CNS STORY: Faith-based groups say biblical call guides payday-lender campaign

WASHINGTON LETTER Jul-24-2009 (1,100 words) Backgrounder and analysis. With photos. xxxn

Faith-based groups say biblical call guides payday-lender campaign

By Dennis Sadowski
Catholic News Service

WASHINGTON (CNS) -- The Rev. Mitchell Kent knows about the risks of payday lending very well -- to the tune of $5,000.

Those risks include loan fees that add up quickly, fees that faith-based and consumer groups pushing for reform of the industry say are exorbitant and akin to usury.

For the Columbus, Ohio, minister, it all began about nine years ago when he needed $100 to pay a utility bill. With no cash in hand but a secure paycheck just two weeks away, he walked into one of the city's proliferating payday lending stores. Within minutes he had cash, underwritten by a personal check dated two weeks into the future. The $15 fee seemed worthwhile.

"It was so easy to get the money in advance. It was a godsend," he said.

Two weeks later, when the loan came due, Rev. Kent had already spent his next paycheck on another bill and the check he wrote to cover the original loan bounced. So he took out another two-week loan to pay off the first. Two weeks later it was more of the same. Eventually, he said, he'd go from store to store to cover the cost of each subsequent loan.

The cycle -- Rev. Kent called it a "downward spiral" -- kept going for two years. He estimated that in the end he borrowed $2,500, most of it to pay back short-term payday loans. Adding up the fees for each new transaction and overdrawn-account fees from his bank for the bounced checks, Rev. Kent estimated that the original $100 loan cost him between $5,000 and $6,000.

Industry critics, largely faith-based organizations and consumer groups, have pointed to what they contend are exorbitant loan fees that mount quickly, especially when an individual seeks repeated loans like Rev. Kent did.

Numbering more than 22,000 nationwide, payday lending stores have been under pressure to reform their practices almost since they first arrived on the financial scene in the mid-1990s.

"It was very, very frustrating," Rev. Kent said in describing his experience to Catholic News Service. "I kept thinking I would get out of this finally. I would liken it very much to an addict, someone on alcohol or drugs.

"They were more than eager to give me as many loans as I wanted," Rev. Kent said of the payday loan stores he frequented. "The staff was very accommodating. They asked very few questions. It was a very quick transaction. All of that is part of the allure of it. There is no responsibility. No one was asking me how am I going to pay my debt. No one cared."

Rev. Kent admitted he should have had more responsible spending habits in the first place so he could have avoided the first loan. He also said he learned he's not the only person who has been taken in by the enticement of getting money in a hurry with few questions asked under the business model that governs the multibillion-dollar payday lending industry.

Uriah King, executive director of the Center for Responsible Lending in Durham, N.C., a pro-consumer organization, called the process of repeatedly taking out a loan every week or two "churning." He said the industry thrives on churning.

In a study released July 9, the center found that churning accounts for $20 billion of the $27 billion in annual loans. Churning also accounts for 59 million loans a year, costing consumers $3.5 billion in fees, according to the report.

Rachel Anderson, the center's director of faith-based outreach, said the high fees amount to usury, a term found in the Bible to identify unjust financial practices by the rich against the poor.

While acknowledging that payday lenders fill a need, especially for people with low or moderate incomes who need small loans, the center has turned to faith-based organizations and state Catholic conferences seeking support for legislative campaigns to stiffen regulations governing the industry. The effort has focused on placing caps on fees and interest charges, generally at 36 percent annually.

In the case of Rev. Kent, he eventually ended up fighting for payday lending reform through Bread, a grass-roots, faith-based organization working on social concerns in Columbus. Bread, a member of the Ohio Coalition for Responsible Lending, was instrumental in pushing the state's Legislature in 2008 to pass a 28 percent annual rate cap on fees payday lenders can charge.

One of the first reform efforts arose in Illinois after a Chicago monsignor heard the story of a poor woman who came to confession at Holy Name Cathedral and described her experience with payday loans. Mounting a campaign based on the biblical admonition against usury, Msgr. John Egan organized community groups and church congregations to push for payday lending reform, recalled Marilou Gervacio, associate director of the Catholic Conference of Illinois.

After Msgr. Egan died in 2001, Citizen Action of Illinois carried on the campaign, naming it for the Chicago cleric. It was not until 2005, however, that a reform measure passed in the Illinois Legislature. Since then, campaigns with significant faith community involvement have evolved in Arizona, Missouri and Wisconsin.

Fifteen states and the District of Columbia have imposed a 36 percent cap on fees. The federal government also enacted in 2005 the same cap and other restrictions on stores that operate near military bases.

Three pieces of legislation that would expand protections to all consumers also have been introduced in Congress, but, Anderson said, the bills are less restrictive than what has been passed or what is being sought in states across the country.

Fearing its livelihood is at stake, the industry has fought back, changing the way it does business. In states with strict-cap limits, the industry has repackaged itself, saying it has entered the installment loan business. By doing so, the same fees that have come under fire can continue to be charged.

Working under the original fee structure is the only way the industry can remain profitable, said Steven Schlein, a spokesman for the Consumer Financial Services Association of America, whose membership includes about 60 percent of the country's payday lenders.

"The rate cap in Ohio reduced our fee from $15 per $100 to 80 cents," Schlein said. "That would put us out of business."

He criticized the Center for Responsible Lending, charging that its goal is to destroy the industry. After all, he said, 34 states already regulate payday lending.

"They want to put us out of business, but they don't want to help these people (who are our customers)," he said. "That's nonsense. All of our critics offer our people moral support. But we offer them loans."

END

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