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As Kentucky payday lenders see a decline in business, the industry looks for forgivable loans

ByCindy J. Daddario

Mar 9, 2021

As members of Congress push for payday lenders to get access to federal loans, data shows their Kentucky business has plummeted with the pandemic outbreak.

According to a monthly report from loan processing company Veritec Solutions to the Kentucky Department of Financial Institutions, the industry processed about 20% fewer loans in March than in March. This is equivalent to a $ 8.3 million decrease in lending on short-term, typically high-yield, loans.

The database shows that loan volumes ranged from 129,000 in March 2019 to 168,000 in the following August. But only 104,000 loans were processed this March, the lowest by far in the last year.

More than 282,000 Kentuckers applied for unemployment insurance in March.

Payday or deferred deposit loan products offer borrowers small dollar loans, typically those with poor creditworthiness or no access to a traditional bank account. Data shows that the average payday loan in Kentucky was $ 348 last year. Borrowers usually have to repay the borrowed amount plus interest and loan fees within two weeks.

Industry critics say the loans are designed to put borrowers in a debt cycle, and Research by the Consumer Financial Protection Bureau shows that more than 75% of payday loan fees come from people who borrow more than 10 times a year.

The industry reached out to Congress for help managing the downturn, and a group of lawmakers last week asked Treasury Secretary Steven Mnuchin and Head of Small Business Administration Jovita Carranza to give short-term, high-yielding lenders access to funds from the Allow paycheck protection program.

No decline in business was mentioned in the letter; Kentucky Rep. Andy Barr, a Republican from Lexington, was among the signatories.

If the legislature’s request is upheld, payday lenders with annual interest rates of up to 469% could avail forgivable loans at an interest rate of 1%.

Ben Carter of the Kentucky Equal Justice Center says it’s too early to say why Kentucky credit has been falling.

The expanded unemployment benefit can reach more people and help the new unemployed meet the cost of living; The Kentucky eviction freeze may mean people are less desperate for cash even after job losses.

The real impact of the coronavirus and subsequent policy changes won’t become clear until months later, Carter said, and people could still turn to these products if the crisis persists.

“The reality is that payday loans are incredibly expensive,” Carter said.

Payday loans are already in decline

Interest rates are capped at 36 percent or less in 16 states and the District of Columbia. However, Kentucky lenders are not subject to an interest rate cap, although borrowers can only have two outstanding loans at a time from one lender.

According to Whitney Barkley-Denney, senior policy counsel at the Center for Responsible Lending, a nonprofit research and policy group for the Self Help Credit Union, consumers have turned their backs on payday or deferred deposit loans.

Instead, borrowers are turning more and more to installment and online lenders, some of whom offer longer repayment plans with more lenient interest rates than payday lenders.

The Kentucky Department of Financial Institutions issued guidelines on March 24th for non-bank lenders to “work with coronavirus-affected customers to meet their financial needs”. The department recommended that lenders restructure existing loans, extend repayment deadlines, or waive fees.

So far, small financial institutions that are not banks are not eligible for loans from the paycheck protection program. These include federally certified Community Development Financial Institutions, which offer underserved communities under strict guidelines financing options with bank-like interest rates. In its letter, the legislature has expressly endeavored to include these institutions.

Not mentioned in the letter are payday lenders. But Rep. Blaine Luetkemeyer, a Republican from Missouri and a lead author of the letter, confirmed to POLITICO that it was meant for payday lenders. Luetkeymeyer is a member of the House Financial Services Committee and one of the payday loan industry’s most popular legislators, having received $ 164,900 from the industry over his career. according to OpenSecrets.

Payday Lenders Contributed More Than $ 50,000 to Barr’s Congressional Campaigns after Open Secrets. Barr’s opponents in the 6th District, representing central and northeast Kentucky, have previously criticized his relationship with payday lenders.

Barr’s office did not respond to a request for comment.

“Retaining people who work with non-PPP finance providers during these troubled times will make it easier to restore American productivity once the health crisis has subsided,” the letter said.

The Community Financial Services Association of America, a trading group that represents payday lenders operating in Kentucky such as Advance America and CheckSmart Financial, says its members are key companies that provide access to credit.

“Adding these companies to the paycheck protection program would ensure that lenders, many of whom are small businesses, are able to keep credit flowing and serve their customers and communities uninterruptedly,” said a spokesman for the Community Financial Services Association of America in an emailed statement.

Critics say that payday loans do not meet the PPP goals

However, Barkley-Denney of the Center for Responsible Lending says that most payday lenders are not small businesses and that their access to taxpayers ’money through the Paycheck Protection Program would be” the opposite of what the PPP is supposed to do. “

“PPP is about building prosperity in communities,” said Barkley-Denney. “Payday lenders are the opposite of that; they deprive communities of wealth, they make people less financially secure. So the idea that we want to spend taxpayers money to support them is just absurd. “

Sarah Crozier, senior communications manager at Main Street Alliance, a network of small business owners, says loopholes in the paycheck protection program prevent it from really helping many small businesses. Main Street Alliance has heard from members that the program’s timeline to provide assistance is too short and the cost it covers too limited. Many small businesses have struggled to get approval from lenders while larger companies have received credit before the initial funds were used up.

But opening up the program to high-yield lenders, including companies that provide predatory loans to small businesses, would be a step in the wrong direction, says Crozier.

The legislature’s letter also aimed to cover companies that offer factoring services or cash advances from traders who use a company’s future earnings to secure funds. Recent research by the Opportunity Fund, a not-for-profit small business lender, found that such products have an average annual interest rate of 94 percent but can go up to 358 percent.

“Opening up small business finance to payday lenders who turn around and abuse small businesses is absolutely the wrong way to support small businesses during the crisis,” said Crozier.

(This story went on first Kentucky Public Radio.)

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