Fighting predatory lending in Tennessee

For many Americans, loans and banking go hand in hand. Borrowing money from an institution typically requires a traditional financial provider, such as a bank or credit union, to underwrite that loan. But many of those facing tough financial situations have few options but to turn to nontraditional, and often less scrupulous, lenders.

These lenders, often known as payday lenders or check cashers, are used by over twelve million Americans. The loans they offer are characterized by some of the highest interest rates in the financial industry—annual percentage rates (APRs) range between 391 percent and 521 percent in the 28 states that these lenders are legally allowed to operate in, according to The Pew Charitable Trusts. In fact, payday loans frequently carry fees and interest charges that exceed the principal amount loaned.

Tennessee has the most predatory lenders in the country. Based on an analysis of state licensing data:

• There are over 1,200 predatory lending locations across 89 of Tennessee’s 95 counties.
• Shelby County leads the state, with 232 brick-and-mortar predatory lending locations in the county.
• Madison County has the highest concentration of lenders amongst Tennessee’s 20 most populous counties, with 29.5 locations per 100,000 residents.
• People without a four-year college degree, home renters, African-Americans, and those earning below $40,000 are more likely to have used a payday loan. And contrary to payday lender advertising, seven in 10 borrowers use them for regular, recurring expenses as opposed to unexpected or emergency costs.

And the demand for payday and installment loans, another kind of high-interest revolving loan, is huge—with industry revenues exceeding $14.3 billion in 2016. This is indicative of a growing need for short-term, alternative credit options for people who are often underserved by traditional financial institutions. Predatory lenders are able to exploit this need, in part, because there are few alternatives for consumers to go to.

Traditional banks are typically restricted in the interest rates they can charge, with limits of 10 or 11 percent annual percentage rates for consumer loans. And access to credit cards is often limited to those lacking good credit scores.

Predatory lenders rely on extended indebtedness. The Consumer Financial Protection Bureau (CFPB) finds that 80 percent of payday loans are taken out within two weeks of repayment of a previous payday loan. The industry often concentrates in distressed communities and areas with high rates of poverty.

These kinds of bad business practices are not only damaging to consumers, but they’re also detrimental to the development of strong and prosperous communities. That’s why the Metro Ideas Project (MIP) is taking on predatory lending as an urban policy challenge. In this report, we will dive into data from Tennessee to better understand the predatory lending landscape in our own state. But the policy recommendations and solutions presented herein are applicable to cities across the country.

This report proposes a three-prong strategy to combat predatory lending:

• Warn: Leverage laws allowing municipalities to regulate signage and require predatory lenders to post plainspoken warnings on all exterior signage (e.g., billboards, exterior signs, posters) about the dangers and risks associated with their services.
• Permit: Require an additional local permit to operate a predatory lending establishment in city boundaries.
• Lend: Create an alternative, community-based, and nonprofit lending institution under the same legal structure utilized by predatory lenders, featuring affordable rates, transparent fees, and honest underwriting practices.

As cities look to build strong local economies and bring people out of poverty, ensuring that people are not trapped in debt and have lending options that encourage upward mobility will be paramount. This research aims to provide cities a selection of tools and strategies to help achieve those goals.