By Doug Miller

Payday lenders – neighborhood operations where cash-strapped borrowers can go for small, short-term loans – contend they shouldn’t be facing the same kind of financial reform regulations as full-service banks. But critics who call high-interest payday transactions “legalized loan-sharking” say they disproportionately target minorities and need to be reined in along with Wall Street giants.

Samantha Solleveld, a spokesperson for the Alexandria, Va.-based Community Financial Services Association (CFSA), which represents about 13,000 payday lenders, says that, as a class of business, the stores have been around only since the early 1990s. There are approximately 20,000 of them nationwide, and their operating model is fairly simple: A customer in need of fast money agrees to pay what some see as an exorbitant interest rate for the privilege. Usually a borrower writes a postdated personal check that the lender agrees not to cash until the customer’s next payday.

The average loan, according to Solleveld, is about $375, and customers generally are people who find themselves “in a bind between paydays (over) something that can’t wait a week.”

The numbers don’t lie… or do they?

Payday lenders “charge a flat rate of 15 to 20 percent for every hundred dollars loaned,” she explained, a fee that, when compounded, amounts to an annual interest rate (APR) of nearly 400 percent. “Of course that looks higher than what customers are used to seeing,” Solleveld adds, “but at the same time these are two-week loans,” a difference that she says sets payday lenders apart from larger financial services companies.

In fact, another CFSA spokesperson, Steven Schlein, recently told USA Today that payday lenders are distinct enough from banking institutions that “We don’t think we should be regulated by the federal government. The idea of financial reform was to regulate the too-big-to-fail banks and the mortgage industry, which caused the (2008) crisis. We don’t think (payday lending) has anything to do with the meltdown,” he contended. The CFSA spent $2.6 million lobbying that viewpoint to federal legislators in 2009.

Currently, payday lenders come under the jurisdiction of state usury laws, a fairly comprehensive list of which can be found at UsuryLaw.com.

But if there is a difference between payday loans and loans made by larger retail and commercial banks, it apparently doesn’t extend to the approach payday stores are taking to influence federal lawmakers. Wright Andrews, the CFSA’s lead lobbyist, also headed up the lobbying effort for the subprime mortgage industry in the period leading up to the 2008 economic meltdown.

“A lender is a lender, and a loan is a loan,” maintains Kathleen Day, a spokesperson for the Center for Responsible Lending (CRL) in Washington, D.C. “You need to have all (financial) products be regulated in the same way,” she contended, or there will be a “race to the bottom,” just as there was in the subprime mortgage debacle. Legitimate banks may well begin to make relative comparisons to payday loan profits and decide they need to get into the business, too.

But Day agrees there is a big difference between banking institutions and payday lending, at least on one count. “We look at it as legalized loan-sharking.”

The debt cycle

Solleveld contended that it’s unrealistic to spin two-week loans at 15-20 percent interest into a 400 percent APR because payday loan customers often are limited by state law from engaging in cyclical borrowing – borrowing more money this week to pay off last week’s loan. That’s what would have to occur to ratchet a short-term loan up to an APR of 400 percent.

Day, however, said that’s exactly what does happen. Citing studies by the center, she held that “the vast majority of those folks have to re-borrow the same money shortly thereafter.” Some 90 percent of a payday lender’s revenue is generated by borrowers who take out five or more loans a year, she said; 60 percent of a lender’s revenue is generated by borrowers who take out 12 or more loans per year.

“Most of the demand is from people who get trapped,” Day maintained, “and have to keep taking out the same loan.”

And it probably is no coincidence, she added, that a disproportionate number of those people are black. A 2009 CRL study of payday lenders in California found that they overwhelmingly are located in African-American and Latino neighborhoods. Specifically, the report found that payday lenders are nearly eight times as concentrated in those as compared to white neighborhoods. Not surprisingly, blacks and Latinos comprise 55 percent of all payday loan borrowers in the state. The Center’s study determined that because of the exorbitant interest rates for the loans and the repeat-borrowing phenomenon, payday lending businesses drain $247 million annually from the state’s black and Latino communities in service charges.,

Despite a fairly detailed demographic breakdown of typical payday customers available on the CFSA website, Solleveld said – erroneously – that the association did not have payday customer survey numbers based on race or ethnicity because gathering that kind of data was “against the law.”

Former NAACP Chairman Julian Bond is quoted in the CRL study as saying that “study after study has demonstrated that payday lenders are concentrated in communities of color. A drive through minority neighborhoods clearly indicates that people of color, regardless of income, are a target market for legalized extortion.

“Payday lending,” he adds, “is an economic drain that threatens the livelihoods of hardworking families and strips wealth from entire communities.”