Predatory lending practices continue to target low-income Rhode Islanders

“We're the last state left in New England that allows this,” said Alan Krinsky from EPI. “It's not helping people in need. It's not giving people access to credit, it's giving people access to debt."

“Payday lending has been an issue here at the Rhode Island State House for several years, but payday lending is not the only kind of predatory lending operating in the state," said Alan Krinsky, Director of Research and Fiscal Policy at the Economic Progress Institute during a press briefing at the Rhode Island State House on Thursday.

Krinsky went on to describe the characteristics of what he called “predatory lending.”

“Predatory lending involves unfair or deceptive practices. When credit unions or banks make loans, they don't do so at a loss, but they do it to help people. One of the things that categorizes predatory lending is that it's done primarily for the benefit of the lender, at the expense of the borrower,” said Krinsky. “Another thing common to predatory lending practices and products is triple-digit interest rates - interest rates over a hundred percent while most rules around lending cap interest rates at about 36%.”

According to R.I. General Laws §19-14.2-8, the maximum rates small loan lenders can charge are:

• a maximum monthly interest rate of 3.0% on the principle of loans of $300 or less, equating to an Annual Percentage Rate (APR) of 36%.

• a maximum monthly interest rate of 2.5% on the principle of loans above $300 up to $800, equating to an APR of 30%.

• a maximum monthly interest rate of 2.0% on the principle of loans above $800 up to $5,000, equating to an APR of 24%.

“The question is,” asked Krinsky, “If those are the rules, how is it that there are lenders that avoid these limits? How is it that they manage to charge triple-digit interest rates and what kind of legislative or non-legislative solutions could prevent such practices?”

In the piece below I take from Krinsky’s published policy brief and the remarks he made at the briefing.

In his briefing, Krinsky suggested that some of these practices possibly violate existing laws and can be investigated by the Office of the Attorney General. The General Assembly can also strengthen existing statutes to protect Rhode Islanders from predatory practices. During his briefing, Krinsky spoke about three types of predatory lending - storefront payday lending, rent-a-bank lending, and earned wage advances - and presented solutions to address these schemes.

Krinsky's conclusion?

“Rhode Islanders ought to be able to make ends meet and embrace economic opportunity without being preyed upon by predatory leaders seeking to extract profits by trapping people in cycles of debt. Small loan products with much more reasonable interest rates already exist. Most policymakers would not tolerate triple-digit interest rates for small business owners, and the nation prohibits such rates for active-duty military personnel. Legislative and legal solutions are available to policymakers seeking to provide similar protection and support to low-income and modest-income Rhode Islanders seeking to thrive.”

Storefront Payday Lending

“About 20 years ago a Rhode Island statute was created to say that these storefront payday lenders are not small loan lenders like banks or credit unions,” said Krinsky. “They're check cashers. They have to register as check cashers under the same sort of statute that Western Union or others that are just doing check cashing. They're explicitly exempted from those interest rate rules because they are check cashers, not lenders according to state law.”

A payday loan is called a payday loan because it is borrowing the money someone will be paid on their next payday. Under Rhode Island law, payday loans are referred to as “deferred deposit transactions” because the borrower writes a check, but the payday lender's depositing of the check is delayed until the loan is due.

As explained in Krinsky’s printed briefing:

“An individual goes to a payday lending outlet and writes a check for $500, for example, to be deposited in 13 days or more (in principle, this is intended to be on the individual's next payday, but many people are paid every 14 days, so the loan repayment could become due before the next payday). The 10% fee of $50 is taken out, and the borrower is given $450. If that next payday the borrower needs the money in their paycheck to pay for ongoing expenses, such as food and rent, they can roll over or take out another loan for $500 to pay off the first loan, at the cost of another 10%, or $50. That is, effectively the individual is borrowing the same $500 (and not $1,000), but has now paid $100 in fees for this, or 20% of the loan.

“For many borrowers, this creates a rolling cycle of taking out another loan to pay off the previous one. If the borrower rolls over or otherwise remakes that original loan for a year, 13 two-week cycles, they will have paid $1,300 in fees to borrow the same $500 over and over again, paying a $50 charge each time, for an effective APR of 260%. To be clear, even if they take out only one or two loans, the annual rate remains the same, 260%.”

Why payday loans are predatory and not a helpful service to people in need?

“Payday lenders say, ‘We're providing the service our customers need,’” said Krinsky. “If everyone in crisis came in to borrow $500 to pay a bill, and then they paid it off the next week and were done with it, the interest rate would still be 260%. But the industry only survives because people come back again and again. They have to flip it, renew it, or take out a new loan... If everyone came back after one loan and paid it back, the business wouldn't function.”

According to research conducted by the Consumer Financial Protection Bureau (CFPB), the median borrower takes out 10 loans in a year, and 75% of payday loan fees nationally come from borrowers who take out more than 10 loans in a year. Not only is the industry model based upon repeated loans, but this goal is part of the training. Obtained as part of a CFPB enforcement action, the following image was taken from a payday loan industry employee training document and shows the intention of creating a cycle of debt, without an off-ramp.

“We're the last state left in New England that allows this,” said Krinsky. “It's not helping people in need. It's not giving people access to credit, it's giving people access to debt. That can have bad consequences in the end for people's credit rating and financial situation.” In his printed briefing Krinsky notes that “Although some claim that prohibiting storefront payday lending will only send Rhode Islanders to online payday lending, the latter is subject to state law as well and companies violating state law are subject to action on the part of the Office of the Attorney General.”

Many of those caught in this cycle of debt find themselves facing overdraft fees, closed bank accounts, and bankruptcy, resulting in even worse credit scores than before, noted Krinsky in his printed report.

Most of the following is taken directly from Krinsky’s printed report:

Payday lending is targeted at Rhode Islanders of color

In 2018, the Rhode Island Advisory Committee to the U.S. Commission on Civil Rights received testimony and unanimously adopted a report that included the following findings:

• Payday Loans are Targeted at People of Color

• Payday Loans Create a Cycle of Debts

• Payday Loans Adversely Affect the Rhode Island Economy

Payday lending is prohibited for active-duty military

“Senator Jack Reed has been a leader on this issue nationally,” said Krinsky. “He was part of the effort, over a decade ago, that made it against federal law to target payday loans at active duty military.”

After the U.S. Defense Department determined that predatory lending “undermines the military readiness,” Congress acted in 2006 to protect active duty military personnel by capping loans to such individuals at 36%. Senator Reed continues to lead in this area, introducing legislation to set a federal limit of 36% on all loans for all people, not just active duty military, noted Krinsky in his printed briefing.

There are 10 storefront payday lending outlets in Rhode Island

As of early 2024, there remain 10 payday lender stores operating in Rhode Island, 9 of these owned by Advance America. In 2022, the other major payday lender, Check 'n Go’, closed its seven Rhode Island outlets without any explanation. The remaining locations are spread across the state, with three in Warwick, two in Pawtucket, and one each in Woonsocket, Providence, East Providence, Warren, and Cranston.

Rhode Islanders send millions of dollars out-of-state each year to payday lenders

In 2022, Rhode Islanders paid $3.0 million in fees to payday lenders, most of this money going out-of-state; the total in 2018, before Check 'n Go' closed its seven stores, was $7.5 million. Rhode Islanders take out tens of thousands of payday loans each year, totaling close to a billion dollars between 2008 and 2021. The truth, however, is that a considerable amount of the dollars are not “new” loans, but the “same” money loaned out over and over to the same borrowers, with a new fee applied each time.

There are non-predatory alternatives to payday loans

There are good, lower-interest alternatives to payday loans. They offer non-exploitative interest rates and are not designed to capture people in debt. These alternatives include at least the following:

• In 2022, credit unions nationally made $227 million in loans through the Payday Alternative Loan (PAL) program; in Rhode Island, at least Navigant Credit Union, Greenwood Credit Union, and Rhode Island Credit Union offer small loan products.

• In Rhode Island, Massachusetts, Connecticut, and seven other states, Capital Good Fund offers small loan products.

• Six of the eight largest banks now offer small installment loans and/or lines of credit to checking account customers, including those with no or low credit scores (Bank of America, Wells Fargo, U.S. Bank, Huntington Bank, Truist, and Regions Bank); there are quick applications and sometimes pre-approval for $500-$1,000 loans.

Besides taking out loans, former payday borrowers have reported negotiating with utility companies and other creditors for manageable payment plans. Some have turned to family and friends. Even carrying a balance on a credit card will have an APR no higher than 36%. It should also be noted that existing payday loans are not available to individuals who are unbanked and have no checking account; this means that removing the carve-out for payday lenders will not affect this group.

A Legislative Solution

Although Senator Reed's national legislation would end the predatory practice of payday lending, Rhode Island policymakers can themselves repeal the special carve-out for payday lenders that allow them to play by different rules from other small-loan lenders. In June 2023, in a historic vote on the floor of the Rhode Island House, representatives voted 70-2 to do just this; however, the legislation did not receive a hearing or votes in the Senate during the 2023 legislative session. Such legislation would not prohibit payday lenders from operating in Rhode Island but instead require them to operate by the same rules and with the same interest rate limits as other small loan lenders.

Rent-a-Bank Scheme

Ordinarily, banks and other financial institutions are regulated and bound by the laws of the states in which they do business. However, in 1980, Congress enacted the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA), allowing state-chartered banks to follow the interest rate limits of their home states instead of the lower interest rate limits of other states in which they do business. Although in 1978 Congress permitted nationally chartered banks, including the largest and best well-known ones, to do so, this is not common practice, to charge triple-digit interest rates for any of their products.

With the rent-a-bank scheme, a lender (without its own national or state charter) arranges loans - soliciting and processing the applications, putting up the funds, and managing almost every part of the lending process, including collection - yet at a critical juncture of the process pays one of these banks chartered out-of-state to sign off on the loan at triple-digit interest rates and then buys the loan. In essence, the lender is renting the bank for this one step in the process that allows the avoidance of state interest rate limits on small loans. This is why in California and elsewhere the rent-a-bank schemers have been accused of violating truth-in-lending rules. In the rent-a-bank scheme, the lender, which would otherwise be subject to state interest limits, tries to claim they are merely an intermediary arranging the loan, but for all practical purposes is the true lender, and not the bank chartered out-of-state.

The rent-a-bank scheme operates in Rhode Island

According to the National Consumer Law Center (NCLC), the following five rent-a-bank lenders currently operate in Rhode Island: OppFi/OppLoans, EasyPay, Enova's NetCredit, LoanMart, and Check 'n Go's Xact. All charge triple-digit APRs in Rhode Island. Here is an example from the OppLoans website, explicitly advertising a 160% APR:

Take the middle example, a $3,000 loan with 12 monthly payments of $514.60. This means the borrower would pay $6,175.20 on the loan, over twice as much. The OppFi loan amount is typically larger than a payday loan, takes many months to repay, and is given at triple-digit rates, four times or more than the limit on other small loan lenders in the state. The fine print also makes clear that there is no guarantee that the rate will not exceed 160% APR.

A Legislative Solution

Although the Office of the Attorney General might have grounds in existing state law to challenge the operation of rent-a-bank schemers in Rhode Island, there is one simple and strong legislative solution available to Rhode Island policymakers: the DIDMCA opt-out. The 1980 federal legislation included a provision for states to opt out of the federal act, to require banks chartered in other states to play by the same rules and interest rate limits as banks chartered in a state. At the time, only one state, Iowa, opted out. However, in 2023, Colorado became the second state to opt out. Rhode Island policymakers could enact legislation to add Rhode Island to this list and prevent the predatory rent-a-bank scheme from continuing to operate in the Ocean State.

Earned Wage Advances (EWA)

Perhaps the newest form of predatory lending and a particularly deceptive one, Earned Wage Advances (EWA) are presented as a convenience for workers while cynically extracting money from them. Two different products are being presented as EWAs, one of which is particularly predatory. The products typically work through a mobile app providing employee access, at a cost, to earnings for work done though not yet paid out in a paycheck. For example, after working a shift, a worker would be able to access the wages they earned that day without waiting until the next week or the week after for their paycheck. In essence, this is a form of a payday loan.

In one model, an employer links payroll with a fintech company to provide early access as a service to employees. In the best, if rare, cases the employer absorbs all of the cost. In other cases, the employee must pay part of the cost, but both fully and partially subsidized products figure as a small part of this growing industry.

The direct-to-consumer model is presented to workers as a way of accessing their earned but unpaid wages, but is not connected to payroll or paychecks; the fintech company accesses a worker's bank account instead. Repayment is therefore through the checking account in general and not a paycheck specifically; overdraft and other fees can be triggered by this arrangement.

How EWAs are predatory

The worker is borrowing against their own money, whether from wages earned or not, and paying a fee for this each time. To be clear, this is not the same thing as an ATM transaction by which someone withdraws money from their bank account. This is a loan, accessing credit, and having to pay it back. Like with payday loans, the effective annual interest rates are in the triple digits, averaging over 300% APR. Also similar to storefront payday loans, a user might need to take an EWA to pay back the previous one, creating a debt cycle. Compared with storefront payday borrowers, EWA users typically go back even more frequently, an average of 26-33 times per year, paying a fee each time.

The variety of fees charged by vendors include transaction fees, subscription fees, expedite fees, and the truly cynical “tips.” Many of these apps request tips from users for the use of the service. Such tips are encouraged with manipulative design strategies, making it difficult not to tip in some cases. To the companies, the transaction costs are minimal, and tips do not go to help people in need. It is not enough to extract money from low-wage workers at usurious rates, some of these apps get them to pay extra for how grateful they feel for this “service.”

EWAs operate in Rhode Island

Although there is no database of EWA use in Rhode Island, EPI has heard of such activity in the industry that schedules non-unionized workers for nursing home shifts. There have also been reports of EWA usage in the fast-food industry.

A Legal Solution

Consumer protection advocates have argued that legislative solutions are not necessary at this point. Rather, the EWA providers are small loan lenders already bound by state rules and limits. The Office of the Attorney General should investigate, as appropriate, any lenders in violation of state rules and look to other states doing similarly.