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9/2/2013

Predatory Lending: An economic and moral decision for the City of Sylacauga
By Rev. Ross Reddick, M. Div., Resident of Sylacauga District 4, and Pastor of First Presbyterian Church in Sylacauga. The views expressed in this document are the authors and in no way reflect the opinions or positions of First Presbyterian Church of Sylacauga, its elders, trustees, or members.

Brief History of Lending:

From the 1800s to the 1940s, the State of Alabama capped interest rates at 8%. 1 This maximum rate is still the legal standard in the Alabama Code which states: Except as otherwise provided by law, the maximum rate of interest upon the loan or forbearance of money, goods, or things in action, except by written contract is $6 upon $100 for one year, and the rate of interest by written contract is not to exceed $8 upon $100 for one year and at that rate for a greater or less sum or for a longer or shorter time. Like all laws, however, people found ways around them. Informal or black market lending began to arise when folks exhausted legal lending and credit services, which were then offered primarily by local general stores. During industrialization, banks grew and industrialized too. The banks understood they could provide needed and legitimate lending services, but the rate cap of 8% would need to be increased to provide room for free market competition. This led to a national push for a 36% cap on interest. Between 1914 and 1943, 34 states adopted a version of the uniform small loan law; Alabama did so in 1959. Alabamas Legislature passed the Small Loan Act which recognized the need for credit and its connection to the states interest in protecting the public welfare. 2 Again, like all laws, people found ways around the Small Loan Act. Between 1960 and 1990 Alabama saw a rise of fringe lending operations (beyond the traditional lending institutions). Then, opportunists created a new product: the payday loan, wherein a desperate borrower (who usually had exhausted legal means of acquiring credit) gives a lender a post-dated check as collateral for a small, short-term loan with an extortionate interest rate.3 These products existed illegally, spread informally, and enjoyed a huge surge in the 1990s.
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Code 1852, 1519; Code 1867, 1827; Code 1876, 2088; Code 1886, 1750; Code 1896, 2626; Code 1907, 4619; Code 1923, 8563; Acts 1935, No. 37, p.69; Code 1940, T. 9, 60.
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Acts 1959, No. 374, p. 966, 1-25. Accessed via < http://alisondb.legislature.state.al.us/acas/CodeOfAlabama/ 1975/141616.htm >. 23 July, 2013. Accessed via < http://www.consumer.ftc.gov/articles/0097-payday-loans >. 23 July, 2013

Rev. Ross Reddick, M. Div.

rev. 9/2/2013 At that point, some additional rulings would exacerbate the now growing problem. In 1993, the Alabama Supreme Court ruled that title lenders are legally classified as pawnbrokers, which allows a 300% Annual Percentage Rate (APR). In 2003, the Legislature passed the Deferred Presentment Services Act (ADPSA). 4 This loophole is what legally allows businesses in Alabama to charge 456% APR.

How Predatory Lending Works:

There are two particularly insidious kinds of predatory loans: payday loans and title loans.

Payday Loans:
The borrower must have a checking account. He/she presents a post-dated, personal check for the loan amount, which in most cases must be at least $500. There is a 10-31 day loan term, which is laden with various fees and which encourages rollover. Unclear marketing terminology purposefully hides the up to 456% APR, which is the legal carve-out allowed under the 2003 ADPSA.

Title Loans:
The borrower must own a vehicle with the title. He/she gives the title to the borrower as collateral for the loan. There is no cap on loan amounts, but the usual loan offer is half the amount of the vehicles value. There is a 30 day loan term with a 300% APR often hidden by unclear marketing terminology. In the event of a default, when the lender repossesses the car and sells it, Alabama law does not require the lender to return any remaining surplus to the borrower. Recent reports released by the Consumer Financial Protection Bureau (CFPB) 5 and the Pew Charitable Trusts6 helpfully describe both the cyclical nature of financial predation and the harm these businesses bring to communities. These loans are often defended and marketed as short-term loans for the purpose of covering unexpected or emergency expenses. In reality, the average payday loan user, is in debt for 199 days out of the year. One out of every four borrowers is indebted for over 300 days out of the year. 7 This is certainly related to the fact that most borrowers use these loans to cover ordinary
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Accessed via < http://alisondb.legislature.state.al.us/acas/CodeOfAlabama/1975/154466.htm >. 23 July, 2013.

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Consumer Financial Protection Bureau (CFPB), Payday Loans and Deposit Advance Products. Accessed via < http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf . 24 April, 2013. 6 The Pew Charitable Trusts. Payday Lending in America: How Borrowers Choose and Repay Payday Loans (February 2013), Accessed via < http://www.pewstates.org/research/reports/howborrowers-choose-and-repay-payday-loans-85899452131?p=1 >; The Pew Charitable Trusts. Payday Lending in America: Who Borrows, Where They Borrow and Why (July 2012), Accessed via < http://www.pewstates.org/research/reports/who-borrows-where-they-borrow-and-why85899405043 >. 7 CFPB, supra note 5

Rev. Ross Reddick, M. Div.

rev. 9/2/2013 living expenses.8 To be profitable, payday lenders rely on customer repetition and, as such, payday loan products suffer from a serious design flaw that, in practice, very rarely meet the needs of its consumers. In fact, 75% of all payday loan fees come from borrowers with over 10 loans per year, and 90% come from borrowers with over 6 loans per year.9 The States current laws and rulings effectively prop up businesses which would fail to be profitable without these rapacious financial products.

The Case against Predatory Lending Services:

There are many arguments against predatory lending services. Here are three: 1. The cost The APR charged simply costs too much, especially when you consider other interest rates like those on consumer credit cards. A 36% APR allows for legitimate lending institutions to compete in the needed service of short-term loans. 456% APR is not only exorbitant, but it strips wealth out of local communities. It prevents personal/family asset building (and savings) in which municipalities have an economic interest. It prevents people from paying their bills and increases domestic strife. There is a clear negative correlation between property values and the density/number of payday storefronts in a neighborhood. 2. The cycle The average borrower takes out around 9 payday loans per year and spends roughly 200 days out of the calendar year in debt. The lending products are designed to encourage repeat borrowers for repeat profits. More often than not, these loans are not being used as emergency sources of credit for crisis situations. Rather, they are being used for recurring expenses like utilities and groceries. Title loans have the additional detriment: upon default, the lender can repossess the car, sell it for more than the value of the loan, and keep the profits (often valued more than the initial loan). The lack of a car causes further financial burdens like not being able to drive to work. 3. The moral argument People of Judeo-Christian faith and mores articulate particularly compelling reasons to limit the scope of predatory lending. The Hebrew Scriptures display outright prohibitions against usury 10 and focus on the condition of the one(s) needing a loan. 11 Interest was most certainly a reality in those ancient times; the Israelites internal, faith-based prohibition of usury symbolically differentiated them from other nations/groups. Collectively, as Gods people, they were to be a microcosm of Gods perfect Kingdoma place where interest charges, and money writ large, is unnecessary. 12 Furthermore, we see
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Pew 2012 Report, supra note 6 CFPB, supra note 5 Exodus 22:25 Leviticus 25:35-36 Isaiah 55:1

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Rev. Ross Reddick, M. Div.

rev. 9/2/2013 powerfully Gods particular attention in not taking advantage of the poor in both the Levitical and Deuteronomical codes, as well as the major and minor prophets. In the New Testament, Jesus explicitly extends this principle, and does so using the language of credit and lending.13 An overwhelming amount of Jesus teachings in the New Testament are about money. With the exception of the kingdom of God, Jesus talks the most about the subject of money. His care and concern for those on the margins of society is undeniable.14 Adherents of other major world religions find predatory lending against the tenets of their faith too. However, one not need be a person of faith to recognize the malady of predatory lending. Atheists, agnostics, humanists, and adherents to a panoply of ethical and moral systems recognize the pernicious nature of these financial products.

Some Sylacauga-specific information:

There are eight (8) businesses licensed under the ADSPA at the State of Alabama Banking Department. There are eighteen (18) businesses licensed by Sylacaugas Revenue Office under the North American Industry Classification System (NAICS) designation Nondepository Credit Intermediation which includes loan/finance companies, cash advance companies, and check cashing companies. These businesses do not include ones that are geographically close, but which are beyond the jurisdiction of the city. Sylacauga has more of state-licensed predatory businesses than the following cities of comparable size: Alexander City, Calera, Fairfield, Gardendale, Hueytown, Irondale, Jacksonville, Leeds, Ozark, Pell City, Rainbow City, Talladega, and Tuskegee.

Proposal to Sylacauga City Council:

I propose that the City of Sylacauga adopt and implement a temporary two year moratorium on granting business licenses to new payday and title loan stores within the city limits to allow the council to gather information and study the economic impact of predatory lending in Sylacauga. Particular language should be developed for this ordinance/resolution, perhaps using analogous ordinances passed by other Alabama municipalities as a guide. Sylacaugas city attorney should be asked to help draft the proposal.

Next Steps:

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Identify professionals and conversation partners that will be helpful during the study period. Delineate a plan for study with manageable goals.

Luke 6:34-35 Luke 4:18

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Rev. Ross Reddick, M. Div.

rev. 9/2/2013 Gather resources (learning materials, data, articles, studies, reports, etc.) related to the impact of predatory lending for study and consideration. Plan an initial meeting date today.

Rev. Ross Reddick, M. Div.