RESOURCE GUIDE: PROTECTIONS FROM PREDATORY SHORT-TERM LOANS 1 ASSETS & OPPORTUNITY SCORECARD OVERVIEW Predatory lending strips wealth from financially vulnerable families and leaves them with fewer resources to devote to building assets and climbing the economic ladder. Predatory lending spans a range of industries and products from the housing and automobile industry to credit cards and student loan products. Predatory short-term loans are the subset of small dollar credit products that strip wealth from low- and moderate-income consumers. Lenders of these products charge exorbitant fees and interest rates, lend without regard to borrowers ability to repay and continually refinance loans over a short period of time. 2 Three of the most prolific and wealth-stripping short-term loan products are payday loans, car-title loans and abusive installment loans. Payday and car-title loans are small, short-term loans of a few hundred dollars with average fees and interest the equivalent of an annual percentage rate (APR) of around 400%. They are marketed to cash-strapped customers as emergency loans to cover short-term expenses. Payday loans are secured by holding the borrower s signed personal check or obtaining electronic debit access to their bank account. Car-title loans are secured by signing over the title of the borrower s automobile, and in some states handing over a set of keys. If the borrower fails to pay back a car-title loan, the lender can take and sell the automobile, and in some states even keep the surplus value of the car. Installment loans range from a few hundred dollars to multiple thousands of dollars and are typically made by finance companies. Unlike payday and car-title lenders, installment lenders sometimes assess the ability of the borrower to repay, which means interest rates may be lower for consumers with better credit. Although installment loans are not an inherently predatory product, they become predatory when finance companies charge excessive fees and interest rates and continually pressure customers to refinance and take out new loans. Small dollar installment loans are generally targeted at low- and moderate-income families. Borrowers who use predatory short-term loan products often pay more for loans than other consumers. For example, a typical payday loan borrowertakes out eight loans of $375 each per year and spends $520 on interest. 3 Although the payday lending industry claims these loans are one-time loans, research has shown that the average payday borrower remains in debt for more than half of a year double the length of indebtedness recommended by the Federal Deposit Insurance Corporation (FDIC). 4 Only 2% of payday loans go to borrowers who can afford to pay off the loan the first time. 5 The average car-title loans borrower is similarly unable to pay off the loan the first time. The chief executive of the largest car-title lender in the country stated in court papers that the average customer renews a car-title loan eight times, generating 1 CFED acknowledges the expert assistance of Uriah King of the Center for Responsible Lending and Carolyn Carter of the National Consumer Law Center. Jean Ann Fox of the Consumer Federation of America also contributed to this document. 2 Leah Plunkett, Emily Caplan, Nathanael Player, Small Dollar Loan Products Scorecard Updated, (Boston, MA: National Consumer Law Center, May 2010). 3 Nick Bourke, Alex Horowitz, and Tara Roche, Payday Lending in America: Who Borrows, Where They Borrow, and Why, (Washington, D.C.: The Pew Charitable Trusts, 2012) http://www.pewstates.org/uploadedfiles/pcs_assets/2012/pew_payday_lending_report.pdf. 4 Uriah King and Leslie Parrish, Payday Loans, Inc: Short On Credit, Long On Debt, (Durham, NC: Center for Responsible Lending, 2011). 5 Uriah King and Leslie Parrish, Phantom Demand: Short-Term Due Date Generates Need For Repeat Payday Loans, Accounting for 76% Of Total Volume, (Durham, NC: Center for Responsible Lending, 2009).
significant additional interest costs. 6 Predatory small-dollar lenders are disproportionately concentrated among communities of color. In states such as Texas, North Carolina, California and Arizona, people of color make up a dramatically disproportionate percentage of all payday borrowers as compared to the racial composition of the area population. 7 Predatory short-term lending not only hurts individual consumers, it also drains millions of dollars from communities every year. For instance, one study found that payday lending in California cost low-income African-American and Latino communities $247 million in fees over the course of a year. 8 Recognizing the predatory nature of these products, in 2006 the U.S. Department of Defense made it illegal to make loans greater than 36% APR to active-duty service members and their families. 9 In July 2011 the U.S. Consumer Financial Protection Bureau (CFPB) officially opened its doors. While the CFPB cannot limit interest rates on short-term loans as states can, it does have the authority to take other steps to ensure these loans do not turn into long-term debt, such as (1) limiting the amount of time a borrower can remain indebted in high-cost loan; (2) setting sustainable loan terms, such as providing the borrower adequate time to repay a loan and prohibiting lenders from taking a borrower s personal check or ACH authorization to secure the loan; (3) developing responsible underwriting standards that take the borrower s income and other obligations fully into account; and (4) facilitating efforts to help households save. 10 WHAT STATES CAN DO Many states have already recognized the negative impact of predatory small dollar lending. The majority of states regulate these practices in some way, although laws offer varying degrees of protection. While there are a number of strategies to curb payday and car-title lending, by far the most effective is to prohibit these loans outright or to establish a fair playing field by imposing an APR cap of 36%. Research suggests that state efforts to address high-cost payday lending without such rate caps have been largely unsuccessful. 11 Unlike most payday and car-title loans, small dollar installment loans when responsibly regulated can be a safe product. Therefore, rather than prohibiting them altogether, the best policy is to cap these loans at 36% APR. The FDIC recently found that small dollar lenders can safely and profitably lend to consumers at an APR of 36% or less. 12 In addition to prohibiting or capping predatory short-term loan products, states can strengthen their Unfair and Deceptive Acts and Practices (UDAP) statutes to ensure that they cover predatory short-term lending. State UDAP laws protect consumers from a range of predatory, deceptive and unscrupulous business practices. These laws offer basic justice to consumers if they are cheated or deceived by a lender. Essentially, UDAP statutes help ensure that these lenders are honest, transparent and accountable in their day-to-day 6 Affidavit of John Robinson, President of Titlemax Holdings LLC, U.S. Bankruptcy Court for the Southern District of Georgia, Savannah Division (April 20, 2009). 7 Aracely Panameno and Keith Corbett, Wealth Stripping Payday Loans Trouble Communities of Color, (Durham, NC: Center for Responsible Lending, 2008). 8 Wei Li, Leslie Parrish, Keith Ernst and Delvin Davis, Predatory Profiling: The Role of Race and Ethnicity in the Location of Payday Lenders in California, (Durham, NC: Center for Responsible Lending, 2009). 9 John Warner National Defense Authorization Act of 2006, Pub. L. No. 109-364, 670 (2006). See, e.g., Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 72 Fed. Reg. 50,580, 50,581-83 (Aug. 31, 2007). 10 Uriah King and Leslie Parrish, Payday Loans, Inc: Short On Credit, Long On Debt, (Durham, NC: Center for Responsible Lending, 2011). 11 Uriah King and Leslie Parrish, Springing the Debt Trap: Rate Caps are Only Proven Payday Lending Reform, (Durham, NC: Center for Responsible Lending, 2007). 12 A Template for Success: The FDIC s Small-Dollar Loan Pilot Program, FDIC Quarterly: 2010, Volume 4, No. 2, http://www.fdic.gov/smalldollarloans/. 2 RESOURCE GUIDE: PROTECTIONS FROM PREDATORY SHORT-TERM LOANS
CFED: ASSETS & OPPORTUNITY SCORECARD operations. However, some states statutes do not cover small dollar credit transactions; they either exempt most lenders and creditors or have significant gaps or ambiguities. States should close loopholes and ensure that all small dollar credit transactions, particularly payday and car-title lending, are covered under UDAP statutes. 13 ELEMENTS OF A STRONG POLICY Based on the Center for Responsible Lending s and National Consumer Law Center s expertise and work in the field of responsible lending policy, CFED considers a state s predatory small dollar lending policies strong if they meet the following criteria: 1. Does the state protect consumers from payday lending? States should protect consumers by prohibiting payday lending altogether or imposing an APR cap of 36% or less. 2. Does the state protect consumers from car-title lending? State should protect consumers by prohibiting car-title lending altogether or imposing an APR cap of 36% or less. 14 3. Does the state protect consumers from predatory short-term installment loans? States should impose an APR cap of 36% or less on $500, 6-month unsecured installment loans. 15 4. Does the state include short-term lending in basic consumer protection laws? States should ensure that their Unfair and Deceptive Acts and Practices statutes cover predatory short-term lending. STRENGTH OF STATE POLICIES Legend D.C. Very strong policy Strong policy, but some room for improvement Some policy, but much room for improvement Minimal policy Weak or no policy CFED evaluated the strength of each state s policies that protect consumers from predatory short-term lending against the four criteria described in the Elements of a Strong Policy section above. Ten states have prohibited or capped all three types of predatory loan products and include short-term lending in basic consumer protection laws. Fifteen states do not effectively regulate any of the three predatory loan products, 13 For more information about state UDAP laws, see: Carolyn Carter, Consumer Protection in the states: A 50-State Report on Unfair and Deceptive Acts and Practices Statutes, (Boston, MA: National Consumer Law Center, 2009). 14 APR calculations are based on a $300, one-month car-title loans, as this is the most common type of car-title loans and it is the loan examined by NCLC in the Small Dollar Loan Scorecard. 15 CFED examines the $500, 6-month loans because most states have tiered pricing systems for small dollar installment loans that vary by the size of the loans. 3
although nine of these states include short-term lending in basic consumer protection laws. All other states protect consumers against some, but not all, predatory short-term loan products. The table below shows which criteria each state met. CFED uses the following icons to denote the strength of state policies: Strength of State Policies Legend State policy meets 4 criteria State policy meets 3 criteria State policy meets 2 criteria State policy meets 1 criteria State policy meets no criteria State against payday lending? 16 against car-title lending? 16 against short-term installment loans? 16 Do state UDAP statutes cover short-term consumer loans? 17 Policy rating Alabama No (456%) No (300%) No (94%) Yes Alaska No (443%) Yes (Prohibited) Yes (36%) Yes Arizona Yes (36%) No (204%) No (54%) Yes Arkansas Yes (17%) Yes (Prohibited) Yes (17%) Yes California No (460%) Yes (Prohibited) No (45%) Yes Colorado Yes (Prohibited) 18 Yes (Prohibited) No (91%) Yes Connecticut Yes (30%) Yes (Prohibited) Yes (29%) Yes Delaware 19 No (No cap) No (No cap) No (No cap) Yes District of Columbia Yes (24%) Yes (Prohibited) Yes (24%) Yes Florida No (342%) Yes (30%) Yes (30%) Yes Georgia Yes (Prohibited) No (304%) No (44%) No Hawaii No (460%) Yes (Prohibited) Yes (24%) Yes Idaho No (No cap) No (No cap) No (No cap) Yes Illinois No (404%) No (No cap) No (99%) Yes Indiana No (391%) Yes (Prohibited) Yes (36%) Yes Iowa No (358%) Yes (35%) Yes (36%) Yes 16 Leah Plunckett and Ana Hurtado, Small-Dollar Loans, Big Problems: How States Protect Consumer from Abuses and How the Federal Government Can Help, Suffolk University Law Review, Vol. XLIV (2011):31. Additional updates provided by Uriah King at the Center for Responsible Lending and Jean Ann Fox at the Consumer Federation of America. Payday loan maximum APR caps are based on a $250, two-week payday loan. Car-title loan maximum APR caps are based on a $300, one-month auto-title loan. Small dollar installment loan maximum APR caps are based on a $500, six-month installment loan. 17 Data based on a state-by-state analysis of UDAP statutes and past court decisions from Carolyn Carter at National Consumer Law Center. 18 Two-week payday loans are effectively prohibited in Colorado; however, the APR for a $250, six-month, lump sum repayment payday loan (the minimum length permitted by law) is 145%. 19 Delaware enacted legislation in 2012 limiting the number of short-term loans a consumer may borrow in a 12-month period to five. The law also expands the definition of short-term consumer loans to include all loans under $1,000 and creates a database that tracks the number of short-term loans consumers obtain. 4 RESOURCE GUIDE: PROTECTIONS FROM PREDATORY SHORT-TERM LOANS
CFED: ASSETS & OPPORTUNITY SCORECARD State against payday lending? 16 against car-title lending? 16 against short-term installment loans? 16 Do state UDAP statutes cover short-term consumer loans? 17 Policy rating Kansas No (391%) No (No cap) Yes (36%) Yes Kentucky No (471%) Yes (36%) No (42%) Yes Louisiana No (574%) Yes (Prohibited) No (81%) No Maine Yes (30%) Yes (Prohibited) Yes (30%) Yes Maryland Yes (33%) Yes (Prohibited) Yes (33%) Yes Massachusetts Yes (23%) Yes (Prohibited) No (37%) Yes Michigan No (375%) Yes (Prohibited) No (43%) No Minnesota No (235%) No (116%) No (51%) Yes Mississippi No (572%) No (300%) No (52%) No Missouri 20 No (1955%) No (No cap) No (No cap) No Montana Yes (36%) Yes (36%) Yes (36%) Yes Nebraska No (460%) Yes (Prohibited) No (47%) No Nevada No (No cap) No (No cap) No (40%) Yes New Hampshire Yes (36%) No (300%) Yes (36%) No New Jersey Yes (30%) Yes (Prohibited) Yes (30%) Yes New Mexico No (409%) No (No cap) No (No cap) Yes New York Yes (25%) Yes (Prohibited) Yes (25%) Yes North Carolina Yes (36%) Yes (Prohibited) No (54%) Yes North Dakota No (520%) Yes (Prohibited) Yes (28%) Yes Ohio Yes (28%) 21 Yes (Prohibited) 22 No (70%) Yes Oklahoma No (396%) Yes (Prohibited) No (46%) Yes Oregon Yes (36%) 23 No (154%) Yes (36%) Yes 20 In 2012, Missourians for Responsible Lending submitted 180,000 signatures to the Secretary of State for a ballot initiative that would cap payday loans at 36% APR. Following a series of legal battles between consumer advocates and the payday lending industry, the issue did not make it on the November ballot. 21 Although Ohio has a 28% annual interest rate cap for payday loans, many payday lenders in the state have stayed in business through a loophole: using licenses issued under the state s small loan and mortgage loan acts. Measures are being taken to address this problem, including efforts by the Ohio Department of Commerce to revoke several lenders licenses and proposed legislation that aims to close this loophole. 22 Although auto-title lending is not authorized under Ohio law, some auto-title lenders are operating under statutes not intended to regulate their practices and may be operating illegally. 23 While Oregon successfully lowered its rate cap to 36% APR, lenders may still charge initial loan fees of $10 per $100 borrowed, up to $30 higher than in any other state with a rate cap. As a next step, Oregon should further strengthen its payday lending policy by closing this loophole. 5
State against payday lending? 16 against car-title lending? 16 against short-term installment loans? 16 Do state UDAP statutes cover short-term consumer loans? 17 Policy rating Pennsylvania Yes (24%) Yes (Prohibited) Yes (26%) Yes Rhode Island No (261%) Yes (Prohibited) Yes (30%) No South Carolina No (391%) No (117%) No (71%) Yes South Dakota No (No cap) No (No cap) No (No cap) Yes Tennessee No (313%) No (264%) No (87%) No Texas No (No cap) No (No cap) No (84%) No Utah No (No cap) No (No cap) No (No cap) No Vermont Yes (18%) Yes (Prohibited) Yes (24%) Yes Virginia No (610%) Yes (Prohibited) 24 Yes (36%) No Washington No (390%) 25 Yes (Prohibited) No (39%) Yes West Virginia Yes (31%) Yes (Prohibited) No (38%) No Wisconsin No (No cap) No (No cap) 26 No (No cap) No Wyoming No (313%) Yes (Prohibited) Yes (36%) Yes STATE PRECEDENTS: A SUCCESSFUL VOTER BALLOT INITIATIVE TO CAP PREDATORY LENDING IN MONTANA 27 During every legislative session from 2003 to 2009, advocates in Montana worked with legislators to introduce bills to cap interest rates on payday and car-title loans. In every instance, the bills faced intense opposition from industry lobbyists and died after close votes in committee. In 2009, a committed statewide coalition of nonprofit, labor and faith organizations many of the same players involved in previous efforts formed the 400% Interest is Too High - Cap the Rate Coalition, dedicated to ending predatory short-term lending in Montana. Publicly the coalition focused on payday and car-title lending, though it also explored remedies to address other types of predatory short-term lending practices. After another unsuccessful legislative session in 2009, the Cap the Rate Coalition decided to pursue a completely different strategy a voter ballot initiative to cap interest rates on payday and car-title loans. In fall 2009, the Coalition contracted with M+R Strategic Services to develop a campaign plan and guide the 24 The title loan product evaluated by the Scorecard is prohibited in Virginia as of October 1, 2010. However, title lending at triple digit APRs is still permitted for other title loan products in this state. 25 Washington limits borrowers to eight payday loans in a 12-month period. This has substantially decreased payday loan volume and the number of lenders in the state. For more information, see 2010 Payday Lending Report, Department of Financial Institutions, 2010. 26 In 2010, Wisconsin Governor Jim Doyle partially vetoed an industry-friendly payday and car-title bill. The Wisconsin Governor s unique line-item veto powers allow for the deletion of individual provisions or even words of a bill. Governor Doyle s partial veto effectively capped interest rates at 18% annually. However, in 2011 the Joint Budget Committee attached what was effectively a repeal of the 2010 legislation limiting car-title loans in the Wisconsin s omnibus budget bill and was ultimately passed by both legislative chambers and signed by the new Wisconsin Governor. 27 CFED thanks C.B. Pearson and Matt Leow of M+R Strategic Services and Nicole Rush and Linda Reed of the Montana Community Foundation for their contributions to this section. 6 RESOURCE GUIDE: PROTECTIONS FROM PREDATORY SHORT-TERM LOANS
CFED: ASSETS & OPPORTUNITY SCORECARD Coalition through the ballot initiative process including filing the initiative, gathering the signatures and conducting the fall campaign. In January 2010, the coalition brought in Lake Research Partners to conduct an opinion poll on the issue. The poll, which surveyed 600 likely voters across the state, gauged public support of a 36% rate cap on payday and car-title loans, identified strategic spokespeople, and tested arguments for and against such a rate cap. Seventy-five percent of respondents voiced their support of a rate cap, while 16% opposed it. Most impressively, 63% of respondents strongly supported a cap, while just 9% strongly opposed. These results encouraged the coalition to move forward on drafting ballot language and filing it with the secretary of state. In April 2010, the Secretary of State approved the ballot language and petition form; they were circulated as Initiative Number 164 (or I-164). This approval marked the beginning of signature gathering, a process that would take eight weeks. In 2010, proposed initiatives were required to receive 24,337 valid signatures as well as signatures from 5% of voters in at least 34 legislative House districts. The Coalition submitted over 37,000 signatures, 27,421 of which were deemed valid after review by the county election offices and the Secretary of State. Additionally, the Coalition received enough signatures to qualify 54 House districts, well more than the required 34. Because the opposition understood that I-164 would probably be approved by the voters if it made it to a vote, opponents spent more energy filing complaints against the I-164 campaign than campaigning to deliver a message to the voters. These complaints took two main forms: campaign finance complaints and legal complaints. The Cap the Rate Coalition was able to weather these storms, though the opponents were successful in draining time and resources during a critical time in the campaign. The Cap the Rate Campaign began focusing its efforts on the November general election. During this time, the campaign used a variety of techniques to communicate about and build support for I-164. Much of the work was focused on an earned media strategy. However, the campaign also used paid media, conducted a successful online and social media strategy, and used traditional organizing techniques such as face-to-face meetings, get-out-the-vote calls and literature drops. An impressive 72% of voters supported I-164 in the November election. Additionally, support was geographically widespread: a majority voted for I-164 in every county of Montana. As a result of the successful initiative effective January 1, 2011 payday lenders, car-title lenders, installment lenders and consumer loan licensees in Montana may only charge 36% APR on loans. FIVE LESSONS FROM MONTANA FOR A SUCCESSFUL BALLOT INITIATIVE CAMPAIGN 1. Form a committed coalition of supporters. Make sure your coalition includes highly regarded nonpartisan organizations. In Montana, the Cap the Rate Coalition included both public and private organizations, some with widely varying missions and advocacy agendas, who were able to unite around the payday lending issue. These groups worked effectively together to fund, staff and steer the campaign to victory. 2. Gather information before you act. Collect information on where voters stand before developing a strategy or proposing initiative language. The poll that established the opinions of Montana voters on payday lending influenced every aspect of campaign strategy and gave the Cap the Rate Coalition confidence that they would succeed. 7
3. Develop compelling and concise ballot and voter information language. The language should clearly convey to voters the intent and effect of the initiative. Carefully crafting language on the front end can help prevent the opposition from distorting the initiative s intent later on down the line. 4. Enlist supporters. The Coalition created a 1,000 Friends initiative, which recruited people from across Montana who publicly endorsed I-164. These supporters assisted the campaign by writing letters to newspapers, appearing at campaign events and serving as media spokespeople. 5. Prepare for the opposition. Take great care to ensure that signatures gathered for the petition are valid and that scrupulous records of the signature gathering effort are kept. This step is crucial for defending the campaign against legal attack by the opposition. STATE PRECEDENTS: DEFENDING INSTALLMENT LOAN PROTECTIONS IN NORTH CAROLINA 28 North Carolina has been a leader in efforts to protect consumers from predatory lending for more than a decade. In response to the large number of abusive home loans that lenders and housing groups witnessed at the time, allies in North Carolina first came together in the mid-1990s to form the North Carolina Coalition for Responsible Lending. Today, the Coalition is an alliance of more than 200 North Carolina organizations, representing over 3.5 million dedicated to the principles of responsible lending. In 1999, the Coalition spearheaded an effort that helped pass the North Carolina anti-predatory lending law, which was widely praised as the toughest law against predatory lending in the country. Following that success, in 2001 North Carolina became the first state in the country to close down the payday lending industry, by letting legislation that allowed payday loans to expire through a sunset provision. Since then, the Coalition has been actively working to protect and, when necessary, update the state s laws so that they stay abreast of ever-evolving predatory practices. One of these laws is the Consumer Finance Act, which regulates small dollar loans up to $10,000. The Act limits the interest rate consumer finance companies can charge, restricts the amount and number of processing fees, and bans late fees, modification and deferment fees. The Coalition has worked in recent years to defend this Act from attack by strong industry opponents. The installment loan industry in North Carolina is made up of consumer finance companies that range from large players like Citi Financial and American General to smaller companies with only a few offices. Although small dollar installment loans are not an inherently predatory product, consumer advocates in North Carolina believe that they need to be regulated to prevent fees from skyrocketing and to limit the amount of repeat borrowing due to inability to repay the loan. The consumer finance industry has been lobbying North Carolina legislators to raise the limit on interest rates and allow additional fees for more than 30 years. With industry support, legislators introduced bills in each the past five legislative sessions prior to 2011. These bills did not get much traction since the North Carolina legislature was controlled by Democrats. However, in 2011, Republicans gained control of both legislative houses. Some in the new majority were sympathetic to the industry s arguments, which increased the likelihood of passage of industry-backed legislation to completely restructure the Consumer Finance Act. These changes would significantly raise interest rates and fees on small-dollar installment loans. 28 CFED thanks Chris Kukla of the Center for Responsible Lending for his contributions to this section. 8 RESOURCE GUIDE: PROTECTIONS FROM PREDATORY SHORT-TERM LOANS
CFED: ASSETS & OPPORTUNITY SCORECARD Industry groups hired a team of lobbyists to push for the legislation. The Coalition for Responsible Lending came out against the bill. Influential members of the Coalition, including the NC Justice Center, AARP, NAACP and Credit Counseling Agencies of North Carolina publicly opposed the bill and published op-eds, articles, and letters publicizing their views. One of the turning points in the fight occurred when the military opposed the bill. Base commanders from all military and coast guard bases in the state publicly opposed the bill, along with representatives from the U.S. Department of Defense and Navy Marine Corps Relief Society. High ranking members came to the statehouse to testify against the bill, describing how higher interest rates would hurt military families. Because young enlisted personnel have uneven income that rises when deployed and falls when not deployed, they are more vulnerable to getting trapped in a cycle of debt. Military opposition generated significant media coverage, which helped sway public opinion against the bill. The North Carolina Policy Watch also conducted a poll to gauge support for the bill. The poll found overwhelming opposition to raising interest rates: 84% of respondents did not support raising rates. The poll also proved that this was a bipartisan issue: 82% of Republicans and 83% of Democrats opposed raising rates. Equally important was advocates access to data on the small-dollar loan industry. For example, advocates used a study commissioned by the North Carolina Commissioner of Banks, which found that the smalldollar loan industry was already profitable and concluded that no change was needed to North Carolina s current laws. Yet, despite intense public opposition, the bill advanced in the legislative process, passing the House by a slim margin. However, it did not progress much further. Two weeks after the House vote, the House Speaker Pro Tempore changed his vote from yes to no, saying that he upon further reflection he voted the wrong way. When the bill was received in the Senate, the bill was sent to the Senate Rules Committee. As of this writing, the bill is still play; however, the Senate Rules Committee Chairman stated in a recent blog post that the bill will most likely die something advocates hope is true. MAKING THE CASE: KEY ELEMENTS OF A SUCCESSFUL CAMPAIGN 1. Build a coalition. As with all policy campaigns, strength in numbers is key. Seek out other advocates and coalitions likely to know about and support lending reform. Think creatively about potential partners to approach; while it is important to secure the support of the usual suspects already engaged in similar work, you should also consider reaching out to less traditional allies in the public, private and nonprofit sectors. 2. Understand the opposition. Advocates for lending reform usually face substantial opposition from powerful, vocal and well-resourced industry players, such as trade associations. The importance of anticipating and preparing for this opposition cannot be underestimated. It is, however, also important to keep the lines of communication open between industry and advocates, as you will likely be in intensive negotiations with your industry counterparts throughout the legislative process. 3. Do the research. In order to make a compelling argument for lending reform, it will be essential to document the extent of the problem in your state as completely as you can, using the most reliable data possible. While anecdotal evidence can be a powerful tool to illustrate the impact of predatory lending on consumers, it is no substitute for quantitative data. Some states require requires lenders and brokers to report individual-level consumer loan data to state enforcement agencies. 9
Where possible, explain not only the prevalence of the problem (e.g., the number of consumers taking out predatory loans) but also the associated cost (e.g., the difference in payments for a consumer with a predatory loan compared to a more reasonably priced loan product). An excellent resource on state-by-state small dollar predatory lending data, including the costs of payday lending to consumers, is available through the Center for Responsible Lending and Pew s Safe Small-Dollar Loans Research Project.. 29 4. Enlist the experts and become one yourself. Predatory small dollar lending is complicated, and advocates who engage in lending reform efforts often find that extensive technical expertise is required in a number of areas, including banking and lending, consumer protection, and general matters of law. If you are not a subject matter expert in these areas, it will be critical to seek out allies with strong experience who can assist you in navigating the complexities of the issues. This is particularly important as legislation is being crafted. Where predatory lending is concerned, the devil is in the details, and a seemingly minor nuance in the construction of legislative language can result in a major unintended loophole for predatory lenders if it is not caught and remedied. Having the right advisory team in place (and ensuring that key advocates understand the technical details) will help states develop stronger legislation and negotiate more effectively. 5. Balance internal and external strategies. Every campaign needs a basic external strategy to elevate the cause, build public awareness and support, and gain visibility. However, in lending reform efforts, the internal strategy is even more important: working closely with allies and opponents to negotiate key elements of the legislation and secure support from key decision-makers. Most of your time will probably be spent on these inside interactions. 6. Secure early political support. Early on, seek strong legislative champions for your lending reform efforts. Since lending reform can be both complex and controversial, legislators will need to be prepared to educate themselves on the many details of the issues, and to stand up to opposition when needed. Seek support from key policymakers on both sides of the aisle, and be sure to document the extent of the predatory lending problem in their home districts as extensively as possible. 7. Engage the media. Many states campaigns have enjoyed success in attracting media attention to lending reform efforts. Work closely with targeted media (e.g., in key districts, or in outlets with extensive reach and/or clout) to generate editorial and news articles in support of anti-predatory lending legislation. 8. Tell compelling stories. While accounts of individual borrowers who have suffered from abusive small dollar loans are no replacement for hard data, they can humanize the issue for legislators and the public. One excellent way of energizing and attracting attention to your campaign is to tell the stories of individuals and families (in their own words, where possible) who have been victimized by predatory lenders. It is particularly powerful to share stories from a legislator s home district. 29 Uriah King, Leslie Parrish and Ozlem Tanik, Financial Quicksand: Payday lending sinks borrowers in debt with $4.2 billion in predatory fees every year, (Durham, NC: Center for Responsible Lending, 2006). 30 Pew Center on the State, Safe Small-Dollar Loans Research Project (http://www.pewstates.org/projects/safe-small-dollar-loans-research-project-328781) 10 RESOURCE GUIDE: PROTECTIONS FROM PREDATORY SHORT-TERM LOANS
CFED: ASSETS & OPPORTUNITY SCORECARD RESOURCES For more information on this policy, go to http://scorecard.cfed.org. Organizations Center for Responsible Lending, http://www.responsiblelending.org Pew Center on the State, Safe Small-Dollar Loans Research Project http://www.pewstates.org/projects/ safe-small-dollar-loans-research-project-328781 National Consumer Law Center, http://www.consumerlaw.org Consumer Federation of America, http://www.consumerfed.org Publications/Websites N. Bourke, A. Horowitz, T. Roche, Payday Lending in America: Who Borrows, Where They Borrow, and Why, (Washington, D.C.: The Pew Charitable Trusts, 2012) Levy, Rob and Joshua Sledge, A Complex Portrait: An Examination of Small-Dollar Credit Consumers (Chicago, IL: Center for Financial Services Innovation, 2012) Theodos, Brett and Jessica Compton, Research on Financial Behaviors and Use of Small-Dollar Loans and Financial Services - Literature Review, (Washington, DC: U.S. Department of Treasury, 2010). Carter, Carolyn, Consumer Protection in the states: A 50-State Report on Unfair and Deceptive Acts and Practices Statutes, (Boston, MA: National Consumer Law Center, 2009). Federal Deposit Insurance Corporation, A Template for Success: The FDIC s Small-Dollar Loan Pilot Program, FDIC Quarterly: 2010, Volume 4, No. 2, http://www.fdic.gov/smalldollarloans/. Fox, Jean Ann, Research Findings Illustrate the High Risk of High-Cost Short-Term Loans for Consumers, (Washington, DC: Consumer Federation of America, 2009). Parrish, Leslie and Uriah King, Phantom Demand: Short-Term Due Date Generates Need for Repeat Payday Loans, Accounting for 76% of Total Volume, (Durham, NC: Center for Responsible Lending, 2009). L. Plunkett, E. Caplan, N. Player, Small Dollar Loan Products Scorecard Updated, (Boston, MA: National Consumer Law Center, May 2010). Plunckett, Leah and Ana Lucía Hurtado, Small-Dollar Loans, Big Problems: How States Protect Consumer from Abuses and How the Federal Government Can Help, Suffolk University Law Review, Vol. XLIV:31. King, Uriah and Leslie Parrish, Springing the Debt Trap: Rate caps are only proven payday lending reform, (Durham, NC: Center for Responsible Lending, 2007). King, Uriah and Leslie Parrish, Payday Loans, Inc: Short On Credit, Long On Debt, (Durham, NC: Center for Responsible Lending, 2011). Payday Loans Put Families in the Red, (Durham, NC: Center for Responsible Lending, 2009). 11
Assets & Opportunity Scorecard published by CFED. CFED, October 2012. 12 RESOURCE GUIDE: PROTECTIONS FROM PREDATORY SHORT-TERM LOANS