Payday loans are a problem. Can a public bank be part of the solution?

When the coronavirus first posed a threat to Americans’ health and finances, Tiffany Moore of Forest Park went to an installment lender for the first time in hopes of some financial relief.

The good news: she got approved for a $9,500 loan to make up for a tenant at her property who couldn’t make rent. The bad news: An interest rate of 35.989%.

It was easy to sign onto a contract that brought temporary relief. But realizing that she would end up paying more than twice what she borrowed, Moore paid the loan off early.

Payday loans, title loans and installment loans with exorbitant interest can place a financial death-grip on borrowers. That remains the case, even though the Illinois Predatory Loan Prevention Act now puts a 36% cap on the annual percentage rate of interest lenders can charge.

These exorbitant deals continue to proliferate in Black and Brown neighborhoods, as a report by the Sun-Times’ Stephanie Zimmermann makes clear.

Lawmakers ought to be brainstorming some way to help vulnerable communities access credit without resorting to high-interest loans.

Payday lenders point out that they’re serving neighborhoods and high-risk borrowers that other lenders avoid.

Yes, they’re providing a needed service. But what desperate borrower can dig themselves out of dire financial straits while borrowing money at an interest rate of 36%?

Cycle of disinvestment

The report highlights data produced by the nonprofit Woodstock Institute, which found that the top ZIP codes for payday loans were majority-Black. The 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 need triple-digit interest rate loans only if they are stuck in a cycle of disinvestment. If they weren’t, they would get a more safe and affordable product,” Brent E. Adams, senior vice president of policy and communication at the Woodstock Institute, told us. “These lenders depend on the cycle of disinvestment and are irrelevant if communities prosper.”

In March, this Editorial Board supported the cap on payday loan rates, writing that Illinois should impose it out of fairness and for the sake of racial equity. Some 40% of borrowers in Illinois ultimately default on repaying payday loans. More often than not, they find themselves caught in a cycle of debt, with old loans rolling over into new ones.

Another step on the road might be to bring affordable banking services back to lower-income neighborhoods that have suffered from disinvestment.

Member of Congress have voiced 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 and establish permanent banking services as part of the U.S. Postal Service. The nonprofit bank would offer low-cost checking and savings accounts, mobile banking and low-interest loans.

State Rep. Mary E. Flowers has pushed the Community Bank of Illinois Act for over a decade, but has faced continued opposition from bankers.

“Banks are in the business of making money, and here I am proposing lower interest rates for residents,” Flowers told us. “All I want to do is make loans to people they wouldn’t give loans to.”

We’re not sold on the idea of public banking, at the federal or state level. There are plenty of unanswered questions on how the model would work, 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 businesses to agree to lower the 36% cap further, if at all. Ed McFadden, a spokesman for the American Financial Services Association, points to a 2015 Federal Reserve Survey in which lenders said they can’t break even on loans under $2,532 at a 36% annual percentage rate.

Postal public banking isn’t a direct solution, but it could help strike a blow to the problem of predatory payday loans.

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