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Payday Lenders Are Somehow Even Worse Than ‘Dirty Money’ Makes Them Look

Unlike in the Netflix series, the people who profit from this predatory industry rarely see prosecution — because what they do is perfectly legal

The first season of Netflix’s new series, Dirty Money, offers an insightful, nuanced looks at infrequently-examined economic subjects ranging from the maple syrup mafia to pharmaceutical price gouging. But the topic which is most germane to our current financial climate isn’t Donald Trump’s shady business dealings — though that is highly relevant.

Instead, it’s the second episode’s extensive look at one payday lender and the man who profited hugely from predatory lending.

Because, while Scott Tucker, in his Spandex cycling gear and utter lack of remorse is a fascinating (and despicable) character, he’s also in the minority in the industry.

That is, he got caught. And convicted. And fined. And that almost never happens, because many payday lenders are operating within full compliance with the law.

And under the Trump administration, that’s likely to continue to be the norm. In fact, though this is one of the worst times to be an American worker, it’s one of the best times to operate a business which profits from that worker’s financial straits.

How Payday Lenders Work

Payday lenders — which often spring up in storefronts strip malls and other areas where they can be easily accessed by car or bus — allow borrowers to take out small amount of cash for a short period of time. The idea behind them is relatively simple: You know you’ve got money coming but you don’t have it yet. Rent is due, you’ve just blown a tire, or an unexpected medical procedure has come up. Payday loans offer to bridge the gap, just until you get paid.

For the uninitiated, this may seem like a decent service — and indeed, these short-term loans, which often advertise their ability to help people out between paychecks, do serve as a valuable resource to some customers. In an unforgiving economy with a withering social safety net, the ability to get cash quick can be very appealing; there’s a reason that an estimated 12 million Americans will use a payday lender this year.

Video: Payday Loans Explained

The problems begin mounting, though, when borrowers go to pay back their loans and are surprised with huge interest rates and additional fees which ultimately make it impossible to dig themselves out of the hole.

The Consumer Financial Protection Bureau estimates that the average payday loan is under $500; the Pew Charitable Trust finds that it’s even lower, just $375. But most borrowers take out multiple loans each year, becoming stuck in a cycle of as many as eight to 12 instances of borrowing annually.

From the Pew Charitable Trust:

Three-quarters of payday loans come from storefronts, with an average fee of $55 per loan, and roughly one-quarter originate online, with an average fee of $95. Using these figures, we calculate that the average borrower spends about $520 on interest each year.

Spending more than $520 on interest alone sounds dramatic, but that’s averaged across the country. Payday lenders are permitted to operate in more than half of U.S. states with varying degrees of flexibility; because the federal government has been relatively lax on payday lenders, it’s up to the states to regulate how much they can charge in interest and fees.

As a result, a borrower in a state like Oklahoma can pay up to 390% APR for a 14-day $100 loan, while in Kentucky, the APR is 459%. A traditional line of credit typically comes with an APR of around 14% to 22%.

Pew breaks that down into a dollar amount:

The same $500 storefront loan would generally cost about $55 in Florida, $75 in nebraska, $87.50 in alabama, and $100 in Texas, even if it were provided by the same national company in all of those states.

On average, most borrowers end up paying a substantial amount for their loan; one 2012 report from the Consumer Federation of America found that “by the time loans are written off by the lender, borrowers have repaid fees equaling about 90% of their initial loan principal but are counted as defaults for the full amount of the loan.” More than half of borrowers — 55% — were found to have defaulted in the first year.

Who Uses Payday Lenders (and Why)

On paper, this math looks plainly problematic. But in practice, payday lending often feels like a lifeline to the small number of people who borrow each year.

In spite of the fact that most Americans do not have $1,000 in savings in the event of an emergency, many do have access to the cash they’d need, either by borrowing from friends, getting an advance at work, or drawing on other resources. Payday lenders, however, rely on those who have neither the cash nor the access — i.e., those who are from historically and systemically marginalized groups.

Borrowers are typically on the younger side — between 25 and 29 — and are overwhelmingly renters who have at least a high school education or some college, and earn below $30,000 per year. The biggest share are not unemployed; instead, they’re on disability, and often need cash assistance between their payments. African-Americans are three times more likely than whites to utilize these services.

This is not accidental; in fact, it’s the result of clever targeting by lenders. Numerous studies have found that payday lenders actively cluster around Black and Latinx neighborhoods—neighborhoods whose residents are less likely to have access to generational wealth due to decades of systemic economic oppression.

Essentially, if you can’t borrow money from family and you don’t have savings, you’re going to need to head to MoneyTree.

The payday lenders and their (mostly conservative, mostly wealthy, mostly white, mostly male) defenders cite the clear demand and the demonstrated market value of these services and paint any regulations as “government overreach.” They argue that if people are showing that they want this service, why curtail it with regulations?

Someone who has never had to use a payday lender — which, statistically, is about 95% of the adult population, though in some states it’s more like 82% — might ask why anyone would use a service that is so clearly a bad deal for the borrower.

The answer is not simple, but it is, in many ways, understandable. It’s no surprise that people are using payday lenders — and that those who use them, use them often—considering the niche market they have created…and the yawning chasm of wealth inequality in the United States.

Payday lending offers a service that virtually no other institution in the United States does — quick money, when you need it, in relatively small amounts. Personal bank loans, government assistance, and nonprofit aid are rarely speedy and usually require a lot of leg work. And, in the instance of a bank loan or a line of credit, the borrow is required to have demonstrable income, decent credit, and any number of other necessary qualifications (including citizenship papers and paystubs).

In the United States, if a person is going to be short on rent on the 1st and they don’t get paid until the 5th, there is very, very little that they can do aside from borrow money, either from someone they know or from an organization that will lend it. And let’s not forget that a lot of Americans are in this exact situation; a reported 78% said, in 2017, that they lived paycheck to paycheck.

Meanwhile, the payday lending industry continues to rake in cash and rack up wins.

It’s A Great Time to Be a Payday Lender

Despite what Dirty Money would have you think, it’s very, very rare that that those who profit off of the payday loan industry actually ever see punishment, in large part because what they do is totally legal.

Under the somewhat watchful eye of the Federal Trade Commission, payday lenders are required to comply with the existing laws. And many of them do; the issue is, and has been, that those existing laws permit lending practices which can be devastating to borrowers.

In the last several years, the lawsuits filed by the FTC on behalf of consumers have largely centered around “phantom debts,” which are exactly what they sound like. For example, in 2016, the FTC mailed close to 2,000 checks to consumers who’d been defrauded by a scam that issued fake collection notices to individuals who did not, in fact, owe any money at all. That, of course, is clearly illegal.

However, the bulk of payday lending isn’t nearly as cloak-and-dagger — instead, it operates right out in the open. This is, in no small part, because payday lenders have the support of many lawmakers, thanks to big campaign donations.

LendingTree’s PAC’s top campaign expenditures for the 2016 cycle.

This is not conspiratorial hypothesis; there are direct links between campaigns which benefit from donations from payday lending companies and bills which are moved through the legislatures of both states and the federal government.

LendingTree, a North Carolina-based payday lender, donated more than $10,000 to Congressman Patrick McHenry (R, NC)’s election campaign in 2016. McHenry is a familiar face among lenders; he was a featured guest at LendIt, “The World’s Biggest Show in Lending & Fintech.” Later that year, he was the prime sponsor of a bill which expressly benefitted payday lenders and was called a “a massive attack on state consumer protection laws” by the Center for Responsible Lending. McHenry’s home state of North Carolina — where LendingTree is based — has a fraught relationship with payday lenders.

North Carolina currently prohibits payday lenders from operating, due to a law which was allowed to sunset in 2001 after an investigation which found that payday lenders were collecting criminally high rates of interest. Payday lenders continued to squeeze through loopholes, though it didn’t go unnoticed by the state’s regulatory bosses. In 2004, Consumers filed a class-action lawsuit against Advance America and, with the support of the North Carolina Attorney General’s Office, it was settled eight years later.

McHenry’s new bill could potentially circumvent the existing laws, allowing LendingTree and other nonbank entities to open up shop once again.

Another example is MoneyTree, a Washington State-based payday lender, who has worked hard to keep incumbent Republicans in their seats at both the state and federal level, as well as to ensure that Republican strongholds remain strongly-held. The company has already begun to flood one of the most-watched Congressional races of 2018, Washington’s 8th District, which has the potential to flip from red to blue.

That payday lenders have been spending so much to establish new footholds and keep the ones they’ve got is significant. The industry has been on the decline in the last several years — possibly due to economic recovery, or to laws like Dodd-Frank and organizations like the CFPB, which have both sought to regulate their activity — but the Trump administration and Republican-backed Congress have made it clear that it’s about to be a brand-new day for payday lenders. Establishing their goodwill is more important now than ever.

And it seems to be working.

In 2017, the CFPB released a report stating that the payday lending industry would be dramatically cut if a new federal law capping payments and the number of loans a consumer can take out in a year were to pass. However, that same rule is being hailed by some Republican lawmakers as a salvation for the industry, helping to make it more profitable by encouraging higher dollar value loans — and, ultimately, higher interest rates, if states relax some of their caps.

Top payday lending campaign contributions in 2017–2018. Image via OpenSecrets.

At the same time, lobbyists for payday lenders have been working hard in Congress to ensure that other prior regulations are getting loosened up — and it seems to be working. And, at the same time, Trump himself has called off the CFBP’s ability to offer oversight on discrimination cases (like those which have been brought against payday lenders for offering more favorable interest rates to white borrowers).

Mick Mulvaney, who heads up the CFBP under Trump, has shown little interest in pursuing predatory lenders, anyway.

In January, the CFPB dropped a huge lawsuit against payday lenders who were taking advantage of tribal laws, similar to those that Tucker uses to run his lending scheme.

At the state level, too, payday lenders are achieving small wins; the Indiana House recently approved a measure that would allow payday lenders to operate within their state. Records show that House Speaker Brian Bosma, who helped push the vote over the edge, received donations from Check Into Cash, an Indiana-based payday lending company, in 2015.

Precedent for Fixing Predatory Industries

It hasn’t always been this way; before the consolidation of banks, the digitization of transactions, and the shrinking of the social safety net, getting floated for a few days from a private creditor or even a community bank wasn’t uncommon. Now, however, it’s much harder to kite a check, to push off payments, or to take out just a little more credit.

Though payday lenders often pretend to be a sort of Robin Hood industry, the truth is that they are wildly profitable and that that profit overwhelmingly comes from people who, in America, already face steep systemic challenges. And though their defenders tend to be so-called “free market” thinkers, the fact is that payday lenders are decidedly not operating within a free market; they are the recipients of tax cuts and corporate welfare just like any other massive industry.

They are also profiting off of other industries which are subsidized by government interventions—their borrowers are people who work low-wage jobs at Walmart, a company that enjoys billions in subsidies from the federal government, or McDonald’s, a company that likely couldn’t survive without artificially cheap beef and corn.

In a truly free market, it’s possible that there would, in fact, be no need for payday lending. But that’s besides the point.

The real issue is that payday lenders have been permitted to act in a way that disproportionately impacts lower earners and People of Color and that there is a clear pattern of economic devastation which has been fully sanctioned by state and federal government. The answer is not putting payday lenders out of business, but instead, reeling them in and ensuring that consumers are protected.

Payday lending does offer a necessary stopgap for many borrowers — but that doesn’t mean that it needs to be this predatory.

The industry itself is valued at around $6 billion. Its business model is relatively low-cost—for the most part, they don’t actually sell anything—and needs few supplies or even spaces, particularly with the popularity of online lending. Thus, even small regulatory changes, like more reasonable caps on interest rates, more clear fee schedules, or more explicit payment instructions could make the industry less stifling to consumers who need the service.

This is not an unlikely scenario—though it is unfortunate that regulations of this sort often come once it’s too late for many consumers. The sub-prime mortgage industry is a good example. So is the lack of regulations on banking prior to the crash of 1929.

In the absence of a similar crash, it seems unlikely that those regulations will come. If anything, the payday lending industry is feeling more positive than ever.

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