Affordable Housing Institute : US

[Continued from yesterday’s Part 1]

 

Even so, higher fees and sorry stories are not hard to find. Payday lenders have proliferated over the last 15 years, including here in Gallup, a scenic but impoverished town of 22,000 with a mix of Indian, Hispanic and white residents and a striking density of storefront lenders.

 

At least 40 lending shops have sprung up, scattered among touristy “trading posts,” venerable pawn shops and restaurants along the main street (old Route 66) and with as many as three crowding into every surrounding strip mall.

 

You can get your kicks/ On Route 66

 

“Payday lending just keeps growing, and it just keeps sucking our community dry,” said Ralph Richards, a co-owner of Earl’s, Gallup’s largest and busiest restaurant.

 

In Gallup, Nancy and I breakfasted at Earl’s.  It’s a terrific place, virtually unchanged since it opened in 1947.

 

Park ‘n’ eat, 1950

 

Mr. Richards sees the impact among his 120 employees, mainly Navajo, some of whom become trapped by payday loans they cannot repay and, he said, “develop a sense of hopelessness.”

 

Creditworthiness breeds self-respect and hope.  Eternal debt destroys both.

 

In one indication of how common the problems are, his restaurant alone gets 10 to 15 calls each day from payday lenders trying to collect overdue fees from his workers, Mr. Richards said.

 

Remember those postdated checks?  The lenders can use them to call employers — and to enlist the state on their side:

 

At any one time, under court order, he must garnishee the wages of about a dozen of his workers to repay such lenders.

 

Observe the value of a reliable and collectible payroll stream, and of the documented employer.

 

The biggest problem, consumer advocates say, and the biggest source of profits to lenders, is that too many customers find, like Mr. Milford, that they must “roll over” the loans, repaying the same fee each month until they can muster the original loan amount.

 

Over several months, they can easily spend far more on fees than they ever received in cash and may end up by borrowing from multiple sites to pay off others.

 

One restaurant cashier here, Pat T., a 39-year-old mother of five who did not want to embarrass her family by giving her full name, said she had borrowed $200 last year when she could not pay an electric bill because “it was so easy to do.”

 

It’s easy, just buy one

 

That today’s young innocent faces

Will be tomorrow’s clientele.

 

Like any other addiction, chronic indebtedness slowly destroys its addict:

 

It took her six months to repay the $200, and by then, she had paid $510 in fees.

 

One critical role played by democratic government is to help and protect those who are unable to protect themselves from exploitation:

 

Efforts to regulate the industry in New Mexico bogged down this year. Lenders hired lobbyists to push for mild rules, and consumer advocates were split between those who wanted to virtually shut down the industry and others, including Gov. Bill Richardson, who promoted rules like mandatory reporting of loans, limits on fees and rollovers, and an option for borrowers to convert loans to longer-term installment plans.

 

Last summer, after legislation failed, Mr. Richardson issued regulations along those lines, but a court declared them illegal. The state has appealed.

 

There’s another way to tackle payday lending.  Rather than legislate it out of existence, compete it out of existence.  Payday loans in the US strongly resemble microfinance elsewhere in the world.  This is a business space that could be occupied by microfinance — and probably should be.

 

The issue will be raised again in January’s legislative session.  Lt. Gov. Diane D. Denish, who described payday loans as “stripping the wealth out of the low-income community,” said she feared that the same political stalemate would prevail.  In the meantime, Ms. Denish and many others say, efforts are needed to develop private alternatives to payday loans.

 

That’s how you kill it — compete it out of business.

 

In an initiative that has attracted wide attention here, the First Financial Credit Union will offer an alternative payday loan plan, with a fee of $12 per $100 borrowed and a novel chance for customers to start building assets.

 

Customers who attend classes in financial planning and agree not to seek loans elsewhere will have 80% of their loan fees returned to them and put into their own personal savings account, said Ben Heyward, chief executive of the credit union.

 

“We’ll lick the payday lending problem when people learn how to save,” Mr. Heyward said.  “When they kick the short-term loan addiction.”

 

First Financial Credit Union president Ben Heyward plucks a cheeseburger from the grill while Pam Meyes, the vice president of consumer lending, waits to take the burgers to First Financial clients Friday during the grand opening of their Mesa View location on U.S. 491 in Gallup. [Photo by Jeff Jones/Gallup Independent]

 

Gaining control of one’s finances requires more than just a money injection; it requires learning financial literacy, and sticking to a plan.  And it probably requires a hand up, not just another loan fix:

 

Here’s a cure for all your troubles,

Here’s an end to all distress.

 

Depositing into savings and paying on a usurious debt involve precisely the same behaviors, but the former builds wealth and hope while the latter destroys both.

 

Debbie Tang, a single mother of two, took out three $200 loans, with total fees of $180 per month, when her child support payments did not arrive last month or this month.

 

Another side of the tragedy: a divorced spouse whose former partner does not deliver on his financial commitments.  Where can she go for short-term essential cash?

 

Only 36% or more annual interest!

 

There’s only one store who will take you with open arms:

 

It’s the old dope peddler

With his powdered ha-happiness.

 

Without a credit history to get a bank loan, Ms. Tang said she felt she had little choice but to visit payday lenders to pay the electric and gas bills until her grants for her nursing studies arrive in January.

 

If ever a business deserved to be competed out of business, it is payday loans.  The credit conundrum and the small-scale problems means that classically for-profit lenders will seldom if ever be able to address what the hand-to-mouth populace needs.  This is a place for government to create or invest in community micro-lenders, like Gallup’s First Financial:

 

Heyward, president and chief executive officer of First Financial Credit Union, said he is working on a savings plan that would make payday lenders obsolete. Though reluctant to offer many details prior to the plan’s implementation in October, Heyward said it would drastically reduce the amount of interest borrowers would be forced to pay, while creating an opportunity to begin a savings plan and repair poor credit ratings.

Heyward spoke about his vision during the grand opening of First Financial’s second Gallup branch at 1383 N. Hwy. 491 in the Mesa View plaza on Friday afternoon.

 

Governments have sponsored microlenders in Kenya, and in Bolivia.

 

Repaying a micro-loan in Bolivia

 

Governments have invested in affordable lenders in Thailand and South Africa.  Why aren’t we investing in microlenders here at home?

 

Can you find the nation not participating?

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