Payday loan companies face legislation caps

(NNPA) - New research from the Center for Responsible Lending has found payday lenders are nearly eight times more concentrated in California's Black and Latino neighborhoods as compared to White neighborhoods, draining these communities of $247 million in payday loan fees. "Payday lenders contend that they provide access to credit for underserved communities," said Leslie Parrish, a senior researcher at the Center for Responsible Lending. "What they are really providing is access to long-term debt traps which too often lead to extra overdraft fees, credit card delinquency, trouble paying bills including medical expenses, even bankruptcy."

The payday loans work like this: the customer writes a check to the lender. The amount on the check equals the amount borrowed plus a fee that is either a percentage of the full amount of the check or a flat dollar amount. The customer must either pay back the full amount of the check and the fees, or pay another fee to extend the loan. The loans too often become cyclical and take much more money to get out of, say advocates.

Payday lending is a $40 billion industry made up of roughly 23,000 lenders, such as Check 'n Go, Advance America, Cash America and Check Into Cash, where a typical borrower takes out between eight and 10 loans each year, according to researchers at Stephens Inc., which follows the industry.

Fifteen states and the District of Columbia have legislated caps on various amounts. Such a cap has been introduced in the U.S. Senate and House, and would not prohibit California or other states from instituting their own caps.

"H.R. 1214, the Payday Loan Reform Act of 2009, creates significant protections from abusive payday practices by preventing rollovers and freeing consumers from the debt trap by mandating a cost-free, 90-day repayment plan. The bill lowers the effective APR of a payday loan to 48 percent, or 15 cents for every dollar loaned," said Rep. Luis Gutierrez (D-Ill.) at a spring congressional hearing of the subcommittee on Financial Institutions and Consumer Credit.

"This is a rate that is lower than 23 current state rate caps, including California, Colorado, New Hampshire and even my home state of Illinois. My legislation would also prohibit unfair mandatory arbitration clauses, increase disclosures and honor all existing stronger state protections by creating a federal floor on which stronger laws can then be built," he said.

Proposed federal legislation, which includes several bills, addresses problems with predatory payday loans, which bind borrowers in long-term debt at 400 percent annual interest rates. Congress passed a 36 percent cap in 2006 to protect active members of the military after the Pentagon testified that payday loans were affecting military readiness.

Surprisingly, opponents and backers of payday loans disagree with the Gutierrez bill, H.R. 1214.

Michael Calhoun, president of the Center for Responsible Lending, commended Rep. Luis Gutierrez for a commitment to economic fairness and financial reform and his interest in addressing payday lending.

But, he added, "We continue to oppose the provisions of H.R. 1214 because they do not address the fundamental problems with payday lending that trap borrowers in debt: the high cost of the short-term credit and the requirement that the borrower pay back the loan with a single paycheck."

The payday loan industry has favored similar bills in states. For example, states have tried to stop abusive repeat payday loans by banning loan renewals like the loan renewal ban in H.R. 1214 (e.g. Florida, Oklahoma). Payday lenders, though, evade this restriction by closing out the loan and simply re-opening it with a new identical loan, with no resulting reduction in the average number of loans per borrower or interest paid.

Jeff Kursman, spokesman for Check 'n Go, told The Hill.com that the bill pre-empts state law and does nothing to protect the industry from state legislatures passing stiffer terms in the future. Kursman said, "We can't support that in any way, shape or form.''