By Davide Scigliuzzo
The terms of the loans were frightening: $5,000 in principal, with payments due every couple weeks at annualized rates as high as 589%.
Interest charges would pile up at such a blindingly fast clip, Jamie Johnson told himself, that he’d have to prioritize debt repayment over everything else. And so he did. This was early April 2020, just as the pandemic was breaking out, and Johnson, a 44-year-old metals worker, had suddenly found himself out of a job and in desperate need of cash. When beefed-up unemployment insurance checks started arriving in his mailbox in Detroit a month later—$965 each week—he set aside big chunks of them to pay back the debt.
This is money, Johnson says, that he would have used to help support his disabled mother and buy food for his girlfriend’s four kids—the kind of essential spending the government had envisioned when it funded a $2.2 trillion relief package for American workers and companies. Instead, it ended up juicing the profits of one of the most controversial corners of the financial industry.
“I can’t even think about how much money I just paid in interest,” Johnson says. “It was just a big mess.”
So good was 2020, in fact, for certain providers of payday and other high-interest loans that they’re emerging from the pandemic stronger than perhaps ever before, a development that’s encouraging them to aggressively ratchet up lending now as the economy rebounds.
It is one of the cruel ironies of the pandemic: At a time of great suffering for millions of working-class Americans, the odd financial rhythms of the past year—with its waves of job layoffs, followed by unprecedented government stimulus and a sharp economic rebound—have helped some of these high-interest lenders rake in record earnings. That the windfall for these companies came just as the Federal Reserve was making near zero-rate loans available for corporate America and the wealthy only further riles up the industry’s biggest critics.
“Debt collectors had a big year, and so did predatory lenders,” said Lauren Saunders, associate director at the National Consumer Law Center, a non-profit that advocates for low-income borrowers. “The idea that any company could keep charging 100% or 200% interest or more during this time of crisis is really outrageous.”
What’s more, consumer advocates point to studies that show Black and Latino communities are disproportionately targeted by providers of high-cost loans.
In Johnson’s home state of Michigan, areas that are more than a quarter Black and Latino have 7.6 payday stores for every 100,000 people, or about 50% more than elsewhere, according to data collected by the Center for Responsible Lending. A forthcoming study from the University of Houston that was provided to Bloomberg shows similar disparities when it comes to online advertising.
The Covid-19 outbreak and the economic fallout from efforts to contain it had the potential to be a major blow for consumer finance companies that cater to the 160 million Americans who don’t have good credit scores. They tightened lending standards in preparation for a surge in delinquencies as the unemployment rate rocketed past 14% last year.
But this crisis proved to be different.
Trillions of dollars in government stimulus, largely in the form of direct payments to low- and middle-income earners, helped countless people keep their heads above water financially. Many borrowers—facing the prospect of being chased by debt collectors and seeing their wages garnished—chose to spend at least some of the cash repaying their most expensive obligations.
According to data collected by the Federal Reserve Bank of New York through March, U.S. households had used or planned to use about a third of the cash they received via stimulus checks to pay down debt. For families earning less than $40,000 a year or without a college degree, the share was closer to 40%.
It’s proven a boon for some of the largest players in the industry. Enova International Inc. and Elevate Credit Inc., two publicly traded companies that provide high-cost loans to non-prime consumers online, reported record profits in 2020, even as overall revenue declined.
“Earnings were definitely higher than we would have expected because they benefited from an improvement in the credit environment,” said Moshe Orenbuch, an analyst at Credit Suisse Group AG who covers the sector. “Consumers tended to pay back debt with funds they were given by the government.”
Providers of high-cost loans say they offer credit to communities that are under-served by traditional banks, and that high interest rates are necessary because those borrowers are more likely to default. But according to consumer advocates, the loans often cause families to fall into debt traps built on exorbitant fees and endless renewals.
That’s the situation Kimberly Richardson found herself in late last year.
Her hours got cut following an outbreak at the factory where she works. Before long, the Tennessee resident began to struggle making payments on a $1,500 loan she had taken from CashNetUSA, a subsidiary of Enova, on which interest was accumulating at a rate of 276%.
As the coronavirus ravaged the U.S., CashNetUSA encouraged Richardson, who like Johnson is Black, to borrow even more on her credit line. She’d get prompts by email anytime her account had available credit. Little by little, she was digging herself deeper into debt.
Richardson filed for bankruptcy last month, but not before paying CashNetUSA nearly $10,000 all-told.Out of ControlHow Richardson went from borrowing $1,500 to bankruptcy.
Through a spokesperson, Enova said its policy is to provide customers with flexibility and to help them be successful with their loan. The company said it plays a critical role serving people who need short-term financing to make repairs or avoid even costlier expenses such as bounced checks or late fees on bills.
In an emailed statement, Elevate said it is committed to serving those with non-prime credit scores who are locked out of traditional financial products. The company added that many of its customers are eligible for payment deferrals as a result of the pandemic.
A few months after Covid-19 was officially declared a pandemic, the National Consumer Law Center and other advocacy groups urged Congress to mandate a cap on the interest rates that could be charged on consumer loans. The idea, in part, was to provide desperate borrowers some relief, much like deferral programs put in place to help homeowners and students.
The provision never made it into law. Instead, policy making in Washington largely went in the opposite direction.
In July, the Consumer Financial Protection Bureau repealed substantial portions of a 2017 rule that would have required lenders to determine consumers’ ability to repay loans. The scrapped provision—which applied only to some types of high-cost loans—could have wiped out as much as 68% of the industry’s revenue from traditional payday loans, according to the agency.
In announcing its decision, the CFPB said its actions would ensure “the continued availability of small-dollar lending products for consumers who demand them, including those who may have a particular need for such products as a result of the current pandemic.”
A separate rule issued by the Office of the Comptroller of the Currency in October made it easier for lenders like Enova and Elevate to partner with national banks to originate high-cost loans. Consumer advocates have denounced such arrangements as “rent-a-bank schemes” designed to circumvent state-level interest-rate caps.
Over a dozen states and the District of Columbia have caps limiting the rate that can be charged on payday loans to 36% or less, but Michigan and Tennessee aren’t among them.
At the federal level, there are early signs that President Joe Biden’s administration and Congressional Democrats plans to reverse course.
Just last week, the Senate voted to overturn the controversial OCC rule. CFPB Acting Director Dave Uejio wrote in a blog post in March that the agency is concerned “with any lender’s business model that is dependent on consumers’ inability to repay their loans,” and that it believes the harms identified by the 2017 regulation still exist.
Even if restored, however, the CFPB regulations are unlikely to cover the type of credit line Richardson received.
Nor would they cover the loan that JoAn Cumbie, a retired truck driver who lives in an RV Park near West Columbia, South Carolina, also took from CashNetUSA.
The 52-year-old, who is disabled and was recently treated for cancer, borrowed $650 in August. In just a few weeks, she saw her balance top $900 as interest started accumulating at a rate of 325%.
She managed to pay off the loan in October, but only after selling her six-month-old power generator for about half of what she’d paid for it.
“I sold it so cheap, someone got a real good deal,” said Cumbie, who estimates she paid over $1,500 to CashNetUSA all-told. “I just needed to pay them off as fast as I could.”
Lending BoomEven though scrutiny of the industry may intensify, executives are confident demand for high-cost loans will grow in the coming years.
U.S. households expect to increase their spending by 4.6% over the next year, according to latest New York Fed survey of consumer expectations, only slightly below the 4.7% reading recorded in March, which was the highest since December 2014.
“As the economy opens back up, we believe that consumers will raise their spending potentially to elevated levels due to increased activity and pent-up demand,” Enova Chief Executive Officer David Fisher told Wall Street analysts during a conference call in April. “We saw the same dynamic following the financial crisis, which led to strong origination growth in 2010 and 2011.”
Anticipating a boom in demand from struggling borrowers, Enova last year acquired OnDeck, a lender that specializes in small-business loans that have an average interest rate of 49%. The opportunity, as the company puts it, is to capitalize on the hair salons, gyms, local retailers and restaurants that have struggled over the past year.
“Many of these businesses have used up their savings trying to survive the pandemic,” Fisher said on the April call. “This could lead to a large surge in demand that we are ready to fill.”
Back in Detroit, Johnson, the metals worker, is slowly digging out of debt.
He got his factory job back last summer and was able to pay off his most expensive obligations—two payday loans he had been juggling for months. “I was lucky,” he says. “I was able to get some overtime.” Every two weeks, though, he still sends $241 to Rise, a unit of Elevate, to service a separate $4,500 loan that won’t mature until October.
The rate on that? Just 125%.
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