A dozen people showed up for a three-hour class on money
management last Saturday at the 11th Street office of the Springfield Housing
Authority. Leading the class was Tami Rechner, whose goal is to get these people
out of debt.
She told the class about one client who was 13 months behind on her $200 monthly mortgage. In that time, the client had been faithfully paying a rental store for three TVs, three VCRs, and a bedroom furniture set for the house she was about to lose.
Rechner said that in order to save her home the client had to call the store and return the stuff.
“Then where did she sleep?” someone asked.
“On the FLOOR of the HOUSE that she OWNS!” Rechner howled.
At least this woman owned a home. Most in this class can’t accomplish that, even when charity enters the picture. Since 1989, Habitat for Humanity has built houses for 45 families in Sangamon County, an average of more than three a year. But according to Dan Frachey, executive director of the local Habitat chapter, there’s no waiting list–only one of every 10 families applying for a Habitat home ends up in one. Of the nine families that don’t make it, seven are rejected because of bad credit.
The Springfield Project’s HOPE program, which also provides affordable housing to low-income families, is running into the same problem. According to director Ron Fafoglia, no more than 5 percent of the people who apply for homes through his project have good credit.
Credit problems among low-income and disabled families are getting worse, keeping affordable housing plans out of the reach of those who need help the most. Many people in trouble turn to “payday” or car-title loans, but these short-term solutions can turn into long-term problems, with borrowers plagued by exorbitant fees and penalties. Laws meant to regulate these arrangements have proven ineffective. “Payday” and car-title businesses are now loaning out $14 billion a year.
Lawmakers are just now responding to an increase in “predatory lending”–home equity loans with high interest rates that target seniors and low-income homeowners. In some cities, such as Baltimore, foreclosures outnumber home purchases.
Consumer bankruptcy filings in Illinois and the nation have more than doubled since 1990, due in part to the seduction of easy credit at high interest rates. In 1997–during the peak of the last economic boom–David Wyss, an economist for DRI/McGraw-Hill, reported that one out of every three families with an income below $10,000 has at least $4,000 in credit-card debt. Once in the hole, where can people turn?
“Bad credit is a huge problem in Springfield,” says Rechner.
“It’s far beyond what I ever thought I’d find,” says TSP-HOPE’s Fafoglia.
“Bad credit is a form of bondage,” says Frachey.
It’s an epidemic with no quick fixes.
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A woman in her mid-30s sits quietly in Rechner’s class. We’ll call her Jean.
As people tell their stories about title loans gone bad and listening to screaming creditors over the phone, Jean keeps thinking, “I’ve done that. I’ve done that too.”
About five years ago, when she was broke–and desperate–Jean, a single mother of two, got a $700 loan, using the title to her early ’90s model Plymouth Acclaim as collateral. She missed a payment, then another. Then she lost her car. It took her a few more months and an extra $300 to retrieve it. She worked double shifts and got another part-time job just to keep herself from digging an even deeper hole. Most people would have turned to credit cards or a bank. But no bank or credit-card company would touch her. She made sure of that after declaring bankruptcy in the late ’80s. Bankruptcy leaves a seven-to-ten-year black mark on a credit report.
Jean’s troubles weren’t over. Two years ago, just as the bankruptcy dropped from her credit record, the bank foreclosed on her home after she missed payments on a lease-to-own arrangement. Foreclosures remain on credit reports for seven years, but two consecutive years of timely payments can minimize the damage.
“But that has to be two good years of not missing one payment,” says Fafoglia. Miss a payment, the black mark comes back.
Shortly after Jean’s foreclosure, she was driving around Springfield’s East Side and saw some new homes belonging to TSP-HOPE. She went to the program’s office on East Cook Street to see whether she could afford one. With a $20,000 to $30,000 grant through TSP-HOPE, homebuyers need a mortgage of only around $50,000 to $55,000. Jean knew her credit history was choppy, but when the report came back: “I didn’t realize it was so bad,” she says. Since then, she’s been climbing out of debt just to qualify for the mortgage. The first bank TSP-HOPE sent her to wouldn’t take her, she says. Now she’s working with another bank that’s a little more patient. “She’s almost there,” says Fafoglia. But there’s no guarantee. Jean says there have been many times during the past two years when she’s considered calling it quits.
“Every time I climb up one step, it’s like I take five steps down,” Jean says, “like there’s just one more bill I forgot about.”
Jean now earns about $1,200 a month driving a bus part-time. She never spent a lot of money–by most people’s standards. She sometimes caved in to her children, buying $160 Air Jordans. But she also racked up medical bills from emergency room visits for her asthma. She wrote bad checks. She spent more than she should have on Christmas presents. She’d visit a payday loan center “now and again” and rollover a loan or two. Her mother eventually sat her down and said, “You’re too old for this.” Jean agrees.
“I got tired of not having money and spending it away when I got it,” she says. “I needed money and I didn’t know what else to do.”
Recalling her reliance on car-title loans, she says, “You couldn’t get me do that again. I think about it, but I won’t do it.”
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Flynt Talkington manages the Fast Cash of Illinois outlet at 1315 W. Wabash. His store is part of a chain–Fast Cash of Illinois, Inc.–that has one other store in Springfield and a third in Litchfield.
Five years ago, when Talkington got into the short-term loan business, there were just a few “payday” operations in town, he says. Now, according to the Illinois Department of Financial Institutions, there are 20 such establishments in Springfield.
“Business isn’t too bad,” he says. “But the industry is pretty saturated. There’s quite a few in town. This location hasn’t turned out so good.”
Payday loans operate on a simple premise. People can get cash by writing a postdated check. The cash they get is less than the amount on the check they hand in. If you borrow $82, you’ll write a check for $100. The problem is many people rollover their loans because their checks will bounce when the loans come due. Fees are then compounded, adding to a balance far greater than the original amount received. According to the Chicago-based Woodstock Institute, which monitors consumer and credit issues affecting low-income and minority communities, the average payday-loan customer rolls over his loan 13 times. The institute also found that payday businesses operate overwhelmingly in neighborhoods with high minority and low-income populations. In addition, most customers frequent multiple locations at the same time.
“The whole problem is: if someone needs the money now, what makes them think they’ll have it in two weeks to pay the loan back?” asks Scott Hepperly, who runs the nonprofit Consumer Debt Counseling Service in Springfield.
“When you compare these loans to other short-term loans, they are the most expensive you can get,” says Marva Williams, a senior vice president at the Woodstock Institute. “They are more expensive than credit card advances.” But most people with low incomes and bad credit can’t get credit cards.
Consumer groups and lawmakers blame the payday loan industry for destroying people’s credit and contributing to high bankruptcy rates, especially among minorities and the poor. Laws are proposed yearly to regulate the short-term loan business, but the industry remains unscathed because there are always more customers.
“Consumers want and need these loans,” says Steve Brubaker, executive director of the Illinois Small Loan Association, a trade group representing about 400 businesses offering payday, car-title, and similar loan products. He argues that a payday loan can actually save people money–it would cost more to bounce a check, he says. “If we close down, there aren’t a lot of other sources where people can go.”
At one time, many banks offered “personal” loans of a few hundred dollars. As credit cards became more popular, such loans disappeared. Banks also hiked processing fees, which meant that loaning less than a few thousand dollars made no financial sense. There were always pawn shops as well as “loan sharks,” which made a living catering to desperate people. But today payday-loan centers are more pervasive than pawn shops ever were.
In the early 1990s, there was just a handful of payday-loan centers in Illinois. By 2000, the number peaked at about 1,000 statewide. While there are now a little under 800, according to the Illinois Department of Financial Institutions, the growth of payday-loan centers has been explosive.
Williams cites a surprising source for the boom: changes in Illinois’ welfare policies. Before 1997, public aid recipients often cashed their general-assistance checks at currency exchanges, paying about $5 a check for the service. Then the Illinois Department of Human Services created the Link card, which can be used to withdraw cash from ATMs. The card was first tested in 1996 as a pilot program in Springfield. On its Web site, DHS brags that the Link card “eliminates the need for currency exchanges to serve as distribution ‘middlemen.’ This saves the state $.81 per case and clients $5.30 in check cashing charges.” The agency estimates that the Link card saves its clients more than $10 million a year. But then currency exchange owners, says Williams, figured out a way to make up for the lost business, spinning off into short-term loans.
Geoff Smith, a researcher at the Woodstock Institute, says the deregulation of the banking industry in the 1990s also opened opportunities for payday loan centers and other short-term loan operations. In the early 1990s, states began to allow out-of-state banks to set up shop without having to establish new charters. As financial institutions, payday chains took advantage of the situation. Some large banks, such as Wells Fargo and Bank of America, even began to back payday lenders.
In the past few years, several Illinois lawmakers sponsored bills to restrict payday and other short-term loans. Former state senator Patrick O’Malley (R-Palos Park) promoted relatively weak measures in 1999. His bill would have required payday lenders to disclose loan rates (which, when calculated annually, can run at more than 500 percent), allowed customers to pay debts in installments, and prohibited payday lenders from operating within a mile of colleges and gambling establishments. The bill died in the Senate. The following session, former state representative Tom Dart (D-Chicago) tried to pass a law that would have limited payday rollovers and created a database to track them. His bill failed in the House.
According to the Illinois State Board of Elections, the Illinois Small Loan Association has contributed more than $300,000 to state officials between 2000 and 2003. That’s nowhere near the millions provided by other interest groups in Illinois. But Dart, speaking to the Illinois Campaign For Political Reform shortly after his bill died, said Illinois Small Loan Association lobbyists were “very sophisticated. They were everywhere. They had a presence at every hearing, and even had people there specifically to work the press. They’re an easy industry to please. They just want to be left alone.”
Nevertheless, lawmakers finally passed a law to limit payday loans to $400 and rollovers to two. New loans aren’t supposed to be made to someone who’s had an outstanding loan within the past 15 days. But “there’s a problem with the law,” says Smith. It defines short-term loans as having 30-day terms, which was the industry standard when the law was passed. It also only applies to lenders chartered in Illinois. The law took effect in August 2001. Almost immediately, the in-state lenders created a new package: the 31-day loan. Since 31-day loans are, by definition, not small-term loans, the act became practically useless. In 2002, the Illinois Department of Financial Institutions surveyed about 2,000 loan applications from payday and title-loan companies. It found the state law applied to only about 3 percent of them.
Tom Dart lost his House seat when he unsuccessfully ran against Judy Baar Topinka for state treasurer. Representative Bob Rita took over some of Dart’s district as well as his fight for payday-lending restrictions. But so far no bill has materialized.
“In my district, payday loans are a big problem,” says Rita. “But this isn’t something that will fly through the legislature. There needs to be a lot of cooperation. It’s a complex thing.”
Illinois Small Loan Association lobbyist Steve Brubaker says, “We have been pretty successful as an organization in trying to make sure prohibition bills don’t pass.” Still, Brubaker says he’s already met with consumer groups and lawmakers crafting a compromise bill. Asked whether Brubaker met with him, Rita says he’s never heard of him.
“There’s a kind of a misunderstanding,” says Fast Cash’s Talkington. “People’s spending habits don’t make sense and we catch grief over it. People can be writing hot checks all over and not have anything to do with us. If someone doesn’t have insurance, breaks a tooth, and needs $100 to get it fixed right away, they come to us. It’s too bad banks don’t want to mess with them.”
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Jean doesn’t drive her Plymouth Accent anymore. Her new car, a 1995 red Grand Am, gets her to where she needs to go, even if she can’t open the passenger-side door. One of her brothers was so embarrassed about riding in the car, though, he asked Jean to drop him off a block away from his destination. “I’ve been crying for a new car,” she says. “But I don’t need it.”
Poor credit, of course, isn’t limited to those with low incomes. Scott Hepperly of Springfield’s Debt Counseling Service has been in the credit-fixing business for seven years, counseling more than 3,000 people. His current caseload, about 900 strong, includes couples scraping by and people earning six figures. His average customer, he says, is a married couple in their mid-30s with two kids, eight credit cards, and about $20,000 in credit-card debt. His office, on Normandy Road off Stevenson Drive, is decorated with several tall glass vases stuffed with sliced up Mastercards, Visas, and Discover cards.
Hepperly works for the creditors, who pay him a small commission for getting people out of debt. But credit-card companies don’t value his service as much as they used to, he says. They’ve cut his commission nearly in half. He suspects the companies are content to continue raking in late fees and other charges. By issuing more cards with limits of only a few hundred dollars, the risks are small but the rewards remain huge.
Hepperly and the SHA’s Rechner both agree that children are not being taught basic financial skills. It’s why Rechner wants to offer budgeting seminars in schools. Common sense, she says, is the best defense against getting trapped by debt. But it’s also difficult to teach.
A hairdresser at Rechner’s Saturday class defies reason. She doesn’t want to put money in the bank. “I just feel like I need my money in my hands,” she says. “I don’t want creditors going after my accounts.”
Rechner insists that such thinking is self-defeating. She appeals to the class: “You’ve got to realize up until this point you’ve been taken advantage of.”
The hairdresser finally responds, “I don’t think I value money as much as I should.”
Jean is quiet, looking a little weary.
This article appears in Jun 5-11, 2003.
