For decades now, the gap between the rich and poor in America has been growing.  Automation and the outsourcing of service and manufacturing jobs to Asia and developing countries have contributed to this growing problem.  This gap between the rich and poor has resulted in another gap, the deficit between those individuals with access to reputable financial services and those without.  Payday lending has become one of the grim alternatives to address the needs of those without access to the world’s most sophisticated financial market. 

Traditionally, the high risk associated with lower-income borrowers has resulted in a much more costly product, if one is available at all, for the bottom sector of consumers. However, the notion that “the poor pay more” has breached the boundary of fairness and headed directly into the realm of exploitation.  Payday lending is one of the newest variations of price gouging that is directed specifically at our vulnerable neighbors.

Payday lenders, who can legally charge up to 782% APR in Virginia, entrap borrowers with few viable financial alternatives and limited financial education in cycles of inescapable debt.  This product, or “service” as industry proponents would have the public and policy makers believe, is dramatically different from loans offered to the more affluent consumers. Payday lenders target the desperate, and it is in their desperation that payday borrowers become victimized by an industry consumed by its own greed.  Many Virginians have found these business practices, especially the triple-digit interest rates and the debt trap, to be nothing less than egregious.  And many, in turn, have begun to respond.

Across America and the state of Virginia, coalitions are being formed to address the problem of predatory payday loans.  While there have been some successes nationally and in Virginia to address the multitude of issues surrounding payday loans and access to financial services, progress has been limited as a result of the power of the payday loan industry.  This business force has grown exponentially over the past decade, and now imparts influence from the very smallest locality all the way up to some of the most powerful federal representatives.  The payday loan industry, rich off the backs of those that can least afford it, spends millions in lobbying efforts and sophisticated public relations campaigns.  They are a formidable opponent, victory over which will require a targeted, specific, and sustained effort and strategy. 

The purpose of this paper is to integrate the efforts of those organizations in Virginia working on the problems outlined above and to propose an action plan for addressing the problem.  The approach outlined will be both ‘bottom up’ and ‘top down’.  In regard to legislation, the focus will be on elected officials that have the power to change and enforce the law and cap payday loans at 36% APR.  Within regard to alternative financial services, the focus will be on building a local model that would be replicable and exportable to other regions.  The key to success of this plan will be our ability to obtain the support and leadership of those individuals and institutions already committed to this effort and to gain the support of those financial institutions that will provide the fair alternative to payday lending and who will profit in the process. This plan is composed of three parts to be pursued concurrently:

1)     To repeal the law allowing payday lending or, at a minimum, amend the law to address the most predatory practices to include a 36% APR interest rate cap and removal of the debt trap.

2)     To provide viable financial alternatives to payday lending for lower-income Virginians who find themselves in need of short-term small denomination loans.    

3)     To achieve financial literacy through education for those most likely to be payday borrowers.

The first priority will be a concerted effort to cap the interest rate at 36% APR for all Virginians as the US Congress has done nationally to protect our military personnel.

Structure

In the pursuit of these three goals, a board of directors will be established to create both short-term and long-term strategies and manage the implementation process.  This group will be drawn from concerned individuals, financial institutions, faith based organizations, consumer advocacy groups, the business community, and other partner organizations already working on the issue.  Under this board of directors, three committees will tackle each goal separately, developing a plan of action relative to their assignment. 

Repeal of Predatory Lending Laws

The payday lending industry is powerful, both nationally and in Virginia.  That power is made up of financial resources, access, and influence to the state and federal legislatures.  The committee on repeal of the predatory loan laws will be responsible for:

1)                 Drafting model legislation to be submitted by key legislators for the repeal of the 2002 Payday Loan Act or implementation of a 36% APR rate cap, along with the elimination of the debt trap and other legislation, as appropriate

2)                 Identifying state committees and legislators most critical to repeal or amendment of the statute

3)                 Employing a lobbyist with experience and access to the key members and committees in the state

4)                 Providing briefing materials and information on the tragic impact of these laws on those entrapped by the predatory lenders

5)                 Gathering support of local organizations and Virginia citizens to demand action by their representatives in the state legislature

Alternative Financial Services

The repeal of payday lending laws will be a hard battle in view of the power of the payday lending lobby.  Regardless of the outcome of the legislative initiatives, there is an immediate need to address the substantive problem of those without access to financial services, often referred to as the “unbanked” or “underbanked”.  Financial institutions are increasingly aware of the need to service this community of potential customers and are beginning to address it. 

As C K Prahalad points out in his book “The Fortune at the Bottom of the Pyramid”, multinational companies are discovering that the less advantaged are increasingly viewed as a vast community of customers that can be serviced to the benefit of the business as well as the public.  Financial institutions can join this fight against payday lending as partners and beneficiaries as these borrowers are transformed from victims to customers. 

Internationally, the World Bank and the International Monetary Fund have recognized that lending to the less affluent has the potential to reduce poverty and encourage growth and development.  The task of this committee is to leverage and accelerate this nascent movement.  The committee on alternative financial services will be responsible for:

1)                 Researching the extent to which financial organizations have begun to address this problem, including identifying national organizations who already developed alternative products (e.g., FDIC’s Money Smart program, Langley Federal Credit Union’s Quick Cash program & Prosper.com)

2)                 Reviewing CFSA’s Peer to Peer Training

3)                 Documenting the approach used by these organizations and the successes achieved

4)                 Identifying those financial service organizations such as credit unions and community banks with a special interest in serving this market and aggregating into an easy to access list

5)                 Ensuring that every local community has financial institutions ready to serve this client base

6)                 Helping to market and advertise viable financial alternatives to a wide audience, including churches, civic associations, and other groups with access to traditional payday borrowers

 Financial Literacy

There is a significant deficit in the US regarding the issue of financial literacy.  The US government, state governments, and banks and credit unions are beginning to address this issue, acknowledging the danger of an uneducated populous subject to financial exploitation and ruin.  They have begun developing programs to reach out to those in need of information about financial services in their communities.  Unfortunately, the organizations providing these services are too far and few between.  The financial literacy committee will be responsible for:

1)                 Identifying the financial institutions and other organizations that have successfully used programs to disseminate information about financial services

2)                 Reviewing the materials currently used for providing counsel to those in need

3)                 Adopting one or more of these training regimens as the standard

4)                 Encouraging other financial institutions in local areas to provide such training and working in partnership to provide resources to supplement their efforts

5)                 Providing an accepted curriculum and supplemental materials to the churches and civic organization for the widest dissemination to those in need of these services.

Implementation

Plans are not self-implemented.  They require the action and leadership of individuals and organizations that are committed to achieving short and long-term objectives immediately after they are identified, under a pre-set and agreed upon timeline.  The board of directors will work with each of these committees to assist in the development and implementation of their plans. 

Adopted: May 21, 2007