in two to four weeks. They could give you three months. They want you to have a short period of time to keep you borrowing." 


The 90 percent figure quoted by Colom was taken from a study by the Centers for Responsible Lending. He says a separate study conducted by researchers from Vanderbilt University and the University of Pennsylvania show payday loan borrowers are twice as likely to declare bankruptcy. 




Consumer complaints 


Despite these figures, Robinson says the most common consumer complaints against payday lenders are not related to the 572 percent interest allowed by a Mississippi legislative exemption. Nor do they regard a lack of competition among lenders who uniformly charge near the maximum interest. 


Instead, he says complaints in Mississippi, which has the highest per capita concentration of payday lenders in the country, generally concern ugly buildings. 


"Most of the time it has to do with signage and storefronts and the appearance of the buildings," said Robinson of the often brightly colored stores. "What one person views as brilliant marketing, another person views as gaudy. 


"I don't think it's so much what we do, but how the businesses look." 


Robinson advocates continuity with surrounding buildings in the appearance of payday lending businesses and, if possible, avoiding grouping the businesses together in one area. 


"I've preached for years our buildings ought to be more congruent with their surroundings. If we're next door to a brick building, our building should be brick. And I would prefer not to have someone in the same business right next door to me," he said. "A lot of times our businesses tend to cluster, but a lot of businesses tend to cluster. It's not indigenous to us." 




Clusters of lending stores 


Starkville Ward 5 Alderman Jeremiah Dumas confirmed many of the complaints received by the city were in relation to the appearance of check-cashing stores, which highlighted the number of stores clustered along Highway 12. Starkville's board of aldermen unanimously passed a moratorium in January preventing new payday lenders from opening. West Point will consider a similar moratorium in July at Colom's request. 


Moore, of the Community Financial Services Association of America, opposes the moratoriums, stating "a ban or limit on the number of payday lending services ... is actually not in the best interest of the consumers." 


Moore contends payday lenders are an ideal substitute for banks which "either do not provide small-dollar loans or have such unrealistic lending restrictions that people cannot qualify for them." 




Small-loan alternatives 


Colom says some banks are beginning to offer alternatives to payday lending at their normal 36 percent interest, but several Columbus banks stated they did not offer loans smaller than $1,000. Triangle Federal Credit Union in Columbus offers loans as small as $500 with a maximum interest rate of 18 percent, but the borrower must sign up to become a member of the credit union, open a savings account containin