(Stephen Reeves will lead a workshop titled "Predatory Lending and the Church: Morality, Missions and Advocacy" during the CLC's Micah 6:8 Conference March 31-April 1 at Trinity Baptist Church in San Antonio.)
Through the prophet Micah, God commands us to do justice. Doing justice is not extra credit; it is not bonus activity or tangential to the Gospel. The work of justice is at the very heart of the gospel of Jesus Christ, the Son of God who came proclaiming release to those held captive.
Millions of our neighbors are held captive by modern debt-slavery. Predatory lending, in the form of payday and auto title loans, ensnares many borrowers in a cycle from which it is hard to break free.
Payday loans are high-cost, small-dollar loans offered with no credit check required. The product seems deceptively simple, but results in terrible complications for many customers. It typically requires payment in two weeks or at the individual's next payday. While the borrower need only show a pay stub or other proof of regular income, including government benefits, lenders give little consideration to the ability of an individual to repay the loan within the original term and meet his/her other obligations for the month. As a condition of the loan, the lender is given direct access to a bank account via a post-dated check or through electronic ACH authorization.
Auto title loans are similar, but the lender holds a car title as collateral and will repossess the car should the borrower fail to pay on time and in full. In addition, lenders in Texas are increasingly offering longer installment loans of nearly six months that still carry triple-digit interest rates. These loans can keep borrowers in debt even longer if they are refinanced.
The typical interest rate and fee charges for a two-week loan range from $15 to $25 per $100 borrowed. The annual percentage rate (APR) for these loans is frequently 391 percent to 700 percent and can climb even higher. In Texas, there is absolutely no limit to the interest rate or fees that can be charged.
While marketed as a short-term solution for emergency expenses, neither is typically the case. According to borrower surveys, 69 percent of loans are used for routine, recurring expenses, and a two-week loan often results in five months or more of debt. A loan of $350 will commonly cost a borrower $800 or more to repay — frequently even three to four times what was borrowed.
A Consumer Financial Protection Bureau analysis of 15 million transactions revealed 80 percent of payday loans are renewed, rolled over, or taken out within 14 days of a previous loan being paid off. In other words, most borrowers get caught in a debt trap.
That same analysis showed that 75 percent of fees generated from payday loans come from the 48 percent of borrowers who have taken out 11 or more loans a year. That is not a business model built on one-time, short-term loans as they are marketed to the public and sold to policy makers.
These products are not loans in any traditional sense; they are self-perpetuating, fee-generating devices whose structure creates a perverse profit incentive for borrower failure. The more the borrower fails, the more money the lender makes. What has been referred to by many as a "cycle of debt" is not an unfortunate accident; it is intentional, and it is the most profitable scenario for the lender.
In states across the country, churches and people of faith have been some of the strongest advocates for reform.
In my workshop at the Micah 6:8 Conference, you'll learn how Christians can work towards justice for those exploited by this industry. You'll hear from a number of people doing this work in a variety of ways, including those who have been advocating for reform and those working to make sure alternatives to this modern-day usury are available.
Well-informed Christian advocates on this issue can bring change that will provide a more just and honest approach to small-dollar loans in the marketplace.
Stephen Reeves is associate coordinator of partnerships and advocacy for the Cooperative Baptist Fellowship.