Biloxi retiree Daniel Smith’s costly home repair project had to be finished, but his two pensions covered only what he needed to survive. The answer to his problems, he thought, came in the mail.
The mail carrier regularly brought pre-approved checks offering Smith instant cash. It seemed a quick way out, but after cashing multiple checks from several lenders it led to bankruptcy.
“I tried to refinance the home. Same thing with the bank, they wouldn’t help me,” said Smith, adding he “tried every option before going into bankruptcy.”
The debt trap that followed his missteps is at the heart of a debate in Washington. Should non-bank lenders that offer consumer loans be required to gauge a borrower’s ability to repay their loans? These lenders run the gamut from ones offering cash in advance of paychecks to loans paid back in installments to lending with car titles as collateral.
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Smith is not his real surname. Daniel spoke on condition that his last name not be used, embarrassed by his financial straits. He blames himself for poor choices but warns Mississippi’s light touch on regulation leaves the door wide open for predatory lenders.
“I am a grown man, retired military, worked for the city of Biloxi for 14 years so I am not an uneducated man. However, I got caught in this. They make it too simple,” he said.
It wasn’t a single pre-approved check that came in the mail that did in Smith, it was several from small-loan companies that all offered him money quickly. His name was on a pre-screened list based on credit ratings, and he bit. And more than once.
“They should not send checks to people where all you have to do is go deposit it or cash it. They make it too easy,” said Smith. “When you are in a bind and you really need it, you are going to do it.”
The lack of any rule requiring non-bank mortgage lenders to measure their borrower’s ability to repay was a major factor in the near collapse of U.S. financial system a decade ago. It led to tougher regulation of mortgage lending, but no such oversight exists for many types of consumer finance products offered by non-bank lenders.
Common as fast food
And Mississippi is chock full of these lenders. It’s why tales like Smith’s are common in bankruptcy court.
“Roughly 80 percent of our cases are debtors who have some sort of payday loans, a smaller percentage of it is [car] title loans,” said Michael Ramsay, a bankruptcy attorney for the Sheehan Law Firm in Ocean Springs, Miss. “There is a significant amount of title and payday lending.”
These check-cashing stores — which encompass payday lenders, auto title loan firms, and installment loan companies — are as pervasive in Mississippi as fast-food joints.
There were 425 title-pledge lenders in Mississippi at the end of last year, 774 check cashing companies (which include payday lenders), and 391 of the newly recognized “credit availability” companies. There are another 569 small-loan firms like the ones that sent “live” checks to Smith. Together these “lenders-of-last-resort” to the working poor represent a billion-dollar industry.
Looming changes in federal regulation, especially the question of a borrower’s ability to repay high-cost loans, jeopardize the business model of what detractors label predatory lending.
In anticipation of federal changes, Mississippi in 2016 tried to get ahead of them by passing and enacting the Credit Availability Act. It expanded the types of high-cost loans that could be offered in the state, effectively muting the expected federal rules.
“Not only has the legislature not done anything to reduce the harm, it has taken affirmative steps to expand the harm,” said Diane Standaert, executive vice president and director of state policy for the Raleigh, N.C.-based advocacy group Center for Responsible Lending.
Consumer advocates in Mississippi agree.
“I’ve heard it said that any business is a good business in Mississippi, even if it hurts its citizens,” said Charles Lee, consumer protection director for the Mississippi Center for Justice, adding this lending targets the “least capable of being able to defend themselves.”
In an ultimately unsuccessful attempt to thwart expansion of high-cost lending, the Roman Catholic bishops of Biloxi and Jackson sent a joint letter to lawmakers in 2016 trying to convey that these sorts of loans can carry abusive costs. It’s a view still held by the Rev. Roger Morin, who has since retired but remains active as bishop emeritus in Biloxi.
“These types of predatory loans are offered under the guise of a safety net, but ultimately turn into a tangled mess of exorbitant interest rates and fees that are often inescapable and drive individuals and families further into debt,” he said a statement on Friday. “It’s really a short-term fix with long-term and often crippling ramifications.”
Lenders take a different view.
“We wanted credit to be available to people who need to use this kind of product,” said Al Sage, an influential lobbyist in Mississippi whose firm Sage Advice has represented a broad swath of non-bank lenders. “Some people get in a bind and need something.”
The loans that lured in Smith were small installment loans, but Mississippi has a wide range of lending done outside of banks.
In its annual report for 2017, the Mississippi Department of Banking and Consumer Finance said it regulated 2,758 licensees in 10 non-bank lending categories. The division held 916 examinations, and revoked the license of a large non-bank lending firm last year.
“I feel we do a good job of regulating,” said Taft Webb, director of the consumer finance division, pointing to aggressive advertising of complaint lines and general standardization of loan documents.
Mississippi has no prohibition on taking out multiple loans across the lending platforms, what got Smith in trouble and what Webb termed “unfortunate.”
One reason Webb can say that is that while lenders in Mississippi are allowed to charge triple digit annual interest rates, they must be clearly spelled out and offer the borrower a clear schedule of payments and costs.
“It’s not our job to determine what rates should be,” Charlotte N. Corley, the state’s banking commissioner, said in an interview.
It was echoed weeks later by Webb, who said, “We don’t make the law, we just regulate.”
Non-bank lending in Mississippi is newer than traditional bank loans. The state in 1997 allowed loans against a car title as collateral and a year later high-cost small loans against a borrower’s next paycheck.
Most borrowers that use non-bank financial companies are poor, comprising what’s often called the unbanked. They don’t have checking or savings accounts, and any check they receive is cashed at places that charge as much as 2 percent of the value in exchange.
Mississippi routinely leads the Federal Deposit Insurance Corp.’s survey of unbanked and underbanked households with 15.1 percent of its households in that category in the latest survey.
“Those loans are put in place for people who can’t go to their bank and get a loan. I understand that,” said Holly Wilhelm, a housing and finance counselor for the Gulfport non-profit group Mercy Housing and Human Development. “But many people don’t understand the consequences of the loans. They don’t understand how they work. They don’t understand the jargon. .... Unless someone has taught you, you don’t know.”
It’s why many in Mississippi bypass banks.
“Some people choose to remain unbanked. Sometimes they don’t trust banks,” offered Webb.
Most often, said Lee, the advocate, it is a learned behavior.
“Most people do what their parents did. If they [the parents] cash a check at the liquor store that is what they are going to do as well,” he said. “The payday lenders locate in communities of low wealth and they target those people.”
Sage, the industry lobbyist, argues the reason is simpler: It fills a need.
“It’s been around a long time, because people are using it so there’s a need for it,” he said. “If it was not needed then it would have gone away a long time ago.”
Expanding Title Loans
Mississippi’s 2016 legislation also expanded the range of lenders who could offer loans made with car titles as collateral, allowing cash advance companies and check cashing firms to offer these loans.
Before 2016, anyone offering a title-pledge product — a loan in which a borrower’s car title is collateral — had to be separated by a walled space from employees offering other types of loan products. That too went away.
Title-pledge loans in Mississippi are 30-day loans that can be extended for up to 10 months. Over the course of the loan the monthly interest rate can be up to 25 percent, for an equivalent annual interest rate of 300 percent.
If a borrower in Biloxi or Gulfport got a title loan for $2,000 at the 25 percent rate of interest, he or she would have to pay $2,500 in 30 days to get their car title back. For every extension beyond that, the borrower must pay down 10 percent of their principal in addition to paying interest. At the end of the maximum 10-month period, borrowers could end up paying as much as $7,000 to buy back their car title.
Mississippi and Georgia stand out as states where title lending is prevalent. Three of the top national title lending companies are headquartered in Georgia — TMX Finance, Select Management Resources and Community Loans of America. Mississippi has these big firms, but also has a large number of smaller lenders.
In 2004, Georgia banned payday loans, where lenders offer high-cost, short-term loans in exchange for getting first dibs on a borrower’s next paycheck.
By contrast, Mississippi is a national leader in payday lending and along with Georgia one of 22 states that allow non-bank lenders to charge triple-digit annual interest rates.
An analysis of federal court records from 2008 to 2018 by McClatchy and The Sun Herald finds that over the past decade Mississippi is second among all states, behind only Georgia, where the big three national title-pawn companies are listed as creditors in bankruptcy filings.
Georgia tops the list both in raw numbers and per 100,000 residents and Mississippi is a fraction behind in filings per 100,000 residents and a distant second in sheer numbers.
Consumer advocates and groups that aid the working poor want restrictions on title lending. When a borrower loses a vehicle they often lose their ability to earn a living, critics argue, prompting a downward spiral that contributes to broken families, crime and community blight.
Mississippi’s bank regulator oversees title-pledge loans. These function much like a title-pawn firm might in Georgia, where a borrower offers a car title as collateral and the title-pledge lender can seize the car if loan terms are not met.
But title-pawn advances in Georgia are 30-day contracts that must become new, larger ones if not paid off in 30 days and the borrower seeks more time. They are not called loans anywhere on the contract, and become a growing debt trap for many borrowers.
Title-pledge loans in Mississippi operate more like a conventional installment loan in that they don’t roll over into a new product every 30 days. There are specified repayment schedules with high rates of interest baked into the loan. Lenders can seize the car for failure to meet loan terms.