Payday lenders face scrutiny for abusive lending

Regulators are clamping down on payday lenders everywhere. In the latest case, New York prosecutors filed criminal charges against Carey Vaughn Brown, a former used car salesman from Texas, for usury, reports The New York Times. Brown operated 12 payday companies that allegedly flouted New York law by channeling money through Tennessee and the West Indies, according to The Times. Brown's companies charged cash-strapped borrowers annualized interest rates ranging from 350% to 650%; New York usury law caps interest rates at 25%.

“The exploitative practices — including exorbitant interest rates and automatic payments from borrowers’ bank accounts, as charged in the indictment — are sadly typical of this industry as a whole,” said Manhattan district attorney Cyrus R. Vance, Jr., as quoted in The Times.

Payday lenders have been in the national spotlight lately. National People’s Action, a network of activist organizations, launched a "shark week" campaign (to coincide with the Discovery Channel’s weeklong shark week coverage) to stop predatory lending to low-income and minority groups. Even comedian and HBO host John Oliver criticized the industry’s practices in a 16-minute segment last week.

Payday loans are short-term loans for relatively small amounts of money, typically less than $500. Yet they tend to trap borrowers in a self-perpetuating cycle of debt. The loans are normally due on the borrower’s next payday (about 14 days) and lenders have access to a borrower’s checking account. Some lenders require borrowers to write a check for the full balance in advance.

Finance charges can run from $10 to $30 for each $100 borrowed, which often equates to an annual percentage rate (APR) exceeding 400%. According to a 2013 Consumer Financial Protection Bureau study, two-thirds of payday loan borrowers take out seven loans per year, or more. Payday lenders are commonly found in poor neighborhoods with high populations of Latinos and African Americans.

Though their methods may be unscrupulous, “payday lenders address a need in the market,” says Yahoo Finance’s Rick Newman. “There are people who need the money, who need the loans.” The problem, he adds, is that many low-income workers can't get traditional banking services or take advantage of ordinary loans. The rise in payday lending also emphasizes how difficult it can be to survive on minimum wage jobs.

Nearly 70% of payday borrowers ask for the loans to cover monthly expenses such as utilities, rent and credit card bills. Seventy-two percent of these borrowers also say they want more regulation of these loans. Twelve million Americans are trapped in a cycle of 400% payday loans every year, according to the Center for Responsible Lending (CRL). Predatory loans cost Americans $3.4 billion annually. The CRL estimates that there are 22,000 payday lenders in 35 states who originate $27 billion in annual loan revenue.

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