Predatory Lending in Alabama
Fixing the Law to Stop Unethical Rip-Offs
That Impoverish Communities
Alabama Organizing Project - 2/16/13
HISTORY
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Informal lending
Rise of bank lending
“Black market” lending and loan sharks
The rise and fall of reform
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Alabama Organizing Project - 2/16/13
General Stores and Credit
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Emergence of Bank Lending
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1959: Reform Comes to Alabama
• Already had usury law (8 percent)
• The Small Loan Act (Act 1959-374)
• Sets a rate “not exceeding three percent a
month” on loans for less than $1,000 (Sec. 1518-15(a)
• Quadruples allowable interest rates, from
usury law (8 percent) to 36 percent
Alabama Organizing Project - 2/16/13
ALABAMA’S SMALL LOAN ACT (1959)
• The Legislature finds as facts and determines that:
• (1) There exists among citizens of this state a widespread demand for
small loans. The scope and intensity of this demand have been increased
progressively by many social and economic forces;
• (2) The expense of making and collecting small loans, which are usually
made on comparatively unsubstantial security to wage earners, salaried
employees and other persons of relatively low incomes, is necessarily high
in relation to the amounts lent;
• (3) Such loans cannot be made profitably under the limitations imposed
by existing laws relating to interest and usury. These limitations have
tended to exclude lawful enterprises from the small loan field. Since the
demand for small loans cannot be legislated out of existence, many small
borrowers have been left to the mercy of those willing to bear the
opprobrium and risk the penalties of usury for a large profit;
• (4) Interest charges are often disguised by the use of subterfuges to evade
the usury law. These subterfuges are so complicated and technical that
the usual borrower of small sums is defenseless even if he is aware of the
usurious nature of the transaction and of his legal rights;
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• (5) As a result, borrowers of small sums are being exploited to the
injury of the borrower, his dependents and the general public.
Charges are generally exorbitant in relation to those necessary to
the conduct of a legitimate small loan business, trickery and fraud
are common and oppressive collection practices are prevalent; and
• (6) These evils characterize and distinguish loans of $749.00 or less.
Legislation to control this class of loans is necessary to protect the
public welfare.
• (b) It is the intent of the Legislature in enacting this law to bring
under public supervision those engaged in the business of making
such loans, to eliminate practices that facilitate abuse of
borrowers, to establish a system of regulation for the purpose of
insuring honest and efficient small loan service and of stimulating
competitive reductions in charges, to allow lenders who meet the
conditions of this chapter a rate of charge sufficiently high to permit
a business profit and to provide the administrative machinery
necessary for effective enforcement.
• Source: Section 5-18-2: Legislative Findings of Fact
Alabama Organizing Project - 2/16/13
Not regulated by the SLA
• Loans larger than $1,000
• Banks and credit unions
• Pawn transactions
• Deferred presentment (2003)
Alabama Organizing Project - 2/16/13
Blame Tennessee
• Check Cashing, Inc. – 12/2/91 – Johnson City,
TN
• Check Into Cash – first chain – Cleveland, TN
• In 1997, Tennessee became the 19th state to
explicitly legalize payday lending, which before
then had operated in a legal gray area.
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Source: Harper’s Magazine; April 2009; “Usury Country: Welcome to the Birth of Payday Lending”
by Daniel Brook
Alabama Organizing Project - 2/16/13
HOW IT WORKS
• Payday loan:
• Must have a checking
account
• Present a check postdated for the amount
borrowed (>$500)
• 10 to 31 day loan term
• Laden with fees;
encourages rollover
Alabama Organizing Project - 2/16/13
HOW IT WORKS
• Title loan:
• Must own vehicle
title
• No cap on loan
amounts
• Usually half amount
of vehicle value
• 30 day loan term
Alabama Organizing Project - 2/16/13
Payday Loan Legitimation
• The 1990s: Payday industry grew significantly in
Alabama, and across the nation. Flying largely under the
radar, storefronts quietly charged interest rates far
beyond the then-allowable 36%.
• July 7, 1994 - AG opinion: Payday loans are covered by
the SLA. No action to enforce until 1998.
• 2002: Legislature modified the SLA to allow loans to
approximately 190% APR.
• 2003: Legislature carved out additional exceptions.
Deferred Presentment Services Act passed, allowing
456% APR.
Alabama Organizing Project - 2/16/13
Payday Loan Legitimation
• 2005: Alabama Supreme Court held that
deferred presentment services were subject to
the SLA, but only prior to the passage of the
DPSA. Austin v. Alabama Check Cashers Assoc.
• Only two attempts to address the DPSA. In
2007, the session ended without any
movement on either bill.
Alabama Organizing Project - 2/16/13
Title Loan Legitimation
• 1993: the Alabama Supreme Court classified title
lenders as pawnbrokers, which allowed them to be
covered under the Pawn Shop Act. as a “pledged
good,” making title loans subject to pawn transaction
rules. Floyd v. Title Exch. & Pawn, Inc.
• In 2006, a Circuit Court judge in St. Clair County ruled
that parts of the Pawn Shop Act were unconstitutional,
holding it violated the Equal Protection Clause to allow
title loan companies to charge up to 300% interest
while restricting other lenders to much lower rates
violated the equal protection clause. The Alabama
Supreme Court has not readdressed this issue since
Floyd.
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WHAT’S
WRONG?
• 1. The Cost
• 2. The Cycle
• 3. The Moral Argument
Alabama Organizing Project - 2/16/13
The cost of predatory loans
• Simply costs too much: Think about other
interest rates
• Strips wealth out of communities
• Prevents asset building and savings
• Prevents people from paying bills
• Domestic strife
• Property values from payday storefronts
Alabama Organizing Project - 2/16/13
The dangers of cyclical borrowing
• Average borrower takes out 8 or 9 payday
loans per year
• 212 days out of the calendar year in debt
• Designed this way: repeat borrowers are
repeat profits
• Debt treadmill and financial quicksand
• Not using them as emergency sources of
credit
Alabama Organizing Project - 2/16/13
The moral case
• For a thousand years, debates over usury,
were “arguably the marquee intellectual
struggle in Western commercial history.”
• Lunar cycles to measure loan terms
• Babylonians (33%, payable in grain); Romans
(12%)
• Records of high cost, abusive loans in ancient
Mesopotamia. Loan terms in cuneiform.
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I have to pay
it back …
WHEN?
Alabama Organizing Project - 2/16/13
But if we’ve had usury for so long…
• The fact that most ancient society’s debated it
and got rid of it suggests that we’re now
moving backwards.
• States and cities are only banning it. Almost
no jurisdiction is passing new laws to allow it,
or to bring it back once it is forbidden.
Alabama Organizing Project - 2/16/13
The Bible on Usury:
• “If thou lend money to any of my people that
is poor by thee, thou shalt not be to him as a
usuer, neither shall thou lay upon him usury.”
– Exodus 22:25 (King James)
• The only recorded act of violence from Jesus
was against money lenders at the temple
Alabama Organizing Project - 2/16/13
The Bible on Usury:
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Leviticus, 25:35-37
Ezekiel 18: 8-17
Ezekiel 22:16-16
Proverbs 28: 6-9
Luke 6:33-35
Matthew 5:42
Alabama Organizing Project - 2/16/13
Secular moral objections
• 29 states and D.C. have laws prohibiting the
excessive pricing of motor fuels and other
commodities during periods of abnormal
supply disruption (normally triggered by a
declaration of emergency by the President,
the governor, or local officials)
Alabama Organizing Project - 2/16/13
Alabama Organizing Project - 2/16/13
Alabama Organizing Project - 2/16/13
Additional issues with title loans
• The risk of
repossession
• The windfall of selling
the car without
refunding the profits
to the borrower
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REFORM
• The Military Lending Act of 2007
• 17 States
• Cities, states, federal
Alabama Organizing Project - 2/16/13
Alabama Organizing Project - 2/16/13
ALABAMA
• Wild, Wild West
• Law limits number of loans, but no database
• Minimal action at the Statehouse since 2007
Alabama Organizing Project - 2/16/13
ANSWERS
“These are needed sources of credit.”
1) Alternatives exist (provide examples)
2) Other states show – no push to resume
payday lending once they are gone
3) Isn’t how we’d respond to other defective
products – Toyota brakes fail: “But people
have to get to work!” Toxic meat: “But people
are hungry!”
Alabama Organizing Project - 2/16/13
ANSWERS
“They’re only used for emergencies.”
• Factually un-true
• Look at other states: A UNC study of former
payday customers in North Carolina concluded
“the absence of storefront payday lending has
had no significant impact on the availability of
credit for households in North Carolina.”
Alabama Organizing Project - 2/16/13
Source:
Alabama Organizing Project - 2/16/13
ANSWERS
“Government shouldn’t ‘Interfere’”
1) Already have the Small Loan Act
2) This isn’t an anarchy. We regulate toxins in
food, land mines, meth labs, child porn.
3) Anti-gouging laws.
4) Payday loans only exist because of a
government carve-out. The playing field isn’t
level now. SLA lenders should be treated fairly.
Alabama Organizing Project - 2/16/13
ANSWERS
“People are making their own decisions.”
1) People also want to make their own decisions
about how fast to drive, where to shoot guns, etc.
We regulate behavior that hurts society.
2) Competition fails. Loan officers vs. TV
commercials
3) Coercion: emergency = desperation, not rational
choice
4) Generational borrowing habits – requires cultural
change
Alabama Organizing Project - 2/16/13
ANSWERS
“Alternatives don’t exist.”
1) Yes they do. (provide examples)
2) More will flourish when predatory loans
vanish.
3) No risk of return to illegal loan sharks or shift
to online Internet lenders
Alabama Organizing Project - 2/16/13
Payday Protections Don’t Lead to a Surge of
Online Loans
In states that restrict storefront payday lending, 95 of 100
would-be borrowers elect not to use payday loans at all.
What would-be borrowers say about
borrowing online:
“I won’t leave my information there.”
“It’s too risky, in my opinion.”
Source: Pew Safe Small-Dollar Loans
Research Project, 2012.
“With the identity theft the way it is … who’s
going to see it?”
“I’m not going to put [my] information out
there.”
Alabama Organizing Project - 2/16/13
ANSWERS
Borrower stories:
• “Grandpa smoked for 45 years and died
healthy.”
• “I drove here drunk and arrived just fine.”
• The plural of anecdote is NOT evidence.
Alabama Organizing Project - 2/16/13
Questions?
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Stephen Stetson, Policy Analyst
Arise Citizens’ Policy Project
stephen@alarise.org
334-832-9060
Alabama Organizing Project - 2/16/13