Falling into the trap of
By Doug Weller
The Register (Diocese of Salina)
SALINA — Predatory lending has emerged as a concern of the Catholic Church in Kansas.
In one of four election-year videos issued this week by the bishops in Kansas, Salina Bishop Edward Weisenburger asks Catholics to urge their state lawmakers to consider stricter regulations to protect vulnerable citizens.
The video, which is available at kscathconf.org, also includes presentations on “Marriage,” “Defending Life,” and “Religious Freedom,” by Archbishop Joseph Naumann of Kansas City, Bishop John Brungardt, and Bishop Carl Kemme of Wichita, respectively.
Catholic Charities of Northern Kansas has been working to help victims of predatory lending since 2007. It launched a new program last year, the Kansas Loan Pool Project, that offers a structured loan to qualified participants to help them escape extreme high-interest borrowing known as “payday” or “paycheck advance” loans.
Those lenders have moved aggressively into Salina, Hays, Manhattan, Junction City and Concordia. Online lenders can reach anyone with access to the Internet.
Catholic social teaching doesn’t prohibit the charging of reasonable interest on loans. However, it does consider exorbitant interest — usury — as wrong.
In the video, Bishop Weisenburger says usury is one of the practices “that are plainly harmful to the poor and simply contrary to the teachings of Christ.” “It’s always been a Church teaching, but we never talk about it anymore,” added Michael Schuttloffel, executive director of the Kansas Catholic Conference, the public policy arm of the four Kansas bishops.
“Charging an unjust interest rate as being wrong was universal,” he said, but that has changed.
Even Pope Francis weighed in on the topic earlier this year, calling usury “a dramatic social ill.”
“When a family has nothing to eat, because it has to make payments to usurers, this is not Christian, it is not human,” the pope said. “This dramatic scourge in our society harms the inviolable dignity of the human person.”
Kansas is among 35 states that have few or no regulations on payday lending.
The Consumer Federation of America, an association of non-profit consumer organizations, reports that in Kansas, loans are capped at $500, with the finance rate and fees capped at 15 percent. Only two loans can be outstanding at one time.
That doesn’t sound unreasonable until you understand how payday lending works, explains Claudette Humphrey, who directs the Kansas Loan Pool Project for Catholic Charities.
An individual can secure a $500 loan with no credit or background check, using only proof of income, hence the “payday” or “paycheck advance” term. The loan typically is due in 14 days, with up to 15 percent interest charged, resulting in a balloon payment of $575.
Most borrowers can’t pay back the loan in full in 14 days, so a new loan is issued to pay off the first loan, with interest then charged on the new loan balance. That 15 percent interest rate on a two-week loan compounds to 390 percent over the course of a year.
“Every two weeks, it’s a brand new loan. That’s how they get away with it,” Humphrey said. “Some people stay in it for over a year, some two years, some three years.”
Title loans use the vehicle title as collateral and typically must be repaid in a month. Although the loan usually is for less than the vehicle is worth, the borrower risks losing the vehicle if the loan isn’t repaid on time. The Consumer Federation of America says that for a typical title loan, annual interest can compound to 300 percent.
Payday lenders target people who likely can’t pay back the loan, Humphrey said. People who have good credit can go to a bank or credit union or even use a credit card for a cash advance, she explained.
Many payday borrowers are on fixed incomes and feel they have nowhere else to turn, while others with relatively good-paying jobs have expenses that exceed their incomes because they haven’t made smart financial decisions.
People don’t think about the consequences of a payday loan, even if they realize the risk.
“It’s hard to explain. It’s a horrible feeling” to be that desperate for cash, said Humphrey, who found herself in the same situation several years ago.
“You know you need the money, and here’s a place that will give it to you. All you’re thinking is, ‘I’m keeping the lights on,’ ‘I’m fixing my car’ … whatever it is,” she said. “You don’t think two weeks ahead.”
Humphrey said she was able to escape the cycle of trying to pay off two payday loans by asking her family for help. Many borrowers, however, don’t have that support system and have nowhere to go.
People have had their wages garnished, lost their vehicles or been evicted or had their utilities cut off, she said.
At least five clients have told Humphrey that if it hadn’t been for the Kansas Loan Pool Project, they would have considered suicide.
“This project literally, and sadly, has saved lives,” she said.
Catholic Charities first began working to help victims of payday lending in 2007. The Salina Area Savings and Education Loan Program, which still operates, combines funding from University United Methodist Church in Salina and loan processing by Bennington State Bank to offer short-term loans to help Saline County residents get out of high-interest debt and establish credit. Catholic Charities screens applicants for the loans.
But Catholic Charities wanted to expand the assistance throughout the Diocese of Salina, as well as offer one-on-one financial counseling and education for clients.
A grant from the Catholic Campaign for Human Development, facilitated by Catholic Rural Life, funded the administrative costs for the Kansas Loan Pool Project. The United Methodist Health Ministry Fund donated $25,000 and Catholic Charities fronted another $25,000 to guarantee the loans; that money is kept on deposit. Sunflower Bank of Salina agreed to administer the loans.
Initially, 18-month loans of $1,000 were available, but to help provide assistance to more people, loans have been scaled back to $700 for 12 months.
Once an applicant is approved, Humphrey meets with the borrower monthly to help craft a budget, ensure that loan payments are made on time and learn more about financial management.
That monthly connection is key to the program’s success, says Michelle Martin, executive director of Catholic Charities of Northern Kansas.
“No one else at this time is doing this,” Martin said of the case management her office is providing.
She wants to expand the program, but Humphrey’s time is consumed by the 32 open loans she currently manages.
“To do it right, we need to expand it to all of our 31 counties,” Martin said, but so far the funding isn’t available. The CCHD grant ends next June, so her staff is focusing efforts on trying to replace that funding first before looking for more money to expand the project.
Although there have been some loan defaults, Humphrey considers the program a success.
“One client paid off her loan, which raised her credit rating, and she was able to secure a conventional loan for a car without having a co-signer,” Humphrey said. The woman called Humphrey to share her good news.
Both Humphrey and Martin said there shouldn’t have to be a Kansas Loan Pool Project.
The 15 states that have restricted or banned payday lending have seen the amount of money owed by borrowers drop significantly.
The Pew Charitable Trust reported last October in the third of a three-part study that in Colorado, where lump-sum repayment was banned and replaced by installment payments over six months, borrowers paid 42 percent less annually than under the conventional model.
The Pew study found that 12 million people annually spend more than $7 billion on payday loans. On average, a borrower takes out eight successive loans of $375 each per year, spending $520 on interest.
Its survey found 5.5 percent of adults nationwide have used a payday loan in the past five years. In Kansas, that number is 8 percent.
In states where payday loans have been restricted, the Pew study found that most borrowers chose other options: They cut back on food and clothing expenses, delayed paying some bills, borrowed from family or friends, or sold or pawned possessions.
And, in the states that have restricted payday lending, borrowers have not sought similar loans through online sources, the Pew study showed.
The Pew study urges the 35 states that have few restrictions on payday lending to:
• Limit payments to an affordable percentage of a borrower’s periodic income. The Pew study indicates that payments above 5 percent of gross income are often unaffordable. One of Humphrey’s clients had a monthly income of $800 but had been approved for a second $500 payday loan while her first $500 payday was still active.
• Spread costs evenly over the life of the loan.
• Guard against harmful repayment requirements or collections practices.
• Require concise disclosures that reflect periodic and total costs upfront.
• Set maximum allowable charges.
The Consumer Financial Protection Bureau, established by Congress, says it recognizes that demand exists for small-dollar loans.
“These types of credit products can be helpful for consumers if they are structured to facilitate successful repayment without the need to repeatedly borrow at a high cost,” CFPB stated in April 2013. “However, if the cost and structure of a particular loan make it difficult for the consumer to repay, this type of product may further impair the consumer’s finances.”
The federal government has stepped in by capping interest charged on loans to U.S. military personnel at 36 percent. However, states have the right to govern their own banking practices for non-military residents.
Both Schuttloffel, head of the Kansas Catholic Conference, and Martin of Catholic Charities say the likelihood of the Kansas Legislature taking any action is slim.
“The Legislature probably won’t do anything,” Schuttloffel said.
Martin said too many other issues, such as educational funding, have more importance in Topeka than helping victims of payday lending.
In addition, restricting lending practices is seen as anti-business, and under the current legislative environment, those issues tend to be off the table, Martin added.
“The federal government has capped the interest rate for military members, so it can be done,” Martin said.
Despite the lack of state regulation and uncertain funding for the Kansas Loan Pool Project, Martin and Humphrey are determined to keep the program operating.
“It’s the right thing to do,” Martin said. “There are too many people out there in need.”