WASHINGTON -- The Community Financial Services Association, the trade association that represents just over half of payday lending outlets in the country, has moved to define the payday lending industry before its critics get to define it further.
At a Feb. 21 press conference the industry rolled out its effort, which includes the adoption of a new seal, the production of a $10 million advertising campaign, changes to its industry best practices to which all its members subscribe, and the funding of financial literacy efforts in partnership with two national African American organizations.
"We have listened to concerns raised about our industry and have developed innovative solutions to address them," said Darrin Andersen, president of CFSA. "These enhancements to our current Best Practices are part of an ongoing effort to respond to the concerns of policymakers and protect the financial well being of our customers. These new initiatives will ensure that CFSA members hold themselves to a higher standard of responsible service."
The new seal is meant to identify CFSA member companies and to distinguish them from the rest of the industry, which has not signed on to the best practices. It will appear at CFSA member company locations and in the end of the advertisement with the tagline "this seal is your assurance that you are always dealing with a responsible lender."
Anderson is also the spokesman in the $10 million advertising campaign that will include television ads that will run on many cable stations and print advertising that will run in 39 national newspapers as well as some local ones.
"Payday advances are never designed to be a long-term financial solution," Andersen says as the camera pans past different scenes such as a car with engine trouble or a child in a doctor's office with his arm in a sling. "It is one way to deal with unplanned, short term expenses," he added.
The new focus on the need for payday loans only for unplanned expenses also shows up in the best practices changes as well. As part of the changes, member companies will now have to post a "customer notice" on all their materials which reads "payday advances should be used for short term financial needs only, not as long term financial solutions. Customers with credit difficulties should seek credit counseling."
The best practices also ban member firms from making payday loans for "frivolous purposes."
But the biggest change in the best practices may be the adoption by the CFSA of the "extended payment" option, which is intended to prevent customers from having to take out more payday loans to pay off existing payday loans and thus digging themselves deeper into a financial hole.
The "extended payment" option is designed to extend the time needed to repay a payday advance loan without additional fees or interest, Anderson explained. Customers will need to let the company know one day in advance that they will need to use the option, which will allow them to repay the loan over eight weeks without additional charges or interest.
Andersen explained that the "extended payment" option had been previously put into place by some of CFSA's members and that they had reported between 5-10% of their customers used the service. Andersen said the only requirement from the change to the best practices were that their members offer the option and the association did not mandate how it was offered. In other words, whether a company would allow a customer to take out another payday loan while still paying off the first on an extended payment plan would be up to the company, Andersen said.
But Susan Lupton, senior policy associate with the Center for Responsible Lending, an affiliate of the $261 million Self-Help Credit Union, said this was precisely the sort of loophole that industry opponents had seen before. "These people are really incredible," she said. "It's like they are selling exploding toasters and then blaming the consumer for plugging them in. The payday loan product is designed to fail. It has to fail so that it can be flipped and that's how they make their money." Lupton used the extended repayment option as an example, pointing out that a borrower who has a $500 payday loan that they cannot repay without taking out another payday loan is unlikely to opt for a repayment plan which will call on them to pay $125 per pay period for four pay periods and not put any more cash in their pocket the way that flipping a loan would, even though flipping the loan would be more expensive in the long run. CFSA also announced that it is partnering with the National Black Caucus of States Institute and the National Conference of Black Mayors to fund financial literacy efforts. The States Institute will run a campaign focusing on credit scores, how to understand and improve them, and the NCBM will run a campaign focused on black youth. CFSA is providing none of the materials for the campaign and will not put its seal on any of them.
There is a possibility as well that the campaigns may have as part of the education effort the need to avoid using payday lenders.
Previously, the payday loan industry has been charged with preying on black and Latino consumers around the country, a charge the industry has hotly denied.
Linda Wallace, executive director of The National Black Caucus of States Institute applauded CFSA for listening and taking these initial steps to educate consumers by launching a national educational campaign.
"We are particularly pleased that CFSA is implementing an industry policy that includes a movement toward greater regulation and stronger enforcement. We encourage other financial institutions to take similar actions," said Wallace.
Niger Innis, national spokesman for the Congress of Racial Equality, voiced his support for CFSA's efforts, "Since 2006, the Congress of Racial Equality has been engaged in a nationwide campaign advocating for the expansion of financial choices and access to capital for its constituents. We have strongly urged all lending institutions to provide needed consumer protections for its clients. CORE applauds the efforts being made by CFSA to inform consumers and provide reasonable guidelines, which help to best service the community. We can only hope that all lenders will replicate the effort being made today by CFSA."
Added CFSA President Andersen, "These enhanced best practices, backed by our public education campaign and financial literacy programs, will help ensure that consumers make educated choices regarding payday loans." --dmorrison@cutimes.com
