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September 8, 2011 – Payday loans can offer short-term financial relief for borrowers strapped for cash, but as debate on a new California bill has pointed out, they can also put borrowers deeper in debt while stacking on high interest rates and fees.
California lawmakers are discussing a bill (AB 1158) written by Assembly Majority Leader Charles Calderon (D-Whittier) that would amend the current state laws to increase the maximum amount borrowers can receive.
Current law sets the maximum payday loan at $300, with a cap for lender fees at 15 percent of the loan. For a two-week loan, this fee amounts to a 460 percent APR. According to the bill, California is tied with one other state for the lowest cap among the states that allow payday financing.
“California is one of the most costly states in which to live, and yet the state has one of the lowest advance limits in the nation,” bill advocates said.
Among the bill’s supporters are members of the payday lending industry, the California financial Service Providers’ Association and the Community Financial Services Association. Opposition includes Center for Responsible Lending, California Reinvestment Coalition and the city of San Diego, among a variety of others.
One concern the opposition has voiced is that borrowers can take out more than one payday loan at a time. Existing state legislation, enforced by the Department of Corporations, limits a payday lender from granting a borrower more than one at a time; however, it does not prohibit a borrower from taking out a loan from a different company to pay off another.
Lawmakers on both sides are advocating changes to the bill to make it more effective, such as considering income-based limits and repayment plan options. Also up for debate, according to an article in the Los Angeles Times, is requiring lenders to assess a borrower’s financial situation before giving them a loan, and also limiting the number of loans a borrower can take out each year.
Many are also concerned with the borrowers’ ability to pay back these larger sums in a short period of time. In the Assembly’s third reading of the bill, opposition said, “Increasing the amount of debt payday borrowers owe will only increase the likelihood that payday borrowers will not be able to pay off the loan at their next payday and will be more likely to land in the debt trap.”
AB 1158 is currently in a Senate Judiciary Committee and debate is ongoing.
A new organization claiming to be a non-partisan coalition of consumers, businesses, civic groups and faith-based groups called Stand Up Missouri has been launched.
This group argues to be protecting Missouri from the Missouri Payday Loan Ballot Initiative, an initiative looking to reform state’s limits on interest rates and fees on consumer credit, title, installment, and payday loans.
“Missourians are being asked to sign a petition for a ballot initiative that would cap lending rates. While the initiative is being reported as an effort to protect consumers from payday loans, it would actually restrict access to all small loans, including beneficial traditional consumer installment loans. These traditional loans help individuals and families get access to safe and transparent credit in a way that enables them to preserve their financial security,” said Tom Hudgins, CEO and Chairman of Stand up Missouri, in a press release.
The organization’s website steers clear of defending payday lending, stating in large font “Stand Up Missouri does not represent payday lending or payday interests.” Instead, the group focuses on installment loans, and features four video testimonies speaking out on behalf of the installment industry.
Hudgins continued to support installment loans by saying “These traditional [installment] loans also support small business by providing borrowers with the funds they need to purchase the businesses’ products and services. Stand Up Missouri is working to educate Missourians on the facts so they can make informed decisions and protect their best interests as the ballot petition travels throughout the state.”
The group argues that while the ballot would save individuals a few dollars a month, the impact of this bill would devastate Missouri’s economy and small businesses.
Stand Up Missouri’s advertisements all feature the response they urge resident’s of Missouri to give signature-seeking activists: “NO, thank you!”
Two legislative bills seek to set interest rate caps on payday and titles loans in Alabama: House Bill 320, which seeks to limit payday loans, and House Bill 462, which seeks to limit title loans.
Both bills would place a 36 percent cap on short-term payday loans and title loans distributed by state businesses. Interest rates can currently reach up to 456 percent for payday loans and 300 percent for titles loans.
The proposed bills would also limit the number of payday loans a borrower could take out each year to six. In addition, borrowers that owed more than $500 would be legally barred from borrowing from lenders within the state.
The payday loan bill, HR320, is sponsored by Representative Patricia Todd (D-Birmingham) and Senator Marc Keahey (D-Grove Hill). The title loan bill, HB462, is sponsored by Representative Roderick Scott (D-Fairfield) and Representative Mike Ball (R-Madison).
But the bills go further than trying to merely cap interest rates. Todd and Keahey’s bill for payday loans would also require a central database to allow lenders to check on a borrower’s loan status. Scott and Ball’s legislation for titles loans would force the lending companies to return the money from the sale of a repossessed vehicle, minus principal, interest and fees, to the original title holder.
Currently, payday loans in Alabama are licensed under the 2003 law called the Deferred Presentment Services Act which allows loans to reach $500 and 17.5 percent fees, but that can turn into APRs of 456 percent. Title loans in the states are currently regulated by the Alabama Pawn Shop Act which allows for monthly charges of 25 percent on vehicles and other property.
Opposition and Economical Fears
According to a 2011 report by the Alabama Banking Department, there were 1,070 licensed payday loan businesses in the state. Reducing the interest rate on payday loans to 36 percent would make the high-interest and high-risk loans uneconomical for payday lending businesses. Some speculate that the legislation would force those businesses to close or move to other out-of-state locations.
While opponents of the bill say that it would drive business out of the state of Alabama, Todd believes it will only benefit the state economy. She said payday lenders are making a lot of money “off the backs of poor people.”
Todd said during her work for an HIV organization, she faced tenants having issues with paying for rent due to owed debts on payday loans.
“You can never get out of the cycle of debt,” she said.
As a part of the Alabama House of Representatives, Todd is trying to develop other avenues for consumers to access short-term loans, but on fair terms.
“We regulate other financial industries like banks. There’s not strong enough regulation to regulate these industries,” she said. ‘We are asking that they charge a reasonable interest rate.”
But Todd is unsure of the outcome of this legislation. She said payday lenders have hired lobbying groups which could negatively sway the outcome of the bill.
“It’s usually the person with the most money who wins, but hopefully people will do the right thing and vote to regulate this industry,” she said.