Don’t make payday loans a scapegoat
Credit access remains a challenge for millions of Americans, leaving them with limited options to meet their financial obligations. Payday loans are just one form of short-term, small-dollar credit that bridges this gap, ensuring access to cost-competitive, reliable and transparent credit when faced with periodic financial challenges. Unfortunately, this service is often misunderstood and misrepresented, as demonstrated by a recent “Great Debate” piece, “Is the payday loan business on the ropes?” (September 21, 2012).
Fifteen years ago, the payday lending industry emerged because of consumers’ need and demand for access to affordable small-dollar credit – credit that wasn’t readily available to many consumers or offered by many traditional financial institutions. Today, according to the Consumer Federation of America, nearly 40 percent of Americans live paycheck to paycheck, with less than a third feeling financially comfortable. The short-term-credit landscape has evolved over the years, as exemplified by the overwhelming popularity and rising cost of competing products like overdraft programs and bank deposit advances.
Advance America offers payday loans in its 2,400 centers around the country. Before choosing any lender, consumers should carefully weigh their options, including bank and credit union advances, overdraft and non-sufficient funds fees, and missed-payment and utility-reconnection charges. To help inform consumers’ choices, we disclose our one-time, flat fee – typically around $15 per $100 borrowed – as both a dollar amount and an implied annual percentage rate (APR). While most consumers make their credit decisions based on the real cost, we disclose the implied APR to help them compare products and make smart borrowing decisions. However, our loans do not accrue interest: Whether customers repay their loan in three days or 30 days, they pay the same fee. For many, a payday loan makes personal and economic sense – it may actually be their least-expensive option.
Our employees fully disclose and carefully walk each customer through the terms and fees associated with their loan. Our terms are straightforward because we want to help our customers be successful borrowers. And our repayment and customer satisfaction rates are both above 90 percent, indicating that our customers not only understand the terms of their loans but also appreciate our service. If a customer is unable to repay a loan by the due date, we offer an extended payment plan at no additional charge. We believe that through meaningful consumer protection and exceptional customer service, we offer American families a safe and affordable credit option.
Beyond our dedication to providing consumers with cost-competitive, reliable and transparent credit, Advance America has a steadfast commitment to responsible lending and regulatory compliance. We operate within a complicated framework of federal and state regulations, governing everything from disclosure requirements to truth in advertising to debt collection practices. We support regulating similar products by the same standards, so that all lenders operate on a level playing field and so that consumers are protected and empowered in their financial decision-making. We welcome all opportunities to work with legislators and regulators to explore innovative policies that preserve consumers’ access to critical credit options, while also providing substantial consumer protections.
Any credit product can be misused and abused, and every industry has good actors and bad actors. In our conversations with Consumer Finance Protection Bureau (CFPB) Director Richard Cordray and his staff, as well as with numerous officials at every level of government, we emphasize the need to shine a light on the practices of illegal, unregulated lenders. Many of these lenders operate primarily online, flouting state and federal law. They offer none of the consumer protections afforded by regulated lenders like Advance America, and they exploit consumers, from repeated withdrawals from borrowers’ bank accounts to attempts to scam and coerce payments from consumers who either never actually borrowed or already repaid their loans.
Unfortunately, an unintended consequence of state regulations banning storefront payday lending is that consumers are left with few options beyond these risky, illegal online lenders. A number of states, including Oregon and Washington, have reported significant increases in complaints against online lenders after restricting storefront payday lending. Advance America, meanwhile, was the subject of only about 100 complaints filed with state regulators in 2011 – out of 10.5 million transactions.
We need to acknowledge and differentiate between these good and bad actors. There is a place for regulated short-term credit, and in today’s economy consumers need it more than ever. Lawmakers and regulators should focus on addressing the multitude of illegal lenders and ensuring that lawful lenders operate in a fairly regulated, competitive and innovative marketplace. Only then can we guarantee that all Americans have access to the credit options and the consumer protections they need to safely and responsibly borrow.