The Mississippi Center for Justice, an advocacy group that operates in the country’s poorest state, has a bird’s-eye view of the factors that contribute to poverty. And poor people can’t get ahead, it argues, if they are using financial products that keep them perpetually in debt.
The center, which views consumer protection as an essential weapon in the war on poverty, has zeroed in on what it considers a primary offender: payday lending, which provides small, short-term loans to help families cover emergency expenses.
Mississippi has one of the highest concentrations of payday lenders in the nation, many of them operating in what the center calls a predatory manner. Because of the way loans are structured, borrowers can end up paying exorbitant interest rates, sometimes more than 500 percent on an annual basis. That happens because people often have trouble paying back the loans within the required period and take a series of loans to cover the original debt—each time paying a fee.
“In most cases, people pay back more in fees than they initially borrowed,” says Pahaedra Robinson, consumer-protection director.
Steep Fees
The center is tackling the problem in two ways. It heads up Mississippians for Fair Lending, a coalition that is lobbying to change the laws governing payday lending. And it is working with employers on the New Roots Credit Partnership to set up alternative small-loan programs that also offer help with financial literacy.
“We can demonstrate a better path, a path that is more likely to enable low-income folks to hold on to more of what they earned,” says the center’s executive director, Reilly Morse.
The legislative battle has proved to be tough due to strong industry opposition. The coalition tried but failed to get the state legislature to let the law authorizing payday lending sunset in 2012 or to cap annual interest rates on payday loans at 36 percent, the same rate that applies to banks and credit unions.
But lawmakers decided not only to reauthorize the law but to make it permanent. They agreed to limit fees to $20 per $100 for checks up to $250, generally with a 14-day repayment period, and $21.95 for those from $251 to $500, with a repayment period of 28 to 30 days.
Ms. Robinson says those fees, while lower than permitted before, are equivalent to 521-percent and 267-percent annual percentage rates. The center is planning a campaign to get the law strengthened in 2015. The problem, she says: Some lenders are issuing only loans that qualify for the higher annual interest, for example four $100 loans instead of one for $400.
Providing a Service
Payday lenders argue that they provide a service to people who would be unable to find loans elsewhere and that tougher laws would cost thousands of Mississippi jobs.
Jamie Fulmer, senior vice president of Advance America, a payday lender that operates in the state, says advocacy groups portray his industry in a misleading way. In discussing annual percentage rates, for example, they fail to note that borrowers could pay even more if they had to get overdraft protection from their banks or pay credit-card late fees.
“Consumers make a choice to use the products and services of companies like Advance America compared to other choices they have in the competitive marketplace,” Mr. Fulmer says.
Consumer Protection
The Mississippi coalition has now set its sites on the federal government, gathering stories to submit to the new Consumer Financial Protection Bureau, which released a report critical of the industry and is planning to issue new rules.
Ms. Robinson says one story will come from a woman who was paying off a $400 debt for two years because the lender allowed her to extend the loan by paying multiple fees, something barred by state law.
The New Roots Credit Partnership is faring better. In August, following a unanimous vote by the city council, the City of Jackson teamed up with two financial institutions, BankPlus and Hope Credit Union, to offer small loans to the city’s 2,300 public employees.
Louis Armstrong, the city’s deputy director of human and cultural services, says the council was attracted by the program because Jackson, with a poverty rate of about 28 percent, has one of the country’s highest percentages of people without bank accounts. Some employees have resigned from their jobs just so they could get their retirement benefits to pay off their debts, he says.
BankPlus offers $500 and $1,000 loans with repayment periods of 12 or 24 months and an interest rate of 5 percent. Borrowers must agree to put half of the loan into a savings account that they can’t touch until they have paid off their debt.
Hope, which is sponsored by the nonprofit Hope Enterprise Corporation, offers $250 and $500 12-month lines of credit at 18 percent interest. It also offers $500 and $1,000 loans with interest from 6 percent to 18 percent, depending on the borrower’s credit history, also requiring that 50 percent be set aside as savings.
BankPlus requires borrowers to attend workshops to learn how to manage their finances, for example to create spending plans and maximize savings. Hope offers one-on-one counseling and optional “financial fitness” workshops. “There is a gap in financial literacy in the work force here,” Mr. Armstrong says. “We’re trying to close that gap to ensure that at least city employees, those we can communicate with, are aware of all the options they have available in the financial arena.”
