Pending bill continues debt trap for low-income borrowers

By Alex Mikulich, Ph.D.

On January 11, 2011, a coalition of Mississippi’s religious and social justice leaders called Mississippians and the state legislature to end predatory payday lending.   As the Mississippi House Banking Committee unanimously passed a bill that would extend predatory lending in Mississippi, Bishop Hope Morgan of the United Methodist Church reflected: “I come to bring good news to the poor—572 percent is not good news to the poor.  The poor are being entrapped.  We are better people than this.” 

The House Banking Committee did not make the bill available for reading until after its vote.  It makes the maximum term 28 days instead the proposed 31 days.  The legislation also increases the maximum amount of a loan from $400 to $500, including fees.  The bill includes a fee to fund the Consumer Protection Education Fund to benefit the Attorney General’s Office and the banking commissioner.  The bill adds a default charge of $20 or 5 percent of the face amount of the check if the loan is not paid back in 10 days. 

Mississippi law enabling payday lending is set to expire in 2012. 

Reverend C.J. Rhodes, pastor of Mount Helm Baptist Church in Jackson, testified that the rates “are not just unjust, but sinful.”

The proposed bill would continue the debt trap payday loans set for poor Mississippians.  As the Mississippi Economic Policy Center (MEPC) explains, the debt trap is created when a working family is unable to pay off the first payday loan and must take out multiple loans over the course of the year to cover basic expenses.   

MEPC utilizes this graph to demonstrate how a payday loan leads to a debt trap:

Table 1: Borrower Earning $35,000 a year, Taking Out $300 Payday Loan @ $21.95 per $100 Borrowed

Given this shortfall, the family will need to either take out another payday loan or choose to skip paying certain bills.  On average, borrowers take out eight payday loans per year.  A 36-percent rate cap in Mississippi with 90 days for repayment, as proposed by MEPC, would allow working families to avoid the debt trap. 

The politics of campaign financing further compounds the challenge that religious and social justice leaders face in the effort to end predatory lending. The Mississippi Center for Justice reports that short-term lenders donate heavily to legislative banking committee chairmen in hopes of extending payday lending in Mississippi.  Senate Business and Financial Institutions Committee Chairman Gary Jackson, Republican from French Camp, reported a total of $5,100 of his $14,700 donations received between January and December 2008 were from payday lenders.  House Banking Committee Chairman George Flaggs, Democrat from Vicksburg, reported $4,900 of his $64,950 contributions in 2008 and $5,100 of his total $43,675 contributions in 2009 were from payday lenders. 

Representative Flaggs retorted that any suggestion that donors influence his vote was an “attack” on his character.  According to the Jackson Free Press, Flaggs defended payday lenders’ contention that they can’t stay in business if their exemption expires.  Flagg contends that the $21.95 payday fee compares favorably to credit-card company fees.

Beth Orlansky, Advocacy Director for the Mississippi Center for Justice stated that “Basically, [payday lenders] are protecting the way the industry conducts business in the state of Mississippi.”  She continued, “It’s the history of the industry to contribute to political campaigns in an effort to secure their special exception to the Small Loan Act.  It would be expected to see an increase in contributions due to the fact that this exception, which expires in 2012, will see legislative action in [this 2011] session.” 

The Mississippi Center for Justice does not donate money to any political campaign.

Alternatives do exist in Mississippi.  The MEPC provides a map indicating the location of over 600 sources of small loans that can be obtained at more affordable and manageable terms than payday loans.  First, small loans of $1,000 or less from banks and financial institutions are subject to an Annual Percentage Rate cap of 36 percent, far lower than the 572 percent charged by payday lenders.  Second, small loans have longer terms for repayment.

Commenting on the House Banking Committee’s January 11 vote, former Bishop William Houck of the Catholic Diocese of Jackson said “It would be my concern that all citizens and especially our legislators continue to address the basic truth that an essential measure of a moral society is the way the weakest, poorest and most vulnerable citizens fare in the life and policies of that society.  We need to search for the wisdom and courage to build that kind of society in our state.” 

The Mississippi Center for Justice also works with localities to create a society that cares for the most vulnerable.  The Mississippi Economic Policy Center advocates local, state, and federal economic policies that end poverty and that empower Mississippi’s working families to gain financial self-sufficiency and economic security. 

The Mississippi House of Representatives passed Bill 455 to continue payday lending by a 78-38 vote late on January 18th and the bill now goes to the Senate.