Even as guidelines against payday lending services stall out in the labyrinth of bureaucracy, local changemakers continue to provide relief for families caught up in debt traps–and fight to keep wealth within our communities and out of the hands of financial predators.
For Lara and her ex-husband, using payday loans was only supposed to be a one-time, financial Hail Mary. Like many American families, the couple found themselves strapped for cash and reluctantly took out a payday loan to manage bills until their next paycheck. At the time, Lara was a young mother raising three children at home while her husband worked full time.
“He was in the military, I was a stay-at-home mom working jobs when I could,” Lara, who asked not to share her last name due to her job, said. “The military didn’t pay enough. Unfortunately they just don’t.”
“We got a payday loan of about $200,” Lara said. By the time payday came around the lender wanted $300. They were able to pay back the $300, but they came up short on their next payment.
“So we took out another loan,” Lara explained. And just like that, the trap door slammed down.
“It’s just so easy to get. So easy! You just bring a paystub down and you tell them how much you need,” Lara said.
And for many Americans caught up in a financial crisis culture of living paycheck-to-paycheck, signing up with a predatory loan agency provides that quick fix, easy money in the short term, which soon becomes a dangerous predicament.
“I kid you not, we did that dance for close to six months,” Lara said. “It was horrible. Just unbelievably horrible.”
Finally, Lara had to beg her parents to help get them out of the cycle for good. But not everyone has such a safety net to fall back on. For some Minnesotans, payday loans are the only recourse they have in times of crises. And the system is deeply flawed.
Payday loan services have been a staple on the public financial landscape since the 1980s. By definition, a payday loan is a small dollar loan, usually between $200 to $1,000, with an extraordinarily high interest rate that requires the borrower to pay back in full with their next paycheck, or risk even further financial penalties. The average annual percentage rate (APR) on payday loans is about 273 percent.
Shockingly, payday loans are still legal and in many states operate without regulation. Even in the face of overwhelming evidence as to the predatory and unjust nature of such loans, multiple efforts to impose national guidelines on payday loans since the 2008 recession have failed. Payday lenders even have both Minnesota DFL and Republican parties eating out of their hands.
“The powers that be in our state are beholden to the payday lenders,” Anna Brelje, co-founder of Exodus Lending, a nonprofit organization committed to helping borrowers break the predatory lending cycle, explained.
In 2014, payday lending groups, including Burnsville-based Payday America, contributed a total of $59,743 in campaign contributions to state lawmakers, with Republicans accepting 75 percent of total contributions to the DFLers’ 25 percent, according to the Star Tribune.
But watchdog groups and economic justice advocates are persistent. In June, the Consumer Financial Protection Bureau proposed new guidelines in an effort to limit the scope of damage caused by payday lending institutions. The guidelines include rules like requiring lending institutions to ensure the borrower can repay the full amount of the loan (and still afford major expenses and obligations), or else the loan won’t be given. Another proposal is for lenders to offer less risky, longer-term lending options.
Leading Minnesotans out of payday loan debt
At any given time, according to Exodus Lending, around 30,000 Minnesotans are stuck in the cycle of vicious lending. Because of the ridiculous interest rates, it can take many borrowers a year or more to get out of the payday loan cycle.
Founded in 2012, Exodus Lending was founded after a new business opened on Lake Street, just around the corner from Holy Trinity Lutheran Church, in the Longfellow neighborhood of Minneapolis.
The congregation learned that the building would soon be home to a payday loan service center and many were outraged at the prospect of having yet another financial predator move into their neighborhood.
“We started reaching out, listening to people,” Brelje explains. “Then two efforts began. The first was a push to regulate payday lending so that it would be fair. The other was to offer an alternative for people who were trapped in payday lending.”
Out of their efforts, the missionto provide financially stressed payday borrowers with a just pathway to financial stability was born. According to Brelje, their vision is for a local economy that can thrive without being victims of poverty profiteering.
Brelje is also no stranger to payday lending horrors. Earlier in her life, she fell victim to the trap of predatory lending services. However, she overcame the debt once she was able to access more stable financial resources and affordable healthcare.
So, in the process of seeking funding to start up the organization, Brelje began sharing her story. Exodus Lending eventually won funding from Colonial Church in Edina in a social entrepreneurship competition. Even after that startup grant, it took another year of planning before they started any lending.
During Exodus’s first year of borrowing, they reached 80 borrowers with a combined debt amount of $45,000.
“We saved those people a collective amount of over $200,000 in fees,” Brelje explains. “That shows just how much payday (loans) are draining from our communities.”
Here’s how Exodus Lending works. People who have been victimized by payday lending make an appointment. They come and meet with staff, talk about their circumstances and they listen to their story. Then they pay off their loans.
“Our staff person literally goes down to the Payday loan office and pays off the loan,” Brelje said.
Once Exodus pays off their loan, then participants now have a loan with Exodus, where they have 12 months to pay it off at zero interest and zero fees. Then during those 12 months, Exodus also offers incentives for financial counseling, primarily through Lutheran Social Services.
For Brelje, the economic catastrophe that payday loan companies leave in its wake are only the tip of the iceberg in the broader discussion about economic justice and a shrinking middle class.
Low credit + low wages = less opportunity
The issue of disparity in credit reporting systems also really strikes a nerve among economic justice advocates.
The credit reporting system is another reason why banks and credit unions are hesitant to lend to people. It’s a rigged reporting system, claimed Gina DeNardo, a financial wellness coordinator who teaches financial self-sustainability and healthy budgeting classes at EMERGE. For those who have been victimized in any way by any predatory lender, had their finances stretched and maxed out the credit that already exists, or had trouble with their mortgage, then their credit subsequently is bound to take a nosedive that could take years to build back up.
“Traditional credit tracking is not set up to help people succeed,” Brelje said. “We need alternative credit.”
Lara also fought for years to combat the ramifications of a crummy credit score.
“The loan market is really locked up for people like me who don’t make a lot of money or who don’t have decent credit,” Lara said. “You can’t just go somewhere and get a [fair] loan. Not a lot of banks give out loans for $200. And, unless you have good credit you can’t get a credit card. So the ways to obtain extra money are very limited.”
DeNardo agrees. She said that many people’s credit scores are chronically tarnished by the same predatory lending institutions that set them up to default and fail and that many agencies are required to report bad credit marks but reporting good credit experiences are optional.
EMERGE is a nonprofit organization with branches both in North Minneapolis and the Cedar-Riverside neighborhood. Their mission is to help adults achieve professional and personal empowerment through education, training, employment and financial literacy. Her classes take place in North Minneapolis where, coincidentally, credit unions–often hailed by advocates as a fairer alternative to big banking–simply aren’t present.
“Sure, credit unions are great, but where are they?” exclaimed DeNardo. She pointed out the the closest credit union to the Northside is downtown, which likely caters to a different demographic.
And sooner or later within the national conversation about predatory lending, you have to talk about the $15 minimum wage debate.
“People have to be able to live,” Lara said.
But many can’t afford to live. There’s simply no safety net or support for people. A recent study by the Federal Reserve Board concluded that 47 percent of Americans wouldn’t be able to afford a $400 emergency expense.
“If people are not making a living wage, it doesn’t matter how much you try to impart on individuals the sense of financial responsibility. There’s a never-ending uphill battle of trying to succeed,” Brelje said.
Common denominator: Racial disparities
Racial disparities are rampant when it comes to accessing loans, credit and banking systems. In July, the National Community Reinvestment Coalition reported that African-Americans in the Twin Cities metro represent 7 percent of the population, but only received 2 percent of all mortgage loans. In addition, Latino borrowers only received 2 percent of all loans in the metro, despite making up 5 percent of the population.
Discrimination in lending leaves more people disenchanted with the banking system and with fewer borrowing options, leaving an opening for payday loans to fill the gap. After all, payday lending services, according to Brelje, rely on people’s inability to pay back a loan. They prey on economic, social and racial vulnerability.
“That’s why the payday lenders succeed. They take advantage of people who are ashamed, who are alone, struggling, being told through our economy that their work doesn’t matter, that their family doesn’t have access to the same upwardly mobile economic advantages that others have,” Brelje said.
Anyone who is financially vulnerable and living paycheck to paycheck, can be victimized. When regular, everyday expenses become unsustainable and unmanageable, people are more likely to seek out payday lenders.
And this, according to Brelje, tells a lot about the ways that the economy today is just not working for people.
In Latino communities linguistic barriers, identification requirements, collective bias and unfamiliarity with traditional banking institutions are just some of the reasons why Latino communities tend to steer clear of traditional banking services, according to Mario Hernandez, vice president and chief operating officer of the Latino Economic Development Center.
“[Recent immigrants] really need to be able to access financial institutions like (LEDC) that help them connect with alternatives when they’re not accessing traditional banks,” Hernandez said.
Historically, disenfranchised communities, especially communities of color, have been systematically excluded from opportunities to build intergenerational wealth and to enjoy the wealth-building practices that comes with traditional banking methods. People of color are therefore particularly vulnerable to predation and exploitation on behalf of predatory lending services and traditional banking methods alike, said Rose Brewer, professor of African-American studies at the University of Minnesota.
“It’s the ugly underbelly of profit and private property in this country,” Brewer explained.
African Americans were systematically excluded from pathways to homeownership as early as World War II, when “white flight” pulled tax dollars out of the urban core and other programs and policies like redlining helped to financially prop up the white middle class and exclude others.
“You don’t build equity from home rentals,” Brewer said. “It had implications for the ability to pass on wealth from generation to generation.”
Many people of color are left with little options to generate sustaining wealth for their families. As The Nation recently reported, it would take 228 years to accumulate as much wealth as the average white family. A Latino family would need 84 years to accumulate as much wealth. With the combined unequal access to financial resources and unchecked consequences from institutionalized racism, it’s no wonder that many borrowers of color are forced into settling for high-risk, subprime loans or resort to payday services.
“The pressure, as usual, has to come from the bottom,” said Brewer. “There are some things that can be done that will offer some relief for people.”
Brelje, DeNardo and Brewer all agree overwhelmingly on one thing: the minimum wage has to to be a living wage.
Brelje and the folks at Exodus Lending know that if there is to be any real change in the way our communities fight back against predatory lending services, the popular narrative and perception about who uses payday lenders needs to change.
“Payday lending is an issue that hurts someone you know,” Brelje said. “Everyone needs to step up.”
Financial resources for the community