Payday of Reckoning

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When the university Kim Saunders used to work for started paying her monthly instead of weekly, she knew she needed help with her car loans. So she called Advance America, which had filled mailboxes across Saunders’ North Carolina neighborhood with its promotional literature offering short-term cash loans–fast.

The deal: The company would loan her $295 for a fee of just $50, provided she paid it all back in two weeks. Well, two weeks later, Saunders says, she was no richer and couldn’t pay back the loan. So she delayed repayment, and Advance charged her an additional $50 fee, as promised in its contract.

Nearly a year later, she has paid the company $1,000 in interest. “I’m still locked in, but to protect my credit I have to keep paying interest,” says Saunders.

On March 14, Saunders joined a few handfuls of New York and North Carolina residents to rally outside the downtown offices of the Federal Deposit Insurance Corporation (FDIC) demanding stronger safeguards against “payday lenders,” as they are called. While North Carolina and New York laws prohibit in-state companies from making these kinds of high-interest loans–in New York, annual interest rates cannot exceed 25 percent–companies affiliated with banks that are chartered in states with less stringent laws can do business here.

Over the last year, for example, County Bank of Rehoboth Beach, Delaware, where there are no loan restrictions, has plastered city subway cars and bus shelters and filled radio airwaves with ads promising loans of up to $500 to anyone who earns at least $1,000 a month in salary or $800 in public assistance. (The fine print on its contracts says the annual percentage rate can total more than 768 percent.)

In an attempt to put an end to these loans before they proliferate in New York, the Payday Lending Task Force of the Neighborhood Economic Development Advocacy Project, whose members range from local credit unions to the American Association of Retired Persons, submitted recommendations to the FDIC asking that the agency require all financial institutions to abide by the laws of the state in which they do business. “Why should some company, because of a technicality, be able to get around our laws?” asks Sarah Ludwig, executive director of NEDAP.

The letter, which was signed by close to 50 consumer advocates and elected officials, including City Council Speaker Gifford Miller, also recommends creating strong incentives for banks to make short-term loans and making it illegal for payday loan agreements to prohibit class action lawsuits.

The FDIC did not return calls for comment.

While their authority over the activities of out-of-state lenders is very limited, some City Council members have taken up the issue. They’re calling on the Metropolitan Transportation Authority to prohibit or limit the ads in subways and buses, or, at the very least, print a legible warning on each of the ads. Says Joshua Rivera, who works for Councilmember Leroy Comrie, “People should know that this could be detrimental to your financial health.”

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