Contempo Magazine Blog

The Payday lending industry makes enormous profits off high interest rates charged low income workers.The Texas legislature is considering implementing regulation and Congressman Hinojosa (D-TX) wants to see these workers steered to mainstream banking.Some local bankers are putting together alternatives as well.

When one thinks about America’s financial institutions it would seem a natural conclusion to think of an industry in trouble especially if it deals with America’s poorest workers. However, for the businesses known as payday lenders times have never been better but many are asking is it at the expense of a vulnerable group in society. Probably most people reading this article take for granted having a bank account which allows them access to an ATM or bank teller to collect cash. Unfortunately at least 10 million workers in America who live paycheck to paycheck are unable to maintain a steady bank account with a positive balance.

Over the past ten years a controversial industry has grown exponentially from a few hundred locations to thousands nationwide. Desperate workers use this institutions to get short term loans to pay off unexpected bills such as car repairs, doctor visits, or delinquent mortgage payments. The industry claims that the loans are setup to be paid back with the next paycheck but reports and investigations by multiple sources including government and consumer agencies have found out that the ideal situation and reality are far apart. According to the Center for Responsible Lending a typical payday loan of $325 usually is paid back with $793. Instead of paying back the loan in a couple weeks, many loans take months or longer to be paid back such that they are often rolled over at least 10 times. Contempo has learned that interest rates exceeding 300% have been paid by poor Hispanics who have been given such loans in South Texas region called the Rio Grande Valley.

The industry has been getting the attention of many state agencies as well the Federal government. Currently there is a bill before Congress called the Payday Reform Act of 2009 which requires lending institutions to clearly state to potential clients that these loans are short term and offer referral for financial counseling, but some critics does not go far enough. Michael Calhoun of the Center for Responsible Lending says under the proposed law effective interest rates could still go up to 48% and the requirement that the borrower pay back the loan with a single paycheck is still unfair.

A major criticism is that these payday loan schemes drain communities of profits and do not serve the community in the way of traditional banks. The Center for Responsible Lending notes that payday loan businesses are usually located in poor minority or working class white neighborhoods. Currently these businesses operate in 41 states out of which 16 and the District of Columbia have passed regulations which try to cap interest rates and stop the process of stacking loans on top of one another.

Up to now the State of Texas which has seen a phenomenal growth of these businesses has not been able to regulate them. According to the Dallas Morning News  these lenders take an advantage of a legal loophole to function as “credit service organizations”which implies they are helping to improve consumers credit ratings rather than lending money. The Texas legislature in May is set to take up several bills including that of Sen. Eliot Shapleigh of El Paso which will eliminate the loophole for payday lenders and also put caps on the interest rate of 36%.

Defenders of the industry point to the fact that they provide a needed service that traditional banks and other institutions do not and call the “predatory lender” labels unfair. They are not in favor of national legislation because they say they are under state legislation in many states which will complicate regulations. The industry now has profits in the hundreds of millions of dollars with some large companies reporting three digit growth rates in a short span of years. Their invasion of Texas has included not only their business establishment but also in spending cumulatively as an industry several million dollars in campaign contributions and political campaigns.

Those that defend payday lenders say that the relatively low number of complaints filed against them speaks to the fact that they are serving a need. They justify their high interest rates because they say about 5% of all loans default. Finally, they point out that no one else is providing this service. I spoke with Matt Ruszczak, Vice President of Business Development and Governmental Affairs for the McAllen Chamber of Commerce who noted that at least two such businesses in McAllen are members in good standing and to date have had no formal complaints against them.

Payday lending companies were created to fill a niche that traditional banks did not but now that may change. In South Texas a group of banks including Wells Fargo, Compass Bank, J.P. Morgan and Chase, Bank of America, International Bank of Commerce McAllen and Brownsville, Frost National Bank,National Cooperative Bank Development Corp., and Lone Star National Bank created an identity called the Rio Grande Valley Multibank Corporation in 1995 which is a certified Community Development Financial Institution. This organization partnered with Brownsville Community Redevelopment Organization to provide loans and education to residents of Cameron County who fell below the 60^th percentile of income. They have been able to institute successful programs for affordable housing and colonia improvement for low income families who before could not get credit.

Now Director Nick Mitchell says they are planning to create a program to give workers who use payday lenders an alternative. This program will include consumer education and financial literacy training to teach workers how to budget their spending and use credit wisely. The goal of the program will be to prepare these workers to eventually use traditional mainstream banking. The program will start in Cameron County initially but hopes to expand to the whole Valley.

Fernando De La Cerda, an officer with IBC Bank in McAllen, points out that many lower income workers have misconceptions about traditional banking. Many may go to payday institutions because they think they will not qualify for a checking account at a regular bank which would allow them to some cash from their paycheck. He points out that his bank and others frequently offer free checking to low income wage earners as long as they can keep a very minimal balance in the bank. This is the reason IBC is involved in the Rio Grande Valley Multibank project.

The real answer to stopping the exploitation of low income wage earners by predatory lenders be they unscrupulous payday lenders or subprime mortgage schemes is education. South Texas Congressman Rueben Hinojosa has been a leading proponent of the concept of financial literacy throughout his career and had to this to say on the subject today when we contacted his office:

“Throughout my life, I have been dedicated to moving my constituents away from payday lenders, predatory lenders, check cashers, and into mainstream financial entities such as banks, credit unions and other financial institutions. Consumers are paying billions in usurious rates for loans that undermine scarce family resources, risk bank account ownership, and compound cash strapped consumers’ financial problems. Payday lending and other similar products should be reformed substantially. It is my continuing hope that by moving them into the financial mainstream, my constituents and others across the United States will be able to open checking and savings accounts, establish credit and eventually realize the American dream of homeownership.”

“In these tough economic times, it has become quite clear that improving the financial literacy rates for all individuals across the United States during all stages of life is essential. Financial security is one of the most important issues for most Americans whether it involves saving enough for their children’s college education, saving for an unforeseen emergency, a house, or their retirement. In 2005, I co-founded and currently co-chair the Financial and Economic literacy Caucus in the House of Representatives Through this Caucus, I have been able to move the financial literacy cause forward to address financial literacy and economic education of our children and grandchildren and future generations to come.”

The working poor of America and our Rio Grande Valley deserve the right to reasonable banking services and protections from exploitation. If their only exposure to personal financial management and credit is through payday lenders I do not see how the community or a family is benefitted in the long run. America has always been about economic competition of products and services for the benefit of the customer. Payday lenders stepped in to meet a need that traditional financial institutions had neglected and their profits show it can be a profitable business. However, just in the subprime scandal of late there is a reasonable need for regulation and improving competition between companies so that more competitive rates for these loans naturally occur.

Hopefully, projects like the Rio Grande Valley Multibank project will lead to more competition coming from banking organizations which have traditionally supported their community. This competition and the education proposals like those of Congressman Hinojosa can perhaps someday make payday loans obsolete.

Thanks for reading Contempo Magazine blog which discusses issues for McAllen, the Rio Grande Valley, and America from a conservative Hispanic point of view. Tony Magaña grew up in McAllen Texas, attended Texas A&M University, served as an officer in Army Reserve, and holds a doctorate from Harvard University. The co-founder of Contempo Magazine has participated in Valley business for over 20 years. He is a member of the National Association of Hispanic Journalists and also writes for the American Daily Review

Recently, there was an incident on Twitter in which Ashton Kutcher, Kelso from That 70s Show, tried to get 1 million followers before CNN Breaking News could. If he got there first, he would donate 10,000 nets to help combat malaria in impoverished countries. This is significant because it tweaked many social media consultants.

Many social media purists will tell you that things like Twitter, Facebook, Myspace, and other networks out there are about relationships. The thinking is that if you maintain relationships with your audience, via conversations, that they will be loyal and will maintain a symbiotic relationship in which you and they provide value to each other. Ashton Kutcher totally blew that out of the water. There is no way that he can maintain relationships with over 1 million people. It’s impossible.

There are other celebrities on Twitter like Levar Burton, Brent Spiner, Wil Wheaton, Cesar Millan, Felicia Day, MC Hammer, Jimmy Fallon, and many more. They do not have 1 million followers; but they do have hundreds of thousands. They could not possibly have relationships with that many people either. There is not enough time in the day to do that and have a job.

The idea of relationships that social media purists preach cannot possibly hold true for celebrities. There are several reasons for this.

First, celebrities became celebrities by using mass media. Every Hollywood movie that comes out is mass media. Those movies get advertised on television, newspapers, the radio, and on the Internet; all of them are mass media. Therefore, they do not need social media to become successful; they already are. Broadcast media got them there and will keep them there.

Second, I already mentioned that it is impossible for anybody with a large following to have that same one-on-one rapport with their audience. Most social media purists don’t have this problem because they have nowhere near the same number of followers as celebrities do, especially outside Internet circles.

Third, people follow celebrities on Twitter or other social media as a way to know more about them. It’s a bit of a voyeuristic approach; social media gives people the window through which to peep at their favorite celebrities. I think it’s a curiosity of whether they live normal lives like the rest of us. For unfamous people, nobody cares.

Fourth, the business models are different. Celebrities make a little bit of money off of millions of people. Consultants typically make a lot of money off a small number of clients. Of course, one favors quantity of relationships and the other quality of relationships.

Finally, social media experts fail to recognize that people who follow celebrities have different expectations. If you follow a social media expert, you expect them to want to foster a relationship with you. If you follow a celebrity, you pretty much expect a one-way relationship.

Ultimately, social media experts who prefer quality of relationships over quantity have no choice in the matter because they do not have the same following. It is sour grapes in almost all instances.

Thank you for reading Contempo Magazine blog with Shaine Mata who writes about politics, technology, and social media for McAllen, the Rio Grande Valley, Texas and America. He is a co-founder of Advantj Media Consortium

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The Mexican Congress today took action on two important initiatives in the fight against the Mexican drug cartels that were supported by Mexican President Felipe Calderon.

Since 2006 Mexican President Felipe Calderon has been fighting the Mexican drug cartels using the Mexican Army as his weapon because of widespread corruption in police forces. In February of 2008 the Mexican President sounded hopeful that he could eventually phase out the Army’s role and replace it with a rejuvenated and corruption free police force.

Although the Mexican Army remains highly respected by most Mexicans there have been reports of brutality and abuse that have been noted by civil rights activists.

Currently there are 45,000 Mexican soldiers engaged in anti-cartel activities throughout Mexico. Officially under current Mexican law which is similar to American law, the military cannot directly arrest or enforce laws but only assist law enforcement.

Although Calderon has previous said that he hopes that by 2012 he can withdraw military forces, today he proposed an escalation of military deployments. The proposal would label special areas “domestic security” zones where cartel activity is identified. For the first time the military would be able to function similarly to an enforcement agency in these zones.

Human rights activists are concerned about the Army obtaining too much power, that they are not trained to be law enforcement, and for the first time that they could carry out “counterintelligence” activities against civilians.

The leftest opposition party PRD as reported today in El Universal opposed the measure and has created a delay until next September before any further action on the measure can take place

One of the ongoing criticisms of American authorities toward Mexico has been that cartel leaders financial assets were too well protected. Mexican law up to now offers substantial protection even for convicted criminals to keep assets even they got them through illegal activities.

Now a bill has passed the Mexican Congress that would clearly allow the ill gotten gains of criminal activity to be seized by the government. Mexican legislators told El Universal their intent was to create a bill which strikes at the heart of the cartels.

A special judge of the national government will be benched to oversee the seizing of criminal assets. An overwhelming majority of members voted for the measure after a compromise was struck that requires that the crime committed must clearly definable as a crime. The measure has been forwarded to the Mexican Senate. If it becomes law than real estate, business, properties and financial deposits and cash may be seized while law enforcement proceedings are underway.

Although members of the PRD opposed the measure the rest of the delegates overwhelming approved it.

Thanks for reading Contempo Magazine blog which discusses issues for McAllen, the Rio Grande Valley, and America from a conservative Hispanic point of view. Tony Magaña grew up in McAllen Texas, attended Texas A&M University, served as an officer in Army Reserve, and holds a doctorate from Harvard University. The co-founder of Contempo Magazine has participated in Valley business for over 20 years. He is a member of the National Association of Hispanic Journalists and also writes for the American Daily Review