States struggle to regulate the vicious circle of payday loans
New York State prosecutors indicted three executives for allegedly greatly exceeding state limits on interest rates on short-term loans, through often poorly regulated payday loans, reports the New York Times.
The rare case highlights the risk that customers may face with payday loans which can lead them to serious financial hardship. It also sheds light on a multibillion-dollar industry that has rarely been the subject of criminal action, the Times points out.
According to the Consumer Financial Protection Bureau, payday loans typically cost less than $ 500 and are due on the borrower’s next payday. Loan financing fees can range from $ 10 to $ 30 per $ 100 borrowed, with a typical two-week loan amounting to an annual percentage rate (APR) of nearly 400%, compared to 12% to 30%. for credit cards.
Carey Vaughn Brown is said to have owned a dozen companies in the US and overseas in an attempt to dodge US authorities while controlling all parts of an abusive lending process, including granting interest rate loans exorbitant interest between 350% and 650% and collecting automatic bank payments from borrowers. accounts.
Business Insider contacted Brown’s attorney for the case, Paul Shechtman, for a comment and will update if we hear back. He told the Times his client “has acted in good faith and is eager to show his innocence.
Although New York City has laws capping interest rates at 25%, these fees are rare as lenders continue to get away with illegally extending loans at much higher rates. In total, 18 states and the District of Columbia are banning excessively high-cost payday loans through various measures, according to the Consumer Federation of America. But 32 states still allow payday loans at triple-digit interest rates, some without even setting a rate cap.
The biggest problem for payday loan clients is what happens when they miss payments, leaving them vulnerable to fees they might not be aware of and huge interest levels like John Oliver As pointed out in a segment of his talk show “Last Week Tonight.” Over 75% of the payday lending industry’s lending volume is generated by borrowers who are forced to borrow again before their next pay period, Oliver reported.
A payday loan company training manual features a pie chart that clearly shows a vicious cycle that customers may face. “A real Ace Cash training manual for employees features a diagram that starts with the client applying for an ACE loan, goes through them spending the money from that loan, being unable to repay it, and then being forced to apply. an ACE loan. again, ”John Oliver said on his show.
We’ve reached out to ACE Loan to give them the opportunity to comment on the Oliver segment, and we’ll update this post if we have any news.
The problem persists because payday loan companies are finding ways to get around the law in many states through minor changes. For example, businesses in Ohio have registered as mortgage lenders to evade legislation targeting businesses licensed as short-term lenders – while maintaining the same practices. “For regulators, it’s like playing legislative pranks,” Oliver said. “Just when you think you’ve run over them, they appear elsewhere with a completely different outfit.”
This vicious cycle impacted poet and author Joylynn M. Jossel of Columbus, Ohio, after borrowing a few hundred dollars but was unable to pay it back two weeks later, DailyFinance reported. As she could not repay her debt on time, she fell prey to excessive interest rates.
Jossel then borrowed from another payday lender to pay off her first loan, creating a slippery slope that forced her to owe money to four different lenders. When she paid off her loans, she immediately had to take out another loan to pay her bills. Eventually, she was paying $ 1,800 for these loans every month.
This led to harassment from collection agencies. “They tell you everything to get you in and pay the check that hasn’t cleared,” Jossel told Daily Finance. “They will say to you, ‘You are a criminal, you wrote a bad check. It is against the law, it is a crime, you are going to jail.’ They call all your references and your work. It’s horrible. I felt so suffocated. I felt like I was in this black hole that I just couldn’t get out of. “
Jossel escaped the cycle after receiving money from an unrelated civil lawsuit. “I have never, and I mean never, thought twice about visiting a payday loan center in my life,” she said.