Southern Bancorp has been a longtime advocate for policies, programs and products that promote family economic security. A part of this advocacy includes efforts to eliminate predatory practices such as payday lending. [i] In our most recent Policy Points edition, “Turning a Cycle of Debt and Dependency into Financial Security: Rerouting Payday Loan Consumers in Mississippi,” we look at the current payday lending environment in Mississippi; highlight the need for successful payday loan alternative products and strong asset building policies by showcasing lessons learned in Arkansas; provide policy recommendations for increased financial security for Mississippians, including payday lending reform; and feature a new alternative payday loan approach in Mississippi, the New Roots Credit Partnership, which is facilitated by the Mississippi Center for Justice through traditional financial institutions and employers throughout the state.
Payday loans, sometimes referred to as payday advances, are small-dollar, short-term easily accessed loans. They are obtained by leaving a check with a lender for the loan amount, plus any fees, to be held until the next payday.[ii] To qualify, a borrower must have a checking account and proof of income, including employment, social security, child support, disability or even unemployment benefits.
While providing a quick, financial boost for Mississippi households, payday lenders rely on a business model that involves loan terms that trap their customers in a perpetual debt cycle. According to the Center for Responsible Lending, the “churning” of existing borrowers’ loans every two weeks accounts for three-fourths of all payday loan volume. Furthermore, repeat borrowers comprise 98 percent of payday loan volume.[iii] Many borrowers are unable to pay back their loans within the required two weeks and are forced to take out new loans in order to cover the loan and interest. When borrowers cannot pay the original loan amount, predatory lenders encourage them to take out a new loan for the same amount—paying a new fee—to cover the loan, or borrowers go to another payday lender to borrow to pay off the first loan.[iv] As a result, borrowers are faced with revolving and increasing amounts of debt. Payday loan consumers in Mississippi take out an average of nine payday loans, paying more than 500 percent of the loan in interest and fees before they begin paying off the original balance.[v]
Consumer protection advocates such as Mississippi Center for Justice and Mississippians for Fair Lending have made many attempts to enact payday lending reform legislation. However, based on the industry’s strong legislative influence, the chances of eliminating payday lending through legislation in Mississippi are slim. As such, consumer protection advocates have begun to shift their attention to ensuring the availability of safe, affordable, and financially appealing small dollar loan products that lessen the need to rely on payday lenders.
Southern is one of these financial organizations working to create innovative, scalable alternatives that lift consumers up, as opposed to trapping them in the debt cycle. One such product being piloted in Mississippi, the Liberty Loan, is still in the development and testing phase, but could soon join others being championed by advocates from across the country.
If you’d like to read more about Southern’s Liberty Loans as covered by the Washington Post, click here. And if you’d like to learn more about our efforts to strengthen the economic security of rural communities, we invite you to contact Tamika Edwards, Director of Public Policy, at email@example.com.
[i] Most notably in working with Arkansans Against Abusive Payday Lending (AAAPL), SBCP helped to shut-down all payday loan storefronts, resulting in the last payday lender leaving the state in 2009.
[ii] Mississippi Economic Policy Center. (2007). Mississippi payday lending fact sheet. Available at http://mepconline.org/images/admin/spotedit/attach/4/Payday_Lending_Fact_Sheet_FINAL.pdf.
[iii] Center for Responsible Lending. (2013). Available at http://www.responsiblelending.org/payday-lending/tools-resources/fast-facts.html.
[iv] Mississippians for Fair Lending. (2013). The high price of small-dollar loans. Available at http://www.mscenterforjustice.org/sites/default/files/pdfs/State%20Policy%20Fact%20Sheet.pdf.