Arrests for Failing to Pay Back Payday Loans on the Rise, Report Finds
A report from ProPublica has found that payday lenders have developed a new tool to get late payers to pay: jail.
This country is in the throes of an overwhelming problem. With median household income growth in the nation being flat for the third consecutive year, one analysis shows that wages — adjusted for inflation — are roughly where they were in 1999. With household expenditures on the rise, more families are finding it harder to make ends meet.
Per a Federal Reserve 2018 report on the economic health of American households, 3 in 10 adults have incomes that vary from month-to-month and 39% of adults say they could not handle an unexpected expense of $400 with cash-in-hand, savings, or credit. This situation is forcing those that are the most vulnerable to seek relief from inscrutable sources. While 15 states and the District of Columbia have banned payday lending, some states have taken extraordinary means to safeguard or encourage predatory lending practices.
In an expose by ProPublica, the watchdog journalism group took a closer look at Utah. Not only does Utah have no limits on the interest that can be collected on a single loan, but it has also redefined its bail system so that bail on civil small claims court cases is not refunded, but transferred to the creditor. In Utah, it is increasingly likely that a payday collector may use jail to force those that had difficulty paying off their loans to pay up.
“If we didn’t have that avenue, I’ll be honest… we could be out of business,” Ralph Silverson, the owner of Loans for Less, an auto title and installment loan lender that was profiled in the ProPublica piece, said.
While payday loans have an average annual interest rate of about 652% in Utah, payday loans can have rates as high as 677% as of 2019. With rates this high, interest becomes the true obstacle. According to the State of Utah Department of Financial Institutions, the average loan amount where a loan is deferred is $388. These loans, despite being small, are offered to borrowers who do not have the means to repay them. This creates a cycle where loans are extended or rolled over. 80% of payday loans are extended within 2 weeks, increasing the interest due on them, with most loans going to borrowers that took out 7 or more loans in a row.
There are no federal rules regulating the payday loan industry. The proposed set of rules, which were to go into effect in 2019, was delayed under Mick Mulvaney during his tenure as the head of the Consumer Financial Protection Bureau. Mulvaney argued that the requirement that payday loan providers must verify that borrowers have the financial means to repay loans was too restrictive and would deny borrowing options to those that do not have any other valid options. Payday loan providers were both donors to Mulvaney’s reelection efforts as a representative from South Carolina and to the Trump inauguration fund.
Since the delay, the Trump administration has moved to further delay implementation and is considering proposals to hollow out the lending rules.
Jail as a Repayment Tactic
There are nearly twice as many payday lending stores in the United States as there are McDonald’s, and the impression that payday lending is safe and convenient is far from the truth.
It is illegal to imprison a person solely because they are in debt. In 1833, Congress banned debtor’s prisons in the United States. This, however, has not stopped courts from imposing jail time on those that do not pay fines and fees or arrest warrants for those who fail to make court appearances. This has provided debt collectors an avenue to exploit.
Capitalizing on the legal illiteracy of those most likely to seek payday loans, many lenders seek judgments in the courts. When the debtor fails to show up for his/her hearing, the creditor might request that a warrant for arrest be issued. The creditor would then use the threat of jail to extort payments that the debtor may not be able to pay without hardship. Per a report by the American Civil Liberties Union, arrest warrants have been issued for debts as small as $28.
“Even without arrest warrants, the mere threat of jail can be effective in extracting payment — even if that threat is legally unfounded,” the report reads. “In the case of debts involving bounced checks, private collection companies now have contracts with more than 200 district attorneys’ offices that allow them to use the prosecutor’s seal and signature on repayment demand letters. It’s estimated that more than 1 million consumers each year receive such letters threatening criminal prosecution and jail time if they do not pay up. But review of company practices has documented that letters often falsely misrepresent the threat of prosecution as a means of coercing payments from unknowing consumers.”
While it may be tempting to use a payday loan, it’s essential to know that there are other alternatives. Finder has compiled a list of such alternatives by state that may help you avoid the payday lending trap.