If you don't have a bank account – and millions of American's don't – how do you cash a check or pay a bill? Even if you do have a bank account, how do you get a small loan in an emergency? One survey showed that as many as 63 percent of Americans would be strapped to raise $500 if they needed it in a crisis.
This is where the predatory "payday loan" industry comes in.
The term for people with no bank accounts is “unbanked.” According to the 2013 FDIC National Survey of Unbanked and Underbanked Households, “7.7 percent (one in 13) of households in the United States were unbanked in 2013. This proportion represented nearly 9.6 million households.” On top of that, “20.0 percent of U.S. households (24.8 million) were underbanked in 2013, meaning that they had a bank account but also used alternative financial services (AFS) outside of the banking system.”
That is millions and millions of Americans who either do not have a bank account or otherwise have to use "alternative financial services," such as payday lenders and check cashing services. A 2014 AlterNet article, "The New Financial Scam Driving Workers Deep Into Debt," pointed out what this means: "If you can lure people into borrowing then you own them, sometimes literally—it’s a game as old as money itself...."
These are the very people who are poor credit risks and cannot get loans from the usual sources. So they often turn to “payday lenders.” Payday loans can have an interest rate up to 500 percent. They charge very high interest rates for short-term loans, often trapping people into a vicious debt spiral, borrowing to pay the interest on earlier borrowing while money for food and rent disappears. These lenders charge 15 percent or more for a two-week loan. That’s not 15 percent per year, that’s 15 percent for two weeks.
The combination of this huge portion of Americans living on the edge, and few lending sources available, the predatory payday loan industry was at one point said to have more payday loan outlets than McDonald's and Burger King outlets combined.
These outfits prey on people who do not have a bank account or can't otherwise get a loan, so they look for another way to get a loan in an emergency or cash a paycheck.
Why is this industry called "predatory?" Let's hear from industry insiders.
Cash America is a payday loan outfit. In 2007 the company's CEO said of their "customers": "The theory in the business is [that] you've got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that's really where the profitability is."
The chairman of the payday lender‐supported Consumer Credit Research Foundation and president of the Payday Loan Bar Association, wrote in an email: " “In practice, consumers mostly either roll over or default; very few actually repay their loans in cash on the due date."
Payday lender ACE Cash Express even put out a training manual for new employees, training employees that their job is to push borrowers from one payday loan to the next.
Predatory, for sure. Trapping people into a cycle of debt for the purpose of draining their every last dollar. This "debt trap" is responsible for ruining the lives of millions.
Florida's Predatory Payday Lenders
In March the National Council of LaRaza, in partnership with The Center for Responsible Lending, released a report, "Perfect Storm: Payday Lenders Harm Florida Consumers Despite State Law," looking at over a decade of payday lending in Florida. According to the report,
● Interest rates average 278 percent.
● In Florida there are more payday loan stores than Starbucks (more than 1,100 outlets vs, 642 Starbucks).
● Payday lenders "stripped" Floridians of over $2.5 billion in fees between 2005 and 2016.
● "Last year, over 83 percent of Florida payday loans were to Floridians stuck in 7 or more loans."
● "The average borrower takes out more than 8 loans per year."
● "The economic drain of payday lending is disproportionately concentrated in Florida’s black and Latino communities, and has seen significant growth among senior citizens."
Payday lenders especially prey on minority communities, according to the report. There were about 8.1 stores per 100,000 people in African-American and Latino communities while neighborhoods that are predominately white had a four to 100,000 ratio. This means areas where minorities live are more than twice as likely to have a concentration of these stores. The report shows this applies regardless of the relative wealth of communities – poor African-American and Latino areas have more payday lender outlets than "white" communities of similar incomes.
The National Council of La Raza called the current system a “failure of a state law that was designed to curb the negative effects of these debt trap lenders.”
Payday Lenders Have an Ally in "Debt-Trap Debbie"
Debbie Wasserman Schultz is a Florida representative in Congress and is also the chair of the Democratic National Committee. In spite of Florida's particular payday lender problem, she is fighting, not helping, efforts to rein them in.
Think Progress explains, in "The Official Head Of The Democratic Party Joins GOP Effort To Protect Payday Lenders":
Rep. Debbie Wasserman Schultz (D-FL) is co-sponsoring legislation to delay and permanently muffle pending Consumer Financial Protection Bureau (CFPB) rules to rein in small-dollar lenders that are currently able to levy triple-digit annual interest rates on the nation’s poorest, the Huffington Post reports.
The bill would force a two-year delay of the CFPB’s rules, which are still being drafted. Last spring, the agency set out a framework for its rulemaking process that indicates it is taking a more modest approach than industry critics would prefer. But the bill Wasserman Schultz signed onto would both delay those rules further, and permanently block them in any state that enacts the sort of ineffectual, industry-crafted regulatory sham that Florida adopted in 2001.
One group, Allied Progress, is putting billboards in Wasserman's district, pointing out that she is sabotaging President Obama's payday lending reform efforts. Florida's Sunshine State News writes about the billboard campaign, in "Debbie Wasserman Schultz Targeted in New Billboards":
On Monday, Allied Progress announced it would run two billboards in Wasserman Schultz’s district portraying her as “Debt Trap Debbie” and insisting she doesn’t stand with President Barack Obama on the payday lenders.
“President Obama has shown he’s on the side of hardworking Americans by encouraging the Consumer Financial Protection Bureau to hold payday lenders accountable,” said Karl Frisch, the executive director of Allied Progress.“In a stunning contrast, Rep. Wasserman Schultz has accepted tens-of-thousands of dollars in campaign contributions from these predators – often within weeks of taking official actions to benefit the industry – and is now working with radical conservatives to help gut the CFPB’s efforts to stop the worst abuses of these payday lenders.”
Politico also covers this story, in "Nonprofit group targets Wasserman Schultz over payday lenders":
Allied Progress, a nonprofit research organization that targets special interests, is spending nearly $100,000 in the initial phase of its campaign on the cable buy and digital ads in Washington, D.C., and Florida’s 23rd Congressional District, an area that includes parts of Broward and Miami-Dade counties.
The organization contends Wasserman Schultz has received $68,000 in political donations from payday lenders — including $28,000 during the 2010 election cycle and $5,000 this cycle. On two occasions, Allied Progress said, Wasserman Schultz has received thousands of dollars in political donations soon before or shortly after taking pro-industry action.
“The difference between Debbie Wasserman Schultz’s relationship with payday lenders and the average borrower’s relationship with payday lenders could not be more stark,” said Karl Frisch, executive director of Allied Progress. “Rep. Wasserman Schultz is benefiting greatly while borrowers are left holding the bag. It’s time for her to quit trying to sabotage President Obama’s hard work to hold payday lenders accountable and instead join him in standing up for hardworking Florida families.”
Sen. Elizabeth Warren (D-Mass.) has a few things to say about this, as well. MSNBC has this, in Warren and Wasserman Schultz clash over payday lenders:
The head of the Democratic Party and one of its most popular figures are at odds over the Obama administration’s plans to regulate the payday lending industry.
Rep. Debbie Wasserman Schultz (D-Fla.), the chair of the Democratic National Committee, is co-sponsoring a bill along with several other Florida lawmakers that would water down a forthcoming effort to regulate payday lenders, whose high-interest loans, consumer advocates say, often trap the poor in a cycle of debt. The Floridians want the federal government to instead use an approach tried in their state, which consumer advocates say has done little to protect borrowers.
[. . .] It’s not just Warren. A liberal group paid for electronic billboards in Wasserman Schultz’s south Florida district that say she’s on the side of payday lenders, not President Obama, and label her “Debt Trap Debbie.”
And a coalition of groups, including the Consumer Federation of America, the NAACP, and the National Council of La Raza, wrote a letter to every member of Congress in December, urging them to oppose the legislation co-sponsored by Wasserman Schultz.