As Ky Payday Lenders See Business Slump, Industry Seeks Forgivable Loans
As members of Congress push to allow payday lenders access to federal loans, data shows their business in Kentucky plummeted when the pandemic struck.
The industry processed about 20% fewer loans in March than in March, according to a monthly report provided to the Kentucky Department of Financial Institutions by loan processing company Veritec Solutions. This represents a decrease in short-term loans of $ 8.3 million, generally at high interest rates.
The database shows that the volume of loans ranged from 129,000 in March 2019 to 168,000 loans in the following August. But only 104,000 loans were processed in March, the lowest by far last year.
More than 282,000 Kentuckians filed for unemployment insurance in March.
Payday loan or deferred deposit products provide small loan amounts to borrowers, typically those with poor credit or who do not have access to a traditional bank account. Data shows that the average payday loan over the past year in Kentucky was $ 348. Borrowers are usually required to repay the borrowed amount, plus interest and loan fees, within two weeks.
Industry critics say the loans are designed to trap borrowers in a cycle of debt, and Consumer Financial Protection Bureau research shows that over 75% of payday loan fees come from people who borrow more than 10 times a year.
The industry has turned to Congress for help managing the downturn, and a group of lawmakers last week called on Treasury Secretary Steven Mnuchin and Small Business Administration chief Jovita Carranza to authorize short-term, high-interest lenders to access paycheck protection program funding.
No decline in activity was mentioned in the letter; Kentucky Representative Andy Barr, a Republican from Lexington, was among those who signed it.
If accepted, lawmakers’ demand would allow payday lenders with annual interest rates of up to 469% to tap into forgivable loans at a 1% interest rate.
Ben Carter of the Kentucky Equal Justice Center says it’s too early to tell why the volume of loans has declined in Kentucky.
Expanding unemployment benefits can reach more people and help new unemployed to cover their living costs; Kentucky’s judgment on evictions may mean people are less desperate for immediate money, even after a job loss.
The real impact of the coronavirus and subsequent policy changes will only be clear in months, Carter said, and people can still turn to these products as long as the crisis persists.
“The reality is that payday loans are incredibly expensive, ”Carter said.
Payday loans already on the decline
Interest rates are capped at 36% or less by 16 states and the District of Columbia. But Kentucky lenders aren’t subject to a rate cap, although borrowers can only have two loans outstanding from one lender at a time.
According to Whitney Barkley-Denney, senior policy advisor at the Center for Responsible Lending, a nonprofit research and policy group affiliated with the Self Help Credit Union, consumers have turned away from payday loans or deferred deposits.
Instead, borrowers are increasingly turning to installment and online lenders, some of which offer longer repayment plans with more lenient interest rates than payday lenders.
Kentucky Department of Financial Institutions published guidelines on March 24 for non-bank lenders to “work with clients affected by the coronavirus to meet their financial needs”. The ministry recommended that lenders restructure existing loans, extend repayment terms or waive fees.
Until now, small non-bank financial institutions have not been eligible for loans from the Paycheck Protection Program. This includes federally certified community development financial institutions, which offer financing options with interest rates comparable to banks to underserved communities under strict guidelines. Legislators specifically sought in their letter to include these institutions.
Payday lenders are not mentioned in the letter. But Representative Blaine Luetkemeyer, a Republican from Missouri and one of the letter’s primary authors, confirmed to POLITICO that it was supposed to cover payday lenders. Luetkeymeyer is a member of the House Financial Services Committee and one of the favorite lawmakers in the payday loan industry, having received $ 164,900 from the industry during his career, according to OpenSecrets.
Payday lenders have contributed over $ 50,000 to Barr’s congressional campaigns, according to Open Secrets. Barr’s electoral opponents in the 6th District representing central and northeastern Kentucky have previously criticized his relationship with payday lenders.
Barr’s office did not respond to a request for comment.
“Keeping the people who work for non-PPP finance providers employed during these difficult times will make it easier to restore America’s productivity as soon as the health crisis subsides,” the letter said.
The Community Financial Services Association of America, a trade group representing payday lenders active in Kentucky such as Advance America and CheckSmart Financial, says its members are critical businesses providing access to credit.
“Inclusion of these businesses in the paycheck protection program would ensure that lenders, many of whom are small businesses, are able to keep credit in circulation, serve their customers and their communities without disruption,” he said. a spokesperson for the Community Financial Services Association of America said in an email. declaration.
Critics say payday loans don’t match P3 goals
Barkley-Denney of the Center for Responsible Lending, however, says most payday lenders are not small businesses, and allowing them to access taxpayer funds through the Paycheck Protection Program “would be the opposite of what the PPP is supposed to do ”.
“The P3 is about building wealth in communities,” said Barkley-Denney. “Payday lenders are the opposite of that; they take wealth out of communities, they make people less financially secure. So the idea that we would want to spend taxpayers’ money supporting them is just nonsense.
Sarah Crozier, senior director of communications at the Main Street Alliance, a network of small business owners, says shortcomings in the paycheck protection program prevent it from actually helping many small businesses. Main Street Alliance heard from members that the program’s aid schedule is too short and too limited in the expenses it covers. Many small businesses have struggled to get approval from lenders while large companies received loans before the initial funds are exhausted.
But opening up the program to high-interest lenders, including companies that provide predatory small business loans, would be a step in the wrong direction, says Crozier.
The lawmakers’ letter was also intended to cover companies offering factoring services or cash advances to merchants, who tap into a company’s future income to secure funds. Recent research from the Opportunity Fund, a small business nonprofit lender, found that these products carry an average annual interest rate of 94%, but can go up to 358%.
“Opening up small business finance to payday lenders who flip and abuse small businesses is the absolutely wrong way to support small businesses during the crisis,” said Crozier.
Contact Jared Bennett at [email protected]