IOWA CITY | Brian Curtis took out his first payday loan when he was 19. It took more than a decade before he got out from under it and the climbing interest payments that followed.
“It’s a trap,” he said.
Curtis, 37, and living in Davenport, said he had roughly $5,000 in payday loan debt after taking out loans for a $1,500 car repair while living in Florida, and then again when he moved to Missouri and needed a deposit for an apartment.
Add to that more than $22,000 in interest that accrued, and he said he faced a bill topping $27,000.
“Who has $27,250 just laying around? Because if you had it just laying around you would never have been in the payday loan store in the first place,” Curtis said.
Payday loan companies provide small-dollar, short-term loans that dodge state usury laws, allowing payday lenders to charge annualized interest rates as high as 400 percent.
Yet repeated attempts to place stricter regulations on the industry have failed to garner interest from state legislators, despite support from the Iowa Attorney General’s Office.
“Leadership on both sides of the aisle will not let these bills move forward for debate,” said Matthew Covington, a community organizer with Iowa Citizens for Community Improvement, which campaigns for tougher regulation of the payday loan industry.
The loans affect thousands of Iowans every year. At the end of 2012, Iowa had 209 payday loan storefronts that made over 950,000 loans that year and had annual combined net earnings of nearly $5 million, according to the 2013 annual report from the Iowa Division of Banking.
Many borrowers — often low-income earners with poor credit histories — turn to payday lenders despite the high cost because payday loans are viewed as more accessible than traditional bank loans. Plus, they can obtain the loans quickly.
“The business model is locking people into this cycle of debt. Most consumers think. ‘How could we allow that?’ But we do,” said Sen. Joe Bolkcom, D-Iowa City.
Since 2001, Bolkcom, majority whip and chairman of the Ways and Means Committee, has introduced multiple bills proposing increased regulation of the industry, including interest rate caps, reducing fees and a requirement payday lenders provide repeat borrowers with information on debt management. Each time, the bills failed to gain traction.
A similar bill in the House mandating an option to pay off payday loans in installments was introduced in 2013 but languished.
Supporters of the payday loan industry have voiced opposition to new regulations, contributing money to political campaigns and hiring lobbyists to voice their concerns.
Campaign contributions to Iowa legislators from payday loan-associated donors totaled more than $480,000 between 2003 and 2013, according to Iowa Ethics and Campaign Disclosure Board data collected by IowaWatch. An additional $800,000 was spent on lobbyists.
Legislators deny the contributions have an influence.
With state legislation stalling, Iowa cities have taken action. Over the past four years, nine Iowa cities passed ordinances restricting locations for new payday loans stores. But cities can’t control interest rates.
Waterloo City Council Member Pat Morrissey, who spearheaded Waterloo’s recent ordinance, said he hoped action at the municipal level could spur the state government into action.
“Just the concept of payday loans is atrocious. It’s usury, and takes advantage of people who can least afford it and puts them in a cycle of debt,” Morrissey said.
Repeat users dig hole
Borrowers who can’t pay off a loan when it comes due end up in a cycle of re-borrowing. With each additional loan, borrowers pay a fee. Added together, these fees can exceed the amount of the original loan, and customers can remain in debt for months.
A seven-month-long IowaWatch investigation found customers rely on the loans to cover chronic shortages, despite warnings from consumer advocates the loans are only meant for short-term use.
Payday lenders warn customers about repeat use, but the warnings often are buried under positive messages portraying the loans as quick and easy.
A survey by the Iowa Division of Banking shows roughly 53 percent of customers at Iowa’s payday loan stores took out 12 or more loans in a year, while 32 percent took out 15 or more loans.
A March report from the Consumer Financial Protection Bureau showed more than 80 percent of payday loans are rolled over or followed by another loan within 14 days. Iowa prohibits rollovers, where borrowers pay a fee or the interest on a loan to extend the due date, but lenders are allowed to make a new loan the same day a borrower repays a previous loan.
The Iowa Division of Banking survey shows the average payday loan interest rate in 2013 measured as an annualized percentage rate was 268 percent. In 2009 the average rate reached a peak of 296 percent APR.
While payday loan businesses are required to post interest using an annualized percentage rate, the businesses often provide additional ways of measuring interest rates that portray the loans more favorably.
In Iowa, a fee of up to $15 can be charged for a $100 loan. This could be billed as an interest rate of 15 percent. But calculating the annualized percentage rate, as mandated by the Truth in Lending Act, takes into account the quick turnaround by dividing that $15 fee over the number of days. During a two-week period that fee is divided by 14 days to become $1.07 per day. Multiplying this $1.07 for a full year results in a fee of $390, or a 390 percent annualized rate on the original $100 loan.
Randy Johnson, compliance examiner at the Iowa Division of Banking, said using an annualized percentage rate is the only way to compare “apples to apples” in order to give consumers an accurate picture of different loan options.
Jamie Fulmer, senior vice president of public affairs at Advance America Cash Advance said the company follows regulations, clearly posting APR rates in its stores.
However, Fulmer said annualized percentage rates best describe loans paid off over a number of years. “That’s not how our customers use our loans,” he said.
A study by Pew Charitable Trusts showed borrowers took an average of five months to pay off their loans, accumulating an average of $520 in interest. The study pointed to the system of fees associated with payday loans that encourages repeat borrowing.
Fulmer referred to a study conducted by Harris Interactive, which found the vast majority of customers were satisfied with payday services and understood the terms and costs of the loans.
Fulmer said the study was done independently of the payday loan businesses. But documents reviewed by IowaWatch show the Community Financial Services Association of America, a payday loans industry organization heavily involved in lobbying and other promotional activities, commissioned the survey.
Bolkcom has introduced bills with proposed payday loan regulation nearly every session since he entered the Iowa Legislature in 1999. But those bills ultimately go nowhere. The story is similar in the House.
Legislators said the lack of tougher regulations is not due to the influence of political donors, but the payday industry has been heavily involved in campaign contributions in Iowa.
Contributions from the payday loan industry amounting to over $83 million have poured into state campaigns across the country, according to data from the National Institute on Money in State Politics. The institute shows Iowa legislators have pocketed more than $360,000 from donors associated with the payday loan industry since 1998.
However, data collected by IowaWatch from the Iowa Ethics and Campaign Disclosure Board shows legislators received more than $480,000 in campaign contributions from payday loan-affiliated donors since 2003.
Four donors make up the majority of the contributions:
- Michael Medved, owner of two Nebraska-based payday loan companies, donated more than $165,000.
- Rod Aycox, owner of an Alpharetta, Ga.-based payday loan company, donated more than $145,000.
- Allan Jones, CEO of the Cleveland, Tenn.-based Check Into Cash payday loan chain, donated more than $38,000.
- Advance America Cash Advance Centers PAC, the political action committee for the Spartanburg, S.C.-based payday loan company, donated more than $37,000.
“We certainly participate in Iowa. We have 60 to 65 employees in Iowa who get up every day to provide these services. We have made an investment in Iowa,” said Fulmer, senior vice president of public affairs with Advance America Cash Advance.
Most of the contributions from payday loan-associated donors went to incumbents from both parties. The top recipient, Senate Majority Leader Michael Gronstal, D-Council Bluffs, received more than $66,000 from payday-associated donors.
In an emailed statement to IowaWatch, Gronstal said campaign contributions never have influenced any decision he’s made about legislation.
House Majority Linda Upmeyer, R-Clear Lake, who has received more than $15,000 from payday-associated donors, said donations don’t play a role in her votes or accessibility. “I speak with anyone who calls the office and schedules an appointment. I’m very accessible,” she said.
This statement came after multiple calls and emails from IowaWatch to Upmeyer during the course of three months failed to garner a response. Upmeyer didn’t answer questions about whether she would support regulations on payday loans.
IowaWatch attempted to contact other legislators among the top recipients of payday-associated contributions, including House Speaker Kraig Paulsen, R-Hiawatha, who received nearly $11,500, and former House Democratic Leader Rep. Patrick Murphy of Dubuque, who received over $16,000. Repeated calls and emails went unanswered.
Adding to the money spent on political campaigns, payday loan companies and industry organizations spent more than $800,000 on lobbyists in the Iowa capitol between 2008 and 2013, Iowa lobbyist registration reports show.
William Brauch, director of the consumer protection division of the Iowa Attorney General’s Office, said the money spent on lobbying can make it harder to get regulation of payday loan businesses passed.
“The payday industry invests a great deal of money in lobbyists who work the issue hard, and even if the voices of others are speaking in favor of this legislation it can be an uphill battle,” he said.
Cities take action
Nine cities in Iowa have passed ordinances limiting the locations of new payday loan stores. But both critics and advocates say the ordinances fail to address key issues: high interest rates and business practices that target low-income borrowers.
Des Moines passed Iowa’s first city ordinance in 2010, which restricted the relocation or expansion of payday lenders and pawnbrokers. Ordinances also have passed in Ames, Ankeny, Cedar Rapids, Clive, Iowa City, West Des Moines, Windsor Heights and, most recently, in Waterloo.
Pat Morrissey ran for the Waterloo City Council last fall on a platform that included tougher zoning for payday lending stores. He won the election with nearly 60 percent of the vote against three other candidates.
“When I was walking around knocking on doors I never had anyone say anything good about a payday lender. The majority said it’s about time. Most wanted to see them gone, or at least out of their neighborhood,” he said.
After winning the election, Morrissey spearheaded an ordinance restricting both future payday loan locations and preventing existing storefronts that closed for more than 90 days from re-opening. The ordinance passed April 28 with a 5-2 vote.
Rebecca Rosenbaum, of Iowa City, said while an interest rate cap passed in the Statehouse would help borrowers, she didn’t support any city ordinances.
In 2012, Rosenbaum spoke at an Iowa City Council meeting, opposing the city’s ordinance restricting payday lenders. She said payday lenders have been one of the few financial resources available to her, and she was grateful to have access to the loans.
“If there were the kind of safety nets we need, such as affordable housing and decent wages and real help for poor people, we wouldn’t need to go to payday lenders,” she said, according to the transcript of the Sept. 4, 2012, meeting.
Rosenbaum’s husband, Steve Marsden, said he doubted the Iowa City ordinance, which passed in 2012, had much effect on payday loan use.
“If people are desperate enough, they can just go online,” he said.
However, Morrissey said keeping new lenders out of residential areas was a step forward, and he hoped the ordinances in his town and others would lead to action in the Statehouse.
“I would hope the state legislators are getting the message loud and clear that people want to see changes and one of those is they need to cap the interest rate. They need to be responsive to the common people of Iowa, not the moneyed business interest,” he said.
This story was produced by Iowa Center for Public Affairs Journalism-IowaWatch.org, a nonprofit, online news Website that collaborates with Iowa news organizations to produce explanatory and investigative reporting.