New Jersey Divests from Payday Lending

Advocates in New Jersey mobilize to make a state pension fund put its money where its state regulations are.

Photo by Taber Andrew Bain, via flickr, CC BY 2.0

Payday loan store window graphics.

Photo by Taber Andrew Bain, via flickr, CC BY 2.0

When Phyllis Salowe-Kaye learned that the New Jersey State Investment Council (NJSIC) had invested 50 million state pension dollars with a private equity firm that used some of the funds to purchase a predatory payday lender, she went through the proverbial roof. The longtime executive director of New Jersey Citizen Action (NJCA) quickly assembled a powerful coalition of consumer protection and civil rights advocates and began applying pressure on the commission to sell its stake in the firm. Payday lending is illegal in New Jersey and she considered the use of state dollars to purchase a payday lender, at the very least, a breach of ethics and conflict of interest for the commission.

On January 27, 2016, almost 10 months after the NJCA’s initial inquiry, the state investment commission announced at its monthly meeting that it had finalized divestiture from JLL Partners, the private equity firm that purchased Ace Cash Express. Ace had earlier been fined $5 million and ordered to repay borrowers another $5 million by the Consumer Financial Protection Bureau (CFPB),which found Ace’s lending and collection practices to be predatory.

“Yes, yes, yes,” said Salowe-Kaye, when asked about the CFPB’s findings and subsequent ruling on Ace, “That’s why they [payday lenders] are illegal in New Jersey.”

“We were not happy that it took until January,” she added. “We would have liked to have seen this happen sooner.”

Among those that assisted in the push for the commission’s divestment were Bruce Davis, economic chair for the NAACP state chapter, the Reverends Dr. DeForest Soaries and Errol Cooper from First Baptist Church of Lincoln Gardens, and Reva Foster, chair of the New Jersey Black Issues Conference.

A payday loan, as defined by the CFPB on its website, is a “short term loan, generally for $500 or less, that is typically due on your next payday.”

According to NJCA, 12 million Americans are sucked in by the quick cash that payday loans offer, costing them $7 billion in interest rates and fees. On average, payday loans carry a 391 percent annual percentage rate (APR) and are targeted mostly to people of color, military personnel, and seniors.

Many people who need help smoothing out erratic cash flows turn to payday loans. Unfortunately, due to the high costs, many of those same people find themselves taking out payday loans to pay back existing payday loans, creating a recurring debt cycle that lawmakers and civil rights groups argue should be illegal.

Beverly Brown-Ruggia, a community organizer with NJCA, helped kickstart the process of formally requesting that the commission begin divestment proceedings with JLL. “The first steps were to contact the state, sign up to speak, contact our advocates and also to do more research about the relationship between the pension fund and Ace Cash Express,” Brown-Ruggia said.

Upon further investigation into the relationship between the commission and JLL, Brown-Ruggia found that, despite the CFPB ruling against Ace, the commission planned on dumping even more state money into JLL. “At the meeting where we bought up our demands for divestment we also pointed out that, in January 2015, the council had approved a proposal for another $150 million investment,” Brown-Ruggia recalled.

As he left the meeting where the divestment was announced, Tom Byrne, chairman of the NJSIC, sounded like a man who was just happy to be putting the divestment campaign behind him. He acknowledged the commission’s obligation to comply with the coalition’s demands, despite the financial ramifications for state pensions, and for JLL Partners.

“What we divested was a business that is illegal to conduct in New Jersey,” Byrnes said. “I don’t think JLL was too happy, but we made a decision that we thought was in the best public policy interest. They’re business people and they have to understand when they make certain transactions they take business risks.”

Byrnes, though, did not appear ready to rule out the possibility that the commission would invest in companies in the future that some groups and individuals might view as unethical.

“There are other situations that are much greyer,” Byrnes said. “People could come in here and say I don’t like coal, I don’t like tobacco, I don’t like oil companies, I don’t like guys that overcharge for consumer products, I don’t like banks, so what are we left with? At some point, needless to say, we can’t accommodate everybody that doesn’t like one thing or another. The bright line is what’s legal to do and what’s not legal to do in the state of New Jersey.”

Unfazed by the chairman’s concerns, Salowe-Kaye expressed a strong desire to see the commission adopt stricter due diligence policies governing its investments.

“A first step would be to prohibit the commission from investing pension funds in any kind of business that is illegal in New Jersey. For example, in Nevada prostitution is legal. Technically if they wanted to invest in a prostitution business in Las Vegas they could; we want to make sure that they don’t do that.”

Davis took Salowe-Kaye’s suggestion one step further.

“One of my objectives is to get someone on the investment council that has that moral compass to oversee the types of investments they are making,” he said.

The commission’s decision comes amid growing national concern over the debilitating effects caused by payday lenders and calls for better accountability from the institutions that invest in them.

U.S. Rep. Maxine Waters (D-CA) has spent the past few years addressing the problem of illegal payday lenders around the country. She heads a national campaign that urges university endowments and state retirement funds to sell their stakes in investment capital firms that invest in Ace Cash Express, among other payday lending businesses.

In a March 2015 press release published on the House Committee on Financial Services website, Waters is quoted saying:

“I join the White House in support of the important work the Consumer Financial Protection Bureau is doing to rein in payday lenders that have turned a business intended to help hard-working consumers stay out of financial trouble into one that often creates trouble instead.

Low-income borrowers need access to small-dollar loans for the kinds of emergencies we all face, but the terms of these loans must be reasonable and not give rise to the kinds of debt traps that have come to characterize the payday industry. What the CFPB has announced today is a starting point, and I am hopeful that this process will eventually yield a strong and simple rule that protects our low-income and minority communities from unaffordable rates and unfair terms.”

Yet, in light of mounting pressure on the industry, payday loan companies have continued to find ways to reach cash-strapped borrowers who find themselves in desperate need of immediate finances. An increasing number of payday lenders have turned to the Internet and direct text messages to lure potential borrowers in. The maneuvers provide shady loan companies like Ace a scarcely-regulated means by which to conduct their business in states that have outlawed the practice.

Cassandra, a New Jersey native whose real name has been withheld for privacy, found out as much upon her return to New Jersey over two years ago when, in the midst of a divorce and struggling with mounting legal bills, she found herself in an even worse bind when her young daughter fell ill and required extended hospital stays and expensive medication.

“During that time a lot of things fell behind,” Cassandra said.

That’s when, in October 2014, she applied for and received an $800 payday loan, under the condition that the lender be allowed to make bi-weekly withdrawals of $140 from her bank account over the course of 17 weeks. (That’s $1580 in costs for an $800 loan). Within days of her final payment, the same payday lender offered her another loan, which like the first, was too tempting to refuse.

Unfortunately, for Cassandra, the new loan didn’t make life any easier.

“My job changed, [and] it changed my pay cycle. So I called them very simply and said, ‘You know, my pay cycle changed, could you please change my payment date to match my pay cycle?’ Well that they consider a renegotiation of your loan, and they increase the amount over the life of the loan, so . . . my payments went from $117 every two weeks to $127, so, you know, over the life of the loan even that small thing costs me maybe 100, 200 additional dollars.”

When Cassandra lost her job while the loan was still outstanding, the loan company refused to consider her situation and still attempted to collect payments directly from her bank account. Overdraft fees of $25 to $35 added to her woes.

Cassandra has finally paid off her payday loans, but she still gets emails and text messages from various payday loan companies. She says going forward she will abstain from the allure of fast cash offered by payday lenders: “I literally pray to God that I will never have to do that again.”

Currently 12 states have either outlawed or restricted payday lending, a figure that Salowe-Kaye would like to see grow dramatically. Despite the NJSIC’s divestment from JLL, the NJCA is not sitting on its laurels. The group is participating in the fight to prevent payday lenders from operating anywhere in the country, and, according to Salowe-Kaye, will continue to keep a close watch on the investment choices made by the NJSIC.

“If nothing else,” she says, “[the hope is] that they pass something that says that their due diligence will not allow them to invest in a business that is illegal in the state of NJ.”

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