Payday lenders use the holidays to target consumers most likely to wind up in a vicious cycle of debt.
The holidays were upon us, and for many this was a season of financial stress and strain as well as joy – a time when the need for an extra couple of hundred dollars can seem especially acute.
For payday, title loan, and auto title lenders, that makes the holidays a season of opportunity. And many of these lenders don’t just make an extra push at the end of the year; they actually insert a holiday theme into their advertising!
Cash Title Exchange, a Mississippi-based lender, sent out a colorful direct-mail piece promising “the cash you need this holiday season” and featuring a smiling Santa Claus with an armful of presents. “Even Santa needs help,” the ad pointed out.
Santa was also a co-star in a TV spot for TitleMax, based in Savannah, Georgia: “Come to TitleMax now for cold hard cash,” says the cheery announcer. “Your car title is your credit – Ho! Ho! Ho!”
What such companies don't advertise, and what many borrowers don’t know, is exactly how much money they will ultimately have to pay for the relatively small sum they receive immediately. Because such loans typically carry fees that work out to the equivalent of 300 to 500 percent in annual interest, many borrowers are forced to take out a long string of loans to cover payments on the original one. Their loan fees often end up dwarfing the amount of money they borrowed in the first place.
Targeting borrowers during the holiday season hits many when they are feeling the most vulnerable. And ads aren’t just splashed in public places, they are sent out in focused mass mailings to people who are particularly likely to respond—the elderly or those with low annual incomes.
While loans like these may be marketed as a way to deal with a one-time emergency or secure a little extra holiday cash, they routinely lead people into a cycle of long-term debt. The Consumer Financial Protection Bureau, in its research on the small-dollar loan market, has found that four out of five payday loans end up being rolled over or renewed within two weeks, with half of those becoming part of a sequence of 10 or more loans. And that is exactly the outcome these lenders are counting on: Getting people to borrow repeatedly, paying fee after fee, is their business model.
In an enforcement action against ACE Cash Express, the bureau exposed the company for using a variety of illegal tactics, including false threats of criminal prosecution, to bully its borrowers into repeatedly taking out new loans to cover the cost of old ones. A graphic from the company’s own training manual spelled out its preferred method of entrapment.
In 2015, the Consumer Financial Protection Bureau is widely expected to announce a set of proposed consumer protection rules that could change this market for the better. This should be welcome holiday news: Most Americans have a negative opinion of payday lenders. (65 percent hold an unfavorable view, versus only 15 percent with a favorable view, according to a recent national survey.)
Payday lenders are hurting Americans; but the industry has been using political contributions to safeguard its profit stream, and Congress has so far been unwilling to regulate.
A recent report by Americans for Financial Reform sheds light on exactly how much this industry is spending to exercise influence in Washington. In the 2014 election cycle, payday, auto title and installment lenders, along with other entities that play a role in their operations, reported more than $13 million in political spending, with much of that money coming from trade associations that represent the industry in Washington.
Major spenders also include some of the trade associations’ big corporate members — the actual payday lenders themselves. Cash America, a company found by the Consumer Financial Protection Bureau to be using illegal debt collection tactics and overcharging servicemembers and their families, spent over $1.7 million in the 2014 cycle on lobbying and campaign contributions.
But the next holiday season could be a bit brighter. The bureau could make lenders verify that loans are affordable in light of a borrower’s income and expenses; reduce the payday debt trap from the typical 200 days a year to no more than 90; and put borrowers back in control of their own bank accounts. The holidays are a time for joy and giving, and as the residents of Whoville know, there is no room for the Grinch.