Payday Lending in Louisiana, Mississippi, and Arkansas: Toward Effective Protections for Borrowers
| Author | Megan S. Knize |
| Pages | 318-347 |
Associate, Dewey & LeBoeuf, LLP. J.D. 2008, UC Davis School of Law. B.A. Honors 2003, Stanford University. Thanks to Robert Laurence (University of Arkansas School of Law), Robert Lawless (University of Illinois-Urbana School of Law), Palma Lower (University of California, Davis), Ronald Mann (Columbia University School of Law), Beth Orlansky (Mississippi Center for Justice), and Jeremy Tobacman (The Wharton School, University of Pennsylvania) for comments on earlier drafts. Steven Graves (California State University, Northridge) and Lisa R. Pruitt (University of California, Davis School of Law) have provided extraordinary support and mentorship for this project. Special thanks to my family for their unwavering love and support.
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"These people are barely making ends meet; [they] will go to one of these [payday lending] places for what they think is a quick fix and find out that it's a nightmare. They never get out from under it."
H.C. Klein, Founder Arkansans Against Abusive Predatory Lending1
Flora Johnson, a thirty-six-year-old single mother, lives in the Mississippi Delta. Every day she hears about the country's economic downturn and looming recession. She worries, for the hundredth time, about how she will pay the bills this month.2While she has a steady job earning about $25,000 per year, Flora, like millions of Americans, cannot rest easy:3 she has just reached the limits of her credit cards and home foreclosure is imminent.4When an unexpected medical bill comes in the mail, Flora sighs in resignation.5 Even though she worries about paying it back, she knows just where she must turn for help: a payday loan.6 Payday loan stores are everywhere in Mississippi.7 Besides being one of Page 319 the nation's poorest and most rural states,8 Mississippi has more payday lending stores than McDonald's restaurants.9
With payday lenders such as Cash Money Payday Loans, Advance America, and Check-into-Cash lining the roads to and from work, Flora finds it easy to select one and request a $325 loan, the state's average.10 To obtain the loan, she shows only her driver's license and proof of a bank account and an income.11 The lender never checks her credit, which is one reason the loan is so appealing and easy to get.12 She writes the lender a personal check, and he agrees not to cash the check until after her next payday in two weeks.13 For the $325 loan, the lender charges $55, which Page 320 works out to an Annualized Percentage Rate ("APR") of 531%.14The lender never explains the interest rate computation to Flora, and she never asks.
A few weeks later, Flora realizes she does not have the extra money to repay the lender. Concerned that her check will bounce if the payday lender deposits it, Flora decides that she will instead renew her loan. She pays $55 that month and every month thereafter, "rolling over" the loan without paying a cent toward the principal.15 Flora eventually pays nearly $800 in interest on her original loan.16 Her lender probably knew this would happen; in fact, he urged her to roll over the loan, knowing full well the debt would trap her.17 Later, when a friend asks why she would agree to such oppressive loan terms, she says with regret that she thought her luck would change and that she could someday pay the money back.18
Flora's story is not unique. The payday lending industry has raised the ire of borrowers, lawyers, and consumer advocates because they say lenders are "predatory."19 That is, lenders prey on Page 321 unsophisticated poor people and ensnare them in extremely expensive loans with an average APR of 470%.20 Loans become predatory when payday lenders lend to borrowers through five or more transactions a year.21 According to the Center for Responsible Lending, a consumer advocacy group, 91% of payday loans fit this description.22 Each month, lenders across the country collect thousands of dollars in interest from the people who can least afford it.23
In this Article, my argument is two-fold. I argue first that the problems facing payday loan borrowers are particularly acute in the South. I argue second that legislation aimed to protect borrowers is pitifully weak, and in some cases futile, for residents in Louisiana, Mississippi, and Arkansas. Given this framework, I nevertheless suggest federal and state solutions to protect borrowers. Part I provides background information about typical lenders, their practices, and relevant legal developments. Part I also situates payday lending among the economic, educational, and geographical challenges facing many southern residents. Part II describes the payday lending laws of Louisiana, Mississippi, and Arkansas. Part III recommends solutions for effective protection of borrowers in the South.
Payday lending has changed dramatically from a relatively unknown financial service in the early 1900s to a billion-dollar Page 322 industry in 2008. Payday lending has roots in the "salary buying" business in which consumers who needed short-term cash sometimes took advantage of "salary buyers."24 A buyer purchased a borrower's salary and provided immediate funds in exchange for the right to "buy" the borrower's entire salary in the future.25 When a borrower did not pay the loan on time, salary buyers used aggressive collection tactics, leading working class people to coin the term "loan sharks."26 For most of the twentieth century, borrowers applied for modest loan amounts at low rates, thanks to strict caps on interest rates (usury).27 Until the 1980s, most states had traditional usury rates that capped interest between 18% and 42%.28 In the mid-1980s and 1990s, states began to relax their prohibition on high interest rates.29
In 1993, an entrepreneur named W. Allan Jones established the payday lending industry when he opened his first Check-into-Cash store in Cleveland, Tennessee.30 A payday loan is fundamentally different from other products, such as a pawnshop loan. The interest rate is higher, and payday loan borrowers are legally obligated to pay their loans.31 These borrowers cannot simply surrender their security ("pawn") and walk away. The industry grew quickly, and from 2000 to 2004, the number of payday lending stores more than doubled, in part because of each store's profitability.32 With $300,000 in the market, a lender can potentially make $1,716,000 in one year.33 A whopping 90% of the revenue generated in the payday lending industry comes from interest and other fees charged by borrowers.34 In 2007, payday lenders collected $8.6 billion in fees from American families Page 323 borrowing nearly $50 billion in loans.35 To maintain high revenues, lenders must be savvy about their target market.
The typical lender knows who its best customers are: America's poorest people. The payday lending industry affects one in twenty Americans, which means that the range of borrowers is huge.36 A typical borrower is likely to be a woman who earns anywhere from $18,000 to $50,000 a year.37 Like most Americans, she lacks basic financial literacy, which makes it more likely for her to agree to the loan terms.38 Lenders are fully aware that people from poor areas are likely to default and can be coaxed or threatened into rolling over their loans.39 Page 324
Without offering a payment plan or flexible terms, many payday lenders "keep consumers poor" by requiring the impossible: after two weeks, pay the amount in full or pay the fees associated with a bounced check.40 In fact, studies show that it is mathematically impossible for typical borrowers to repay payday loans in two weeks.41 In one study, a borrower making $25,000 a year would, without making payments on a loan, fall short $14 each week on recurring payments for food, housing, healthcare, transportation, and utilities.42 She would be unable to pay her loans without taking a second job-or a second loan. A person making $35,000 per year would have a surplus of $67 each week to pay down her loans.43 A slightly longer repayment term could provide positive results for borrowers, as one South African study found.44A "loan alternative," such as a credit card advance, could be more manageable. The APR on a bank-issued credit card is 98.18% and the APR on a credit union-issued credit card advance is 10.99%.45However, these options are not generally available.
With statistics like these, it is no wonder borrowers "roll over" their loans to the next pay period.46 On average, borrowers like Flora roll over a loan seven times.47 Some lenders characterize borrowers who renew loans more than seven times as "26ers," Page 325 because they may take out one loan and then roll it over every two weeks (twenty-six times) for an entire year to avoid defaulting on the original loan.48 Many consumers take out a second or third loan from another payday lender to pay the first, thus becoming indebted to multiple creditors.49
Payday lenders know where to find their desired customers: economically disadvantaged areas, towns near military bases,50 and minority neighborhoods.51 Payday lenders' geographically oriented tactics have become so well-known that they inspired Seattle-based programmer Mike Mathieu to start a satirical website, "Predatory Lending...
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