On Feb. 3, the Chattanooga City Council voted 5-4 to put a moratorium on new permits for alternative financing businesses, including payday loan stores. On Feb. 10, the council will vote on a permanent ordinance to ban such companies from setting up within 500 feet of residential areas, as well as a quarter mile from other stores in the industry.
The ordinance was proposed on Jan. 12 by Carol Berz and Russell Gilbert in order to decrease city crime by spreading out the concentration of title pawn and cash advance organizations.
“We know that predatory lending leads to a decrease in capital investment, hurts neighborhoods and has even been linked to increases in crime,” says Mayor Berke, according to the Chattanooga Times Free Press.
“It just seems like a good step that we can legally take at the local level to prevent the concentrations from increasing.”
All that is usually required to take out a payday loan is a form of identification and proof of employment, which is appealing to customers who don’t have credit at a local bank. Often, the loan is secured by post-dating and signing a check to the business. If the loan is not paid back on time, the client must pay a fee to roll over the repayment date, or else risk being sued by the company. It is estimated that there are as many payday loan stores in the United States as Mcdonald’s and Starbucks combined. Payday lending is illegal in fourteen states, including Georgia, and Washington D.C.
Payday lending and other related transactions have been criticized as exploitative to the needy. If a typical payday lender charges at a 15% interest rate every two weeks, the annual percentage rate is about 400% a year, in addition to late fees added to the original loan. Most payday loans must also be paid back in “balloon payments” –in full at once, which means rollovers are frequent. According to the Center for Responsible Lending, the average payday loan borrower takes out nine loans a year. Moreover, post-dating checks is illegal, which means that the borrower cannot successfully sue the loan company.
Most arguments in favor of payday lending focus on the fact that payday loan offices are only intended for short term relief, and clients are fully aware of the risks in the loan process when signing their contracts. In Tom Lehman’s book In Defense of Payday Lending, Lehman says that the stores are a service that “provide loans to poor households when other financial institutions will not.”
Despite this controversy, prosecution for shop owners is uncommon. One notable exception occurred last August, when Chattanooga’s Carey Vaughn Brown was charged with 38 counts of usury for creating “a payday syndicate” with Ron Beaver and Joanna Temple, a legal counselor. As the New York Times and the Chattanooga Times Free Press previously reported, Brown indirectly owned about 14 companies with offshore interests set up as far as Bermuda. These businesses, which Brown called “shell” companies, raised money for his Christian charity organization, the “Covenant Values Foundation,” which pledged to give away one billion dollars in grant money to applying missionary groups. After years of scrutiny and investigations, Brown was finally indicted for selling payday loans online to clients in Manhattan.
It remains to be seen whether lasting regulation will be placed on advance cash businesses in Chattanooga, to what extent measures will be taken to minimize risk to clients, and whether such measures will be effective. However, the ordinance that will be voted on on Feb. 10 could potentially create chances for further dialogue between lobbyists from both sides of the payday loan debate.