Payday Lenders and Christians

In the face of what some economists are now calling a recession, many low- and middle-income Americans are turning to payday lenders, creditors who offer short-term, small-sum loans to desperate consumers. The catch? These lenders generally charge exorbitant interest rates that can trap borrowers with loans they often can't repay. A 2006 report from the Center for Responsible Lending (CRL) found that 90 percent of the revenue generated in the payday-lending industry comes from fees charged to borrowers.

Steven Schlein of the Community Financial Services Association of America (CFSA), which represents the industry, insists that payday lenders are only reacting to consumer demand, which "has been huge and growing since the '90s. There are currently about 24,000 stores. In 2000 there were about 10,000." Critics may consider the practice predatory, but Schlein says "our customers are extraordinarily satisfied. The only people who are complaining is a consumer group out of North Carolina [CRL] that has spread out across the country."

In a paper to be published this spring in the Catholic University Law Review, professors Christopher Peterson and Steven Graves find a surprising correlation between the geographic density of payday lenders and the political clout of conservative Christians. NEWSWEEK's Patrick Enright spoke with Peterson, visiting professor of law at the University of Utah, about their unexpected findings. Excerpts:

NEWSWEEK: What were the top-level results that you found?
Christopher Peterson:
We [mapped payday lenders] nationwide, and one of the patterns that started to emerge was a lot of density in the Bible Belt and in the Mormon mountain West, and so we started to try and come up with some way to think about that carefully. We also created an index that measures the political power of conservative Christian Americans … What's interesting and surprising to us is that we found a strong correlation between the number of payday lenders within a geographic area and the political power of conservative Christians within a state. It's a surprising result to us because the natural hypothesis would have been to assume that given biblical condemnation of usury, there would be aggressive regulation and less demand for payday loans in those types of states. I think it's ironic that we actually found that the opposite tended to be true.

What are some potential explanations for the correlation?
If you are someone that reads the Bible and takes that seriously, finding out that there's a disproportionate number of predatory lenders—usurious money-changers, depending on what you want to call them—in your flock, that's a significant fact, irrespective of the why. Speaking to the why, our data don't attempt to create a causal explanation for this pattern. We are not arguing that the reason there are more payday lenders in those states is because they are conservative Christian states, as opposed to poverty, race, income, [or] other potential factors …

Nevertheless, it tends to be the case that state laws in these areas are more permissive of payday lending than in some of the other parts of the country. Throughout the Bible Belt and the Mormon mountain West, there is relatively little regulation of this type of lending … That's clearly a causal factor. But in a sense that just begs the question: it's legal there, but why is it legal there? I don't think anybody's going to come up with a study that answers that. That's more a matter of political speculation, but here's what I suspect may be part of the story: in the 1980s and continuing perhaps even stronger in the 1990s, I think it's fair to say that the Christian right and conservative Christians came to align themselves with conservative Wall Street big-business interests, and that's been effective for pushing a variety of issues that are important to social-values conservatives, such as the abortion debate, some sorts of family questions and perhaps gun rights—those types of things. But consumer protection law and the limits on usurious moneylending have been an inconvenient sticking point in that political alliance, and I think therefore has been put to the side. As that alliance has continued to dominate politics in these areas, the laws that protected people from usurious moneylenders in those states have fallen into atrophy.

So you trace this result partly to the connection between conservative Christians and conservative financial interests?
We think that's probably part of the explanation. That doesn't by itself explain this pattern geographically, however … I want to be really clear about that point. I don't want to be seen as suggesting that payday lenders are moving to these areas because conservative Christians want it more or that that's the causal explanation for it. This is a correlation that we've seen that's a significant and important point that is facilitated by the laws in those states. That's all we're saying.

How does this correlation compare to other factors, like income level?
We ran the same correlation test on the percent of the population that lives below the poverty line within each geographic area and we found that the correlation was stronger with our measure of the political power of conservative Christians. We also ran the same test against the percent of the population that's not white, sort of a composite measure of minorities. And again we found that there was a stronger correlation between payday-lender density and conservative Christian political power.

That's really interesting, because you'd think it would be much more closely tied to income level.
You would, wouldn't you? I think part of the thing that may prevent that is that there's a lot of poverty and racial diversity in some parts of the country where this sort of lending isn't tolerated.

It seems that predatory lending is coming more and more to legislators' attention. How do you think that's factoring into this, if at all? Are the states that have cracked down really the ones that need to be doing so?
I think that any state that doesn't have traditional usury limits is going to develop a payday lending problem. It's not so much that the states in, say, the Northeast are cracking down; the better way to say it is states in other parts of the country have given up on the traditional approach … In 1965 every state in the United States, all 50 states in the Union, had traditional usury limits that capped interest rates generally from between 18 percent to about 42 percent annually … In the past 15 to 20 years many states have relaxed those limits, allowing payday lenders to come in and do business at interest rates that average about 450 percent. [The industry argues that typical payday loans are for a period of two weeks, so lenders' interest rates actually aren't that high—only when critics extrapolate them to a full year do they seem exorbitant. A $15 charge on a $100 two-week loan, Schlein says, can be considered an interest rate of 15 percent. In accordance with the Truth in Lending Act, the CFSA's Web site displays a map of annual interest rates in each state, from a low of 156 percent in Oregon to a high of 869 percent in Maine and Montana.]

Why have those laws been relaxed?
I think that part of the explanation is that the alliance between social-values conservatives and big-business conservatives was a big change in the balance of power with respect to consumer protection law or limits on usury. Once that happened, around the country a lot of states started to deregulate, started to less aggressively prevent usurious loans.

Do you get the sense that there's any wider return to the usury laws we used to have 40 years ago?
I think that the pendulum is starting to swing in that direction. For a long time we were only seeing more and more states moving toward deregulation, and I think that that had a lot to do with how aggressive the trade associations for payday lenders were. They're very effective political advocates. They dedicate a significant portion of their revenue to campaign finance and to gifts for legislators around the country, and they have effective lobbyists and public relations firms. I think that helped contribute to the deregulatory trend. But my sense is that a lot of the state legislatures are starting to wise up, and it's likely that there may be a trend to start reversing some of the gains that the payday lending industry has made.