As the federal government considers regulating the infamous “payday loan” industry, Catholics are already acting to help borrowers saddled with loan debt.
“I think that, from a social justice standpoint, we have the ability to speak for an entire group of people who are being marginalized and taken advantage of,” Stacy Ehrlich, executive director of the Society of St. Vincent de Paul for the Diocesan Council of Austin, told CNA in an interview about the society’s predatory loan conversion program.
The program allows people burdened with one or several onerous short-term loans to pay them off with a low-interest loan from a local credit union. The program exists “to offer some sort of resolution” for borrowers who are “being preyed upon,” Ehrlich explained.
Payday loans and similar types of loans have been criticized as capitalizing on people in desperate situations by charging exorbitant interest rates and fees in terms that customers often do not fully understand and to people who may have no other choice but to take the loan despite the extreme conditions. Although the rise in “payday loans” is a recent phenomenon, there is a history of “loan sharks” in the U.S. that goes back much further. The basic idea is the same, however: for borrowers who are often strapped for cash and have an emergency expense, lenders offer a small amount of money for a short period of time — until the next paycheck, for example — but attach high interest rates or high “rollover” fees.
With all the fees taken into account, these loans can carry annual interest rates approaching 400 percent, the Consumer Financial Protection Bureau notes.
Some people are able to pay off such a loan quickly, but the process often ends in debt for the borrower, said Dr. Robert Mayer, a professor of political theory at Loyola University Chicago who authored the book “Quick Cash: the story of the loan shark.”
People take out payday loans because they are “speedy” and “convenient” where “relatively few questions are asked,” Mayer told CNA.
A typical borrower is not necessarily among the “poorest of the poor” who has no credit, he noted, but can be a low-to-middle income working-class person without sufficient savings who needs “fast credit,” perhaps for an emergency expense like a car repair or dental work.
“I think the way household finances work these days, people are living from paycheck to paycheck,” he said, “so a bridge loan that’s convenient, in which people can think they can pay back quickly, can make a lot of sense for people, the way they get started.”
Other borrowers can be simply be those with little to no financial knowledge who are the “ultimate optimists” because they think that their situation — like a part-time job, for example -- will be good enough to pay off a short-term loan, Ehrlich said.
However, because of high rates of interest or fees that are attached to a loan which rolls over to the next pay period, loans not paid off quickly can increase rapidly. The consequences can be serious — many borrowers can go further into debt or face debt collection or asset seizure, the Consumer Financial Protection Bureau says.
Lenders can have access to borrowers’ bank accounts, and if their accounts have insufficient funds to pay the loan, overdraft fees can compound the costs. Thus, those without sufficient financial knowledge, or those without savings who need fast cash to pay for an emergency, can easily become trapped in nasty debt.
The Church has “definitely” been a leader in pushing for reform of the payday loan industry and has historically spoken out against usury, safe Mayer.
In November of 2013, Bishop Stephen Blaire of Stockton, then-chair of the committee on domestic justice and human development for the U.S. bishops’ conference, wrote the head of the Consumer Financial Protection Bureau about payday lending abuses.
Most payday loans are used “to meet recurring, basic needs,” he wrote, but they “are structured in such a way as to make repayment very difficult, initiating a cycle of deeper indebtedness that adds to borrowers’ financial stress, rather than relieving it.”
Such lending is immoral because it “preys on the financial hardship of poor and vulnerable consumers, exploits their lack of understanding, and increases economic insecurity,” he said.
And bishops elsewhere have fought for payday loan reforms, like in Texas, where the state’s Catholic Conference has pushed for regulations at the state legislature.
On Thursday, the Consumer Financial Protection Bureau proposed new regulations of the payday loan industry. Companies, before lending, must conclude that the borrower is capable of paying back the loan. There are other proposals, like limits on the number of times a lender could access a borrower’s bank account to prevent overdraft fees from piling up if the account has insufficient funds.
Regulations could successfully curb lending abuses, Dr. Mayer said, but they could also carry adverse consequences for some people needing a fast line of credit.
“Insofar as lenders are being forced to be more responsible or more cautious,” he noted, “that can help prevent people from getting trapped in cycles of debt, as long as loopholes don’t open up.”
However, he added, “some people will lose access to emergency credit,” including perhaps those who have successfully paid off such loans in the past without incurring large amounts of debt.
This is where the Church and faith-based organizations could step in to help those who need emergency cash at a low cost. And some groups are already doing just that.
The Society of St. Vincent de Paul in Austin started its loan conversion program in 2014 under Bishop Joe Vasquez, a leading voice for predatory loan reform in the state, after he encouraged them to actively help those saddled with debt.
“We also felt like there needed to be a little bit of money where our mouth was,” Ehrlich said, noting “that calling to be actionable and not just talk.”
Although in Texas there is a cap on the direct interest rate for a loan, there are no limits on “rollover renewals,” Ehrlich said, meaning that despite seemingly innocuous interest rates, hidden costs on loans can add up with each session.
For instance, a two-week loan might have an advertised 10 percent interest rate with a $50 paperwork fee, Ehrlich said. However, for each period that loan is not paid, another $50 paperwork fee is added on to the outstanding payment. Over the course of several weeks, that cost can easily balloon into a debt that is enormous for someone with a limited budget or irregular income.
With all the costs and fees included, the average annual interest rate for a loan ends up at an astonishing 303 percent, Ehrlich said. “300 percent interest rate for anyone is just not sustainable,” she insisted.
The society partnered with a local credit union shared-loan program, offering short-term low-interest loans to people who need to pay off their payday loans. They made their first loan in April of 2014 and the program took off later in the summer.
With $100,000 the society raised, the money acts as collateral to guarantee loan payments. The loans are offered at 2.5 percent annual interest, enough to cover operating costs. Neither the credit union nor the society profits from the endeavor, Ehrlich said.
Since the start in 2014, 88 loans of 54 people have been converted, she noted; borrowers often have several loans out at a time, and may take out one loan to pay off another. The average loan size is $720.
The society does its due diligence at first by determining the ability of a borrower to pay back a loan. They must have a “sustainable source of income,” Ehrlich noted, and room in their budget for a loan payment. Oftentimes people forget their normal living expenses like mortgages, rent payments, and groceries when taking out a loan.
In addition, the society offers a financial literacy course for borrowers; if they complete the course and pay off their loan, they receive 10 percent of the original amount back.
Ultimately, Ehrlich sees the society’s work as protecting the vulnerable. “I think it’s the recognition that we need to do everything we possibly can to give voice to people who have no voice,” she said.