Payday Lending in Louisiana Jan Moller jan@labudget.org 225-819-7715

About the Louisiana Budget Project An independent, nonpartisan organization that: Analyzes how state budget decisions impact low and moderate-income families Encourages citizens to be vocal about issues that impact their lives Provides timely research and analysis to drive policy debates An independent, nonpartisan organization that: Analyzes how state budget decisions impact low and moderate-income families Encourages citizens to be vocal about issues that impact their lives Provides timely research and analysis to drive policy debates LBP is located in downtown Baton Rouge and has operated since 2006.

Poverty is a daunting problem Compared to other states, Louisiana has: 3rd highest rate of poverty (nearly 20 percent) 4th highest rate of child poverty (28 percent) 8th lowest median household income (slightly less than $43,000 a year) 12th lowest health insurance coverage, which also puts families at higher financial risk

Recent trends are troubling

State of working is uncertain Wages have been stagnant or falling for years Since 1979, median wages have increased 1 percent, productivity is up 35 percent

Stark disparities remain Continuing racial and gender disparities in education, employment opportunities and wages add another layer of challenges

No easy answers Affordable child care and pre-K can improve outcomes for children and remove barrier to employment for parents, but current programs do not meet current needs Higher education is the key to a good-paying job--yet state support has been slashed 66 percent since 2009, while tuition has spiked

Some programs are helping Louisiana is one of about 25 states with its own Earned Income Tax Credit (EITC) to boost incomes of low-wage workers Currently, Louisiana’s EITC puts $45 million a year back into working families’ pockets But it is the lowest in the nation--3.5 percent of the federal credit compared to national average of 16 percent

What is Payday Lending? Payday loans are high interest loans that vary between $50 and $350. Full payment is due on the individual’s next payday, normally in two weeks. A typical $100 payday loan in Louisiana costs $30 (APR* = 782.14%). So to highlight a few facts from the video: Payday loans are high interest loans that generally vary between $50 and $350 Unlike other types of loans like an auto loan or student loans, payday loans are due in full on a borrower’s next payday, which is normally within two weeks. A typical $100 loan in Louisiana has a $30 fee. The combination of this fee and the short due date means the loan has an annual percentage rate of 782 percent. An annual percentage rate the adjusted value of a loan if applied over an entire year. If you compare a payday loan’s APR to other types of loans, you can see that this is a very expensive form of credit. *APR is the adjusted value of a short-term interest rate if applied over a whole year.

What is Payday Lending Since most payday users live paycheck to paycheck, they cannot afford to both repay the entire loan and still have enough money for necessities like groceries and rent. The average person recycles his loans 9 times per year This customer paid $270 for a single $100 loan. Amount borrowed: $100 Payday Loan Fee: $ 30 Recycled Loans: 9 Total Fees Due: $270 Most people who use payday loans live paycheck to paycheck; thus, they cannot afford to both repay their entire loan and have remaining funds for the bear necessities like groceries and rent. As a result, the average borrower will recycle their loan 9 time each year. Recycling the loan can be either extending the loan due date – which requires another $30 fee – or taking out a payday loan to repay the original payday loan. A person who borrows $100 from a payday lender, pays a $30 fee each time the loan is recycled, and does this 9 times end up paying $270 for a single $100 loan. That’s a raw deal. 10

The Debt Trap As payday users begin recycling their debt… …payday lenders become more profitable. Loans to one-time users 2% New loans made within a two week period 76% Initial loans to repeat users 11% As payday borrowers begin recycling their debt, payday lenders become more profitable. Nearly 76 percent of the payday lending industry’s profits come from new loans that are made to customers who already took a loan two weeks ago. What this graph also shows is that the bulk of payday lending isn’t going for people who need money for one-time emergencies. Those individuals account for only 2 percent of the chart, an extremely small minority. New loans after 14-30 day pause 6% New loans after 30 day pause 5% 11

Payday Lending in Louisiana LA has a high concentration of payday lenders There is one payday lender for every 4,600 citizens. There are four times as many payday lenders as McDonalds. Part of the reason why we are focusing on payday lending in today’s workshop is because the industry is very prevalent in Louisiana: LA has one of the largest concentrations of payday lenders in the U.S. In fact, there is one payday lender for every 4,600 citizens, and four times as many payday lenders in Louisiana as McDonald’s Restaurants. 12

Who’s Likely to Take a Payday Loan Payday lenders come to Louisiana partly because of the profile of our state: Payday lenders are heavily represented in areas with high rates of renters, large populations in poverty, and many African-Americans. That’s because the odds of taking a payday loan are 57 percent higher for renters than homeowners, 62 percent higher for those earning less than $40,000 annually than for those earning more, and 105 percent higher for African-American than for other races/ethnicities. 13

14 [THE MAP WILL VARY BASED ON THE CITY HOSTING THE PRESENTATION] This map, created by LBP in 2011, visually shows the location of payday lenders in [NAME OF CITY]. As you can see, the lenders are highly concentrated in areas with high rates of poverty. The dark green represents communities where more than 30 percent of the residents live below the federal poverty line, the mid green represents 20-30 percent, and the light green represents 20 percent. LBP has interactive maps on its website – labudget.org – that you can use to see the location of payday lenders in your community. The maps compare payday lenders’ locations with poverty rates, household income and race. 14

Effects of Payday Lending In addition to falling into the debt trap, payday borrowers are at a greater risk of – Involuntary bank account loss due to overdraft Higher rates of bankruptcy Delinquency on other bills Payday lending also impacts the community Drains money from local economies Leads to job loss Increased rates of vandalism and foreclosures Earlier I mentioned that people who take payday loans become trapped in cycles of debt. In addition to that, people who take out payday loans are at greater risk of: Losing their bank account to overdrafts Experiencing higher rates of bankruptcy Falling behind on other bills like credit cards and electric payments In addition, payday lending also harms communities by draining money from local economies and causing people to lose their jobs. Neighborhoods with many payday lenders also have higher rates of vandalism and foreclosed homes. 16

Payday Loan Regulations Military Lending Act (2007) APR for consumer credit to service members capped at 36% for traditional payday loans less than 90 days car title loans less than 180 days According to the Department of Defense, “Predatory lending undermines military readiness, harms the morale of troops and their families, and adds to the costs of fielding an all volunteer fighting force.” IF THE MILITARY NEEDS PROTECTION, DON’T YOU?   Now some people have asked, “If payday lending is so bad, why aren’t politicians doing anything to stop them.” The truth is that they are! In fact, the federal government passed a law called the Military Lending Act to reduce predatory payday loans to active service members and their families. According to the federal Department of Defense, predatory lending harms military readiness, reduces morale, and adds to the costs of maintaining our fighting force. If the guys with guns need protection, don’t you? 17

Payday Loan Regulations State’s also regulate payday lending. In fact, 15 states outright ban payday lending, and 8 states regulate it closely. Some of the states that highly regulate or ban payday lending are SEC, bible belt states, including Alabama, Arkansas, Florida, Georgia, and North Carolina. Payday loan regulations vary by state. In the South: Six states allow payday lending (22 nationally), Two states regulate payday lending (8 nationally), and Three states ban payday lending (15 nationally) 18

Louisiana Regulations Deferred Presentment and Small Loan Act Limits payday loans to a maximum of $350. Allows lenders to charge a maximum fee of 16.75 percent, up to $45 Act 668 (2010) increased documentation fee to $10 from $5 Refinance after paying 25 percent of the principal plus additional fees If a consumer defaults on a loan, the lender can: Charge 36 percent interest for the first year Charge 18 percent interest for each following year, or a one-time delinquency fee of $10 or 5 percent of the amount borrowed Louisiana’s payday loan regulations are contained in the Deferred Presentment and Small Loan Act [EXPLAIN TEXT ON THE SLIDE] These regulations do not adequately protect borrowers from becoming trapped in long-term cycles of debt. The next lists better laws that would actually protect payday loan users by keeping them out of cycles of debt. 19

Better Protections Cap payday loan APRs at 36 percent Limit borrowers to six loans per year Restrict lenders from over-concentrating in areas Ban payday lenders from municipalities Create a centralized computer database to track lending Mandate annual reporting of payday lending Require lenders to post consumer warnings [EXPLAIN TEXT ON SLIDE] 20

Alternatives to Payday Lending Nonprofit cash assistance programs Government assistance programs Utility payment assistance programs More affordable credit union or bank products (Caution!) Begin savings plan (find non-profit matching program) Remember, the whole purpose of avoiding payday loans is to protect your wealth. Hence, here are some alternatives to payday lending that you can use if you find yourself in need for credit. [EXPLAIN TEXT ON SLIDE] 21

Alternatives to Payday Lending Payment plan with creditors Paycheck advance from employer Seek help from consumer credit counselor Deal with your debt 22

Recap of Today’s Workshop We discussed four principles for building wealth: Spend less money than you earn Save as much as possible Build good credit Protect your wealth when you accumulate it We discussed the dangers of payday loans and alternatives to predatory lending 23

Payday Lending in Louisiana David Gray / david@labudget.org Ashley Herald / ashley@labudget.org Emma Dixon / emeralddixon@hotmail.com