'Pay day' loans exacerbate US housing crisis
Updated: 2008-03-24 09:19
Because of the astronomical interest rates there is a movement among more states to implement a cap of 36 percent APR that is currently in place in 13 states and the District of Columbia.
"Thirty-six percent is still very high," said Ozell Brooklin, director of Acorn Housing in Atlanta, Georgia where there is a cap in place. "But it's better than 400 percent."
SPRINGING THE TRAP
But even in states like New York where pay day loan caps or bans exist, loopholes allow out-of-state lenders to provide loans over the Internet.
Janet Hudson, 40, ran into pay day loans when she and her fiance broke up, leaving her with a young son and a $1,000 monthly mortgage payment. Short on cash, she took out three small pay day loans online totaling $900 but fell behind with her payments. Soon her monthly interest and fees totaled $800.
After falling behind on her mortgage, Hudson asked Rochester, New York-based nonprofit Empire Justice Center for help. A lawyer at Empire, Rebecca Case-Grammatico, advised her to stop paying off the pay day loans because the loans were unsecured debt.
"For months after that the pay day lenders left me voice mails threatening to have me thrown in jail, take everything I owned and destroy my credit rating," Hudson said. After several months, the pay day lenders offered to reach a settlement.
But Hudson was already so far behind on her mortgage that she had to sell her home April 2007 to avoid foreclosure.
"Thanks to the (New York state) ban on pay day loans we've been spared large scale problems, but Internet loans have still cost people their homes," Case-Grammatico said.
A national 36 percent cap on pay day loans to members of the military came into effect last October. The cap was proposed by Republican Senator Jim Talent and Democratic Senator Bill Nelson -- citing APR of up to 800 percent as harmful to the battle readiness and morale of the US Armed Forces.
There are now proposals in other states -- including Ohio, Virginia, Arizona and Colorado -- to bring in a 36 percent cap.
And, in Arkansas, attorney general Dustin McDaniel sent a letter to payday lenders on March 18 asking them to shut down or face a lawsuit, saying they have made a "lot of money on the backs of Arkansas consumers, mostly the working poor."
Alan Fisher, executive director of the said up 2 million Californians have pay day loans. There is a proposed 36 percent cap awaiting debate in California's state assembly.
"We expect pay day loans will make the housing crisis worse," said Alan Fisher, executive director of the California Reinvestment Coalition, an umbrella group of housing counseling agencies. California, a state with an estimated 2 million pay day loans, the assembly is set to debate a bill on introducing a 36 percent cap.
"Thanks to the credit crunch and foreclosure crisis, state and federal policy makers are taking a hard look at the policy of credit at any cost," the CRL's King said. "But more needs to be done, fast."
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