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