Payday loans are a problem. Can a public bank be part of the solution?
When the coronavirus first posed a threat to the health and finances of Americans, Tiffany Moore of Forest Park first turned to an installment lender hoping for financial relief.
The good news: She was approved for a $9,500 loan to compensate a tenant in her property who couldn’t pay rent. The bad news: an interest rate of 35.989%.
It was easy to sign a contract that brought temporary relief. But realizing she would end up paying more than double what she borrowed, Moore repaid the loan early.
Payday loans, title loans and installment loans with exorbitant interest can put a financial grip on borrowers. This remains the case, even though the Illinois Predatory Lending Prevention Act now imposes a 36% cap on the annual percentage interest rate that lenders can charge.
These exorbitant offers continue to proliferate in black and brown neighborhoods, as a report by Stephanie Zimmermann of the Sun-Times makes clear.
Lawmakers should consider a way to help vulnerable communities access credit without resorting to high-interest loans.
Payday lenders emphasize that they serve high-risk neighborhoods and borrowers that other lenders avoid.
Yes, they provide a necessary service. But what desperate borrower can get out of a difficult financial situation while borrowing money at an interest rate of 36%?
The report highlights data produced by the nonprofit Woodstock Institute, which found that major zip codes for payday loans were predominantly black. ZIP codes included 60619 and 60620 on the south side, both of which are 95.7% black and include Chatham, Avalon Park, Auburn Gresham and Washington Heights. The 60614 zip code, which includes Lincoln Park and is 84% white, showed the lowest incidence of payday borrowers.
“Consumers only need loans with triple-digit interest rates if they’re stuck in a cycle of divestment. If they weren’t, they’d get a safer, more affordable product,” we said Brent E. Adams, senior vice president of policy and communications at the Woodstock Institute, “These lenders are cycle-dependent and irrelevant if communities are thriving.”
In March, this editorial board supported capping payday loan rates, writing that Illinois should impose it out of fairness and in the name of racial equity. Some 40% of borrowers in Illinois end up defaulting on their payday loans. More often than not, they find themselves caught in a cycle of debt, with old loans turning into new ones.
Another step down the road could be bringing affordable banking services back to low-income neighborhoods that have suffered from divestment.
Members of Congress have expressed support for a postal banking pilot program in rural and urban communities across America. The goal would be for the government to learn from the pilot project and establish permanent banking services as part of the US Postal Service. The nonprofit bank would offer low-cost checking and savings accounts, mobile banking and low-interest loans.
State Representative Mary E. Flowers pushed for the Community Bank of Illinois Act for more than a decade, but faced continued opposition from bankers.
“Banks are in the business of making money, and I’m offering lower interest rates here for residents,” Flowers told us. “All I want to do is give loans to people they wouldn’t give to.”
We are not convinced by the idea of a public bank, at the federal or state level. There are many unanswered questions about how the model works, as well as the potential cost to taxpayers.
But the idea of a system that allows low-income, unbanked borrowers to meet their basic banking needs and also have access to small, low-interest loans is worth considering.
There’s no reason to expect payday loan companies to agree to lower the 36% cap any further, if at all. Ed McFadden, spokesman for the American Financial Services Association, points to a 2015 Federal Reserve survey in which lenders said they could not break even on loans below $2,532 at an annual percentage rate of 36%.
Postal public banking is not a direct solution, but it could help deal a blow to the problem of predatory payday lending.
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