WOONSOCKET – A coalition of non-profits and private companies has made the city ground zero for an experiment in consumer lending they hope will persuade state lawmakers to ban “payday” loans.
A joint venture of the United Way and the Capital Good Fund, the Woonsocket Payday Loan Alternative Program is slated to open its doors at 719 Front St. on Nov. 4.
Operating under the banner of the Rhode Island Coalition for Payday Lending Reform, critics of payday loans waged a spirited but unsuccessful lobbying campaign at the Statehouse last year to outlaw the products, arguing they exploit the poor and trap them in a never-ending cycle of debt.
“Wherever we chose to go into low-income neighborhoods, we would also find a bunch of things – payday loans, furniture rentals, pawn shops,” says Anthony Maione, president of the United Way. “These services pop up in places where low income people who don’t have other alternatives live. Sometimes they end up getting in more trouble.”
The United Way has provided a grant of $57,000 to run the payday alternative program with help from the Capital Good Fund. The grant covers only operational costs. The program will make loans with a line of credit provided by Smithfield-based Navigant Credit Union, with guarantees supported by Amica Insurance of Lincoln.
The idea is to make small, short-term loans, typically in the range of $300 to $500, upon which interest would be capped at an annual rate of no more than 36 percent. That’s a fraction of the 260 annual percentage rate, or APR, state law allows for so-called payday lenders.
It would take slightly longer to get a loan from the alternative program – two days perhaps – as opposed to the on-the-spot products offered by payday lenders. And borrowers would be “strongly urged” to participate in a financial literacy or money management program through NeighborWorks Blackstone River Valley or Family Resources Community Action Program.
The United Way and the Capital Good Fund were both active in lobbying efforts for payday lending reform in 2012, according to Maione.
“One of the arguments that was used to not lower the interest rate is people don’t have any alternative and they need these products,” he said. “What we’re trying to prove is there are other products people would use if they existed.”
Andy Posner, director of the Capital Good Fund, says there are good reasons payday loans are assailed as a form of predatory lending.
“A payday loan is technically backed by your next paycheck,” he says. “The vast majority of people, what they do is roll it over because they can’t pay it off. So now you’ve got the original principal, plus the interest, plus a fee for rolling it over. You’re robbing Peter to pay Paul. The average payday loan is rolled over eight times. Under that scenario you end up paying $450 in interest on loan principal of just $325.”
Payday lenders are standard features throughout the state’s urban core, including Woonsocket, which has two Advance America locations and a Check ‘n Go. The main reason United Way and Capital Good Fund chose Woonsocket to run instead of any of the others to run the pilot, they say, is because they already have strong partnerships with other non-profits in the area who can administer supportive programs to borrowers.
The storefront from which the pilot program will operate is actually located in Heritage Place, a plaza owned by NeighborWorks Blackstone River Valley, which also maintains its headquarters there.
“We’re thrilled to have them in our neighborhood,” said NeighborWorks’ Margaux Morisseau.
The director of community Building and organizing for the non-profit developer of affordable housing, Morisseau is also the co-chairwoman of the Rhode Island Coalition for Payday Lending Reform.
Morisseau said NeighborWorks got involved because it believes payday lenders are a destabilizing influence in Constitution Hill and Front Street, two neighborhoods where the organization has spent millions since 1985 to eliminate residential blight, promote job growth and establish after-school enrichment programs.
“It was Advance American being in the middle of our two neighborhoods that really fueled our fire to ban payday lending in Rhode Island,” she said.
Reached at a corporate facility in South Carolina, Jamie Fulmer, senior vice president for Advance America, defended the company’s lending practices, saying consumers choose them because they want to, not because they have to.
“There’s a misconception that there are no other alternatives,” said Fulmer. “All our borrowers have to have an active, open checking account with overdraft protection and about half have credit cards. All consumers have the option of bouncing a check and incurring penalty fees or delaying payment of a bill and paying penalties or reconnect fees. Consumers do have options.”
Fulmer said Advance American doesn’t bill itself as the be-all and end-all of short-term lending, “but we do think it’s an important alternative.” Overall, he says, Rhode Island has one of the lowest APR caps of any state where Advance America does business. Instead of 260 APR, he says another way to frame the lending fee is $10 for every $100 of principal per two-week period.
Fulmer also questioned whether the proposed demonstration project would be economically sustainable in the private market.
At a ceiling of 36 APR, a hundred-dollar loan would yield servicing fees of less than 10 cents a day, he said.
“Anyone that comes up with creative alternatives should be welcomed into the marketplace,” said Fulmer. “We certainly think there is a place for the nonprofit choices the Capital Good Fund is offering but all the marketplace options that Advance America is offering. I imagine they’re not paying taxes, they’re being subsidized by donations or elsewhere.”
Fulmer said regulators ought to be focusing on making sure consumers are served with “fair and transparent products” instead of the claims that one product is better than another.
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