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Payday loans, Round Two

Post by David Seago on Dec. 2, 2006 at 6:19 am |
December 2, 2006 6:19 am

Consumer groups mounted a mighty effort in Olympia last year to win legislation curbing the "predatory" payday lending industry. But only one of 14 bills passed, and that was a minor one that did nothing to cap interest rates on such loans.


The battle will be joined again next session. State Rep. Jeannie Darneille, D-Tacoma, recently led a delegation of activists who told our editorial about their concerns over payday loans. State Rep. Steve Kirby, D-Tacoma, is chairman of the House Financial Institutions and Insurance Committee, and will play a key role in the debate. Earlier this year, Kirby wrote an oped piece (click on Read More to read it) for the TNT contending many criticisms of payday lending were exaggerated.


Kirby told me this week he’s hoping to work out a compromise bill, but he’s having a tough time getting the two sides to compromise. On Friday, demonstrators packed a House committee work session on the issue. Here’s the group’s stand:


"Communities Against Payday Predators (CAPP) is pushing for reform to protect all consumers in Washington, not just military personnel," said Aiko Schaefer, Director, Statewide Poverty Action Network. "All hard working people should be able to get fair and reasonable loans that include a cap on interest rates at 36%; ban the use of post-dated checks; and, allow people to take abusive lenders to court."


Communities Against Payday Predators (CAPP) is the Washington campaign to stop predatory lending. A diverse list of groups who have endorsed the objectives of the campaign, these groups include, AARP, Washington State Labor Council, SEIU Washington State Council, League of Women Voters of Washington, Puget Sound Regional Council, Washington Association of Churches, Minority Executive Director’s Coalition, Washington State Veterans Legislative Coalition and the Washington State Coalition Against Domestic Violence.


This week national groups on both sides of the issue issued back-and-forth volleys.



The Center for Responsible Lending issued a study claiming that the average payday loan customer pays back $793 for a $325 loan.


DURHAM, N.C. (November 30, 2006) – Payday lenders pocket $4.2 billion in excessive fees each year from Americans who seek a two-week loan and end up trapped in debt, according to a new report released today by the Center for Responsible Lending. The study calculates the cost of predatory payday lending state-by-state and also estimates that borrowers save $1.4 billion in states that enforce reasonable interest rate caps.


"Payday loans sink borrowers into quicksand-like debt," said Michael D. Calhoun, CRL president. "Borrowers end up paying more in interest—at rates of 400 percent—than the amount they originally borrowed. But by addressing payday lending squarely with a 36-percent APR cap, state lawmakers can get working Americans back on solid financial ground."


An industry association fired back with a statement accusing the foes of misleading arguments.



"This rehash of flawed statistics is designed for publicity purposes, not a serious discussion of consumer lending needs. Payday loan customers like the service because it is often their best financial option. The Center for Responsible Lending is opposed to virtually every consumer choice when it comes to short-term credit," said Darrin Andersen, CFSA president.


"In a state-regulated environment, payday advances can often be the best choice for consumer seeking low-denomination, short-term credit," said Andersen. Andersen cited a report released by Illinois Governor Rod. R. Blagojevich that the new regulations put in place in Illinois last year saved consumers $6.4 million in loan fees and interest charges in just ten months.


Here’s Kirby’s oped piece:


By Steve Kirby

Friday,March 10, 2006

Edition: SOUTH SOUND, Section: Editorial&Opinion, Page B05

As chairman of the House Financial Institutions and Insurance Committee, I took a personal interest in Monday’s article about payday lending legislation.


It’s clear to me that the public, after reading these news reports, remains baffled as to why the Legislature hasn’t run these shyster, evil, predatory businesses out of town on a rail. The media tell us payday lenders are nefarious, and we all know they couldn’t say that in the newspaper if it weren’t true – could they?


When I talk to my constituents, they are frequently surprised to learn that Washington state has some of the toughest regulations on this industry in the nation. Current law includes a prohibition against rolling over one of these loans, and a limit on the number of consecutive loans that can be made before a payment plan must be offered. Expect a significant piece of legislation next session if indeed it turns out that current law allows a small loan to become a big debt.


Here are a few of the most serious assertions about the evils of the payday lending industry, as well as the additional information legislators have access to that very often doesn’t make it into the news articles.


* Payday lenders prey on low-income people, sucking them into a spiral of debt that they can never escape.


There is a tremendous amount of anecdotal evidence that this problem is legitimate and needs attention. But the state Department of Financial Institutions has consistently provided testimony that it has all the tools it needs to undertake enforcement action against payday lenders who break the law. Where it comes up short is in complaints.


Out of about 3 million payday lending transactions in 2004, there were only 95 complaints – 52 of which were against one company that is no longer doing business in this state. Nevertheless, this is where I believe we need to concentrate our efforts. But we need facts to back up the anecdotes.


* Payday lenders locate near military bases and poor neighborhoods in order to exploit vulnerable people.


It may be true that these businesses favor these locations. However, when an overlay of banks, credit unions and payday lenders is placed on a map of the vicinity of the military bases in Pierce County, it doesn’t appear as though payday lenders have targeted those installations any more than have banks and credit unions or convenience stores. That being said, it makes perfect sense to me that they would locate in low- and moderate-income neighborhoods.


A shopping center that serves a neighborhood made up largely of middle- and upper-middle-class residents might have no payday lenders, but maybe three banks. That tells me that the people living in that neighborhood have a greater need for banks than they do payday lenders.


As for the military, last year we passed a law that allows any military base commander to declare any, or all, of these establishments “off-limits” for their people. Curiously, not a single payday lender has been declared off-limits anywhere in the state.


Again, if indeed it turns out that current law allows a small loan to become a big debt, it doesn’t matter where they locate. We need to intervene.


* Payday lenders are charging 390 percent interest. We need to cap the APR at 36 percent.


These are 15 percent loans. They are not 390 percent loans. If you rolled a $500, two-week loan over 20 times without ever paying back the initial principal, it might be a 390 percent loan – and it would violate state law.


The confusion comes about because federal law requires the interest to be calculated and disclosed on the “truth in lending” form in such a way as to result in an APR in excess of 300 percent.


Referring to payday loans as having a 390 percent interest rate is nothing short of deceptive. Capping the APR at 36 percent would mean that a lender gets to charge about $8 for a $500 loan.


We can seriously discuss whether or not the current charge of $75 for a $500 loan is excessive, but I think $8 is probably unreasonable.


Again, I stand ready to address the specific areas of the law that need improving to protect vulnerable consumers. But simply telling us to run payday lenders out of the state with legislation will not do.


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Steve Kirby, D-Tacoma, represents the 29th District.

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