Tennessee Cities Target Payday Lending Practices
While there’s no significant federal action on the horizon to try to curb the practice of payday lending and the state of Tennessee has long been a hotbed for the predatory practice, that’s not stopping the city of Nashville from taking action.
For the past five years, Nashville has offered free, professional financial counseling to residents to increase financial resiliency, guide them in efforts to pay down debt, and save. The goal is to counsel people so that they break the cycle of financial habits that often make short-term loans an option of last resort.
“The decision to have a financial empowerment center has been one of our best decisions in our efforts to not only end poverty, but make sure that all of our residents can participate in our economy,” said Anne Havard, senior advisor for economic opportunity in the mayor’s office of Nashville.
“There are some systemic problems that are very real,” said Andy Spears, director of the consumer organization Tennessee Citizen Action. “But charging someone 400 percent interest and encouraging them to get multiple loans makes the problem worse and takes advantage of someone who is incredibly desperate.”
Nashville is just one of six cities to have a Financial Empowerment Center. Since the time Nashville received funding from the Cities for Financial Empowerment Fund, those consultations have led to $750,000 saved, and $6.8 million in debt repaid across the 6,000 residents who have come to the program for help in Nashville, according to a June press release.
According to Havard, anyone in the city can turn to the center, from a mother of four struggling with debts and low income to a country rocker.
But according to John Murphy, a principal at the CFE Fund, the average person seeking the financial counseling is an African-American female between 36 and 42 with two kids and an average of $10,000 in debt. When the counselor pulls a client’s credit score, Murphy said, it’s common to find that somewhere in their credit history at least one payday loan.
City initiative and innovation is great, but the lack of more aggressive regulation of payday lending at the state level remains a problem.
In Tennessee, there is not enough current political momentum in the legislature to tackle the high interest rates that it allows lenders to charge, Spears said. And new rules that the Consumer Financial Protection Bureau planned to implement this year have been delayed until next year.
So, the idea of preemption, that state laws overrule local ordinances, create challenges for cities looking to mitigate the effects of the payday loan industry – as with a host of other issues.
“I think we’re in a unique situation as a city, being a pretty progressive southern city in a conservative state,” Havard said. “And so, sometimes the city is limited on what we can legislate and we’re always looking for creative ways to make sure that everyone is included in our economy and able to thrive. And for us, this was a great opportunity to be able to address a real need for our residents outside the limitations that we sometimes face.”
According to Murphy, a city like Nashville has a reason to be concerned about the state of the personal finances of its residents. In 2010, Murphy said, a flood of the Cumberland River, which flooded the Grand Ole Opry, left the city as a whole on shaky financial ground. Then-Mayor Karl Dean proposed an office of resiliency for the city.
Murphy, who was working in Nashville at the time, helped create the Financial Empowerment Center. The CFE Fund, a Bloomberg-backed charity, sought to model a financial empowerment center that was run in New York City and Nashville was one of the first pilot cities, along with San Antonio, Philadelphia, Denver, and Lansing, Michigan.
In Nashville, there were some tweaks to the program.
“The South does not have as robust transit systems as our neighbors to the North,” Murphy said. “So really going out into the community and meeting clients where they were was a really critical piece of the success story for Nashville.”
To mitigate that problem, the financial advisors hold office hours across the city, such as libraries – in places where residents congregate.
According Havard, the city plans to expand the places where the services are offered, such as re-entry programs.
Eventually, the CFE Fund plans to expand financial empowerment centers to 50 cities. It recently accepted bids for 12 other cities, and those cities are currently working to adopt proposals for their own financial empowerment centers.
Meanwhile, the CFE Fund is also piloting city-level consumer protection agencies that protect the interests of consumers. This would also target payday lending, Murphy said, and other predatory loans that operate unfairly or deceptively.
“If we’re looking at examples of how you best both protect consumers and educate consumers from having to be at the place where a payday loan is attractive,” Murphy said, “both of these programs working in tandem together actually increase the effectiveness of both.”
The practice was also pioneered in New York City, and Murphy said that Nashville is taking steps to start a similar program in its city.
When asked about the program, though, Havard said the city isn’t ready to announce anything at this time.
Meanwhile, in Chattanooga, Metro Ideas Project sought to jumpstart the payday lending conversation when it published a study in January that advocated cities tweak their sign ordinances to require payday loan establishments to warn consumers that payday loans are risky, and could lead to lawsuits, repossession, docked wages, and more.
“I think we’ve really given some creative options for cities that doesn’t run afoul with state law,” said Joda Thongnopnua, executive director of Metro Ideas Project, “that is both innovative and the solutions aren’t what the cities thought their options were limited to. And they’re a little outside the box, and provocative.”
A few years ago, Nashville, Knoxville and Chattanooga passed zoning laws that treated payday lenders like adult businesses and regulated the distance one payday lender could set up shop from another. But the report pointed out in many cases, zoning laws do not solve the saturation of lenders that have already come to a city.
Metro Ideas Project also suggested cities require payday lenders to get permits to operate within their limits. Finally, Metro Ideas offered, a city could establish a nonprofit lending institution that charged enough interest to keep operational. In other words, offering a competitive rate to beat payday lenders at their own game.
But according to Thongnopnua, the efforts of what cities can do are only stopgap measures until the state or federal government can step in.
“Unfortunately, the way that the state law is laid out, the state has decided it was going to be the single arbiter of whether or not we solve this issue,” Thongnopnua said. “And there just has not been enough courage within the state legislature to push back against predatory lending lobbyists and corporate PACs to effectively reduce the APR limit to a reasonable number below what is usurious.”
Daniel Jackson is a journalist based in Chattanooga, Tennessee, who writes about poverty, the South and the courts. His work has appeared in Courthouse News Service, The Guardian, The Washington Times and the Chattanooga Pulse.