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Dr. Frederick Haynes: No Economic Justice With Triple-Digit Payday Loans

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By Dr. Frederick D. Haynes III

The recent unveiling of the national monument honoring the late Dr. Martin Luther King, Jr. reminded our nation of the leadership that led to people of all races and walks of life recognizing that America needed to live up to its own creed. The widespread news coverage evoked memories that many of us continue to hold dear – especially the words of our martyred prophet.

Yet while we remember his words, we must also embrace his works, continuing the quest for freedom and his now world-famous Dream. In 2011, it is time for this nation to finally reckon with the financial injustices allowed to continue. As a nation and as a people we must find the will and the way to stop policies and practices that exploit people of modest and limited financial means.

One of the most egregious exploitations is an emerging trend among major banks to offer advance deposit loans or bank payday loans. When the bank repays itself, the customer is left with about half of the monies from that deposit, forcing yet another cycle of loan and interest charges to cover other living expenses. Although Wells Fargo was the first major bank to offer this type of loan, Fifth Third Bank, Regions Financial and U.S. Bank all now offer these loans.

Only bank customers with direct deposits from employers or government benefits have access to these loans. Nearly 25 percent of the transactions occurred with Social Security recipients. Further, older customers were 2.6 times more likely than others to use this type of loan.

If you’re thinking that this loan sounds like a street corner payday loan, you’d be right. Just like storefront payday loans, these newer bank payday loans charge triple digit interest too. A key difference is that while 17 states and the District of Columbia have enacted interest rate caps of 36 percent or less, federally regulated banks appear somehow exempt from state laws.

In the meantime, storefront payday lenders are more common than fast food restaurants – especially in my church’s neighborhood. There are 20 payday loan stores within a five-mile radius on my church. As a pastor and community activist, I have personally seen how quick cash payday loans wind up placing borrowers in financial debt shackles.

More than a year ago, the Center for Responsible Lending warned against the dangers of bank payday loans. According to CRL, although marketed as a short-term loan, these bank loans lead to an average of 16 loans and 175 days of indebtedness – twice as long as the maximum length of time advised by the Federal Deposit Insurance Corporation (FDIC).

If Dr. King were alive today, I believe he would decry the lending practices that rob the poor of their few dollars and make rich those who prey upon others’ financial misfortunes. Nationwide, 12 million Americans are entrapped in some kind of payday loan with interest rates of 400 percent or even higher. Another CRL research finding was that this deceitful lending product reaps $5 billion each year. The vast majority of payday lending – 76 percent – is by borrowers paying off one loan and quickly taking out another.

This practice of lending is especially troubling when one considers that banks, according to the Federal Reserve, are able to receive loans with interest rates of less than one percent.

At a time when 14 million Americans are unemployed – 44 percent of them for 27 weeks or longer, and another 1.1 million discouraged workers who have stopped looking for jobs because they feel none are available, it is simply immoral to allow this kind of legalized loan-sharking to prey upon people who find themselves a few dollars short of needed cash.

With the enactment of Dodd-Frank’s financial reform, as a nation we must find the collective will to protect those who toil at modest wages. Nor should we tarnish what ought to be golden years for those who have already devoted their lives to raising families and earning an honest wage.

As Dr. King wrote in his 1963 Letter from a Birmingham Jail, “We are caught in an inescapable network of mutuality, tied in a single garment of destiny. Whatever affects one directly, affects us all.”

Ending oppressive, predatory lending is the right thing to do for all Americans.  The only remaining question is whether we have the national will to do so.

Dr. Frederick D. Haynes, III is Senior Pastor of the Friendship-West Baptist Church in Dallas Texas.  Pastor Haynes champions racial, economic and social justices, using his books Soul Fitness, a daily devotional and Healing Our Broken Village.

  • Mike H

    Good commentary on a growing issue in urban areas, but it all goes back to the polls. We have to hold City Council representatives and the Plan Commission accountable for giving these type of establishments the green light to operate in our neighborhoods. They don’t exist in certain areas because the residents won’t allow them to exist and if their elected officials make it possible for them to operate then they will replace that elected official. We are empowered to stop this trend but after the businesses open is not the way to do it. Prevention is the key and that comes at the polls.

  • Anonymous

    Muhammad Yunus earned a Nobel prize for making “microcredit” available to the poorest of the poor in Bangladesh and throughout the world. There’s no reason that can’t work here, but a national rate cap will certainly make it impossible. Poor folks deserve access to credit like anyone else in this economy. The focus must be on making better options, and not on banning existing ones.

  • LM

    The answer lies within us as a community. For example, consider all the churches in your state perhaps within your community, or churches that has a population that is adversely affect by economic injustice, why not develop a credit union to service this under presented community? These above-mentioned churches can then deposit all of their monies into the credit union, thereby having a source of funds to lend to the community.

  • A F “Bob” Blair Jr

    The problem is much worst than you state! Unfortunately, the public is not aware (and rarely understands) that the method currently used in determining the Annual Percentage Rate (APR) is what is stated in the Truth in Lending Act (TILA) of 1968, Appendix J(b)(1) the NOMINAL Annual Percentage Rate determined by multiplying the interest rate for a unit- period by the number of unit-periods in a year. That method is also called the SIMPLE-INTEREST (SIAPR) method. In the stated example, no data is given other than 400% interest. It is almost certain that the rate represents the classic example of a 14 day loan with a 15% rate for a two week (14 day) period, as $15 interest on $100 (or anything with that 15% ratio.) That NOMINAL, Simple-Interest APR (SIAPR) is 391.071%, calculated (using Excel math symbols: add +, subtract -, multiply *, divide /, compound ^) as 15% *365/14. The mathematically-true, Compounded APR (CAPR) is 3,723.661%, calculated as (((1+(15/100))^(365/14))-1)*100. TILA allows a tolerance of error in expressing the SIAPR of one eight of one percent (0.125%). The mathematically-true CAPR is not merely slightly over one of the tolerance from the SIAPR, it is 26,600 of the tolerance over the SIAPR, calculated as (3,723.661%-391.071%)/0.125%. Astronomically unconscionable! Black’s Law Dictionary and Webster’s Dictionary, both define “Nominal” as “not real or actual”. That should give the reader of TILA a clue that something is amiss. The method in TILA should be modernized to the mathematically-true Compounded APR.

  • http://www.benjihamilton.com Benji Hamilton

    The reason churches will not offer “microcredit” is the same reason that these payloan places charge such high interest rates…the risk associated witht lending the money. The money they make is the result of them betting that the people borrowing this money will not be able to pay it all back on the due date, which happens often. Few churches have enough depth in their coffers to be able to lend money at such a risk.
    Solution seems to be more of the church taking a more active role in addressing the needs of the community in order to prevent the need for a loan to begin with.

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