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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.
Delaware’s state House is preparing to vote on House Bill 289 this Thursday which is aimed at restricting payday loans within their borders, according to The Associated Press. This regulatory bill is meant to restrict the number of payday loans that borrowers can take out in a 12 month period to just five.
In tandem with the cap on originations, the bill also seeks to limit the number of rollovers permitted on a payday loan to just four.
Additionally, House Bill 289 will modify the definition of what the state considers to be short-term loans to include those of up to $1,000, instead of the $500 ceiling the state’s law currently dictates.
In order to help payday lenders abide by these new limitations, the state will also fund the creation of a database that will track whether a potential borrower already has an outstanding payday loan, which will be accessible by any of Delaware’s payday lenders.
Payday loans are a form of short-term financing that allows bad credit borrowers to acquire cash in a matter of minutes.
In return for this service, however, this type of borrowing comes with very steep fees that consumer advocates often accuse of being usurious. These steep fees often lead borrowers to take out additional payday loans in order to pay off their previous ones — a process which is commonly referred to as “rolling over.”
When borrowers begin rolling over their payday loans, they often find themselves in a sinking debt trap, wherein their financing continues to grow with each successive origination.
Since those who seek short-term lending opportunities often already are in poor financial situation, opponents of this industry claim that it doesn’t help, but instead it preys upon those with little money or poor financial histories.
Back in January 2012, Sen. Ted Lieu proposed new legislation that would regulate “buy here pay here” auto dealerships, which are notorious for selling high-mileage cars to low credit borrowers. That bill went through the Banking and Finance Committee this week, passing with a 7-2 vote.
The bill, more formally known as SB 956, has set out to cap interest rates on auto loans originated by buy here pay here dealers at 17.25 percent.
Under current law, buy here pay here auto loans can carry rates upwards of 30 percent.
Buy here pay here dealerships operate by originating financing on the premises, allowing buyers to walk onto the dealership, pick out a vehicle, and finance it on the site without having to wait for a third-party lender’s approval.
As a result, these dealerships have the freedom to approve poor credit borrowers for an auto loan.
The problem, however, is that buy here pay here locations are often the only means for bad credit borrowers to obtain auto loans for a vehicle—and these dealerships know that.
“A buy here pay here used car dealer is a subset of used car dealers where they will prey on the vulnerable and poor by making you show up every month to make your payment, and if you don’t do that then they will immediately repossess your car,” said Lieu in a recording on his website.
These unreasonable payment methods aren’t the only criticized practices that buy here pay here dealerships commit.
“They also mark up the cars up to 200 to 300 percent above Kelley Blue Book values,” said Lieu. “So these are really the worst of the worst in terms of predatory used car dealers, and they’re not regulated.”
Consider the story of one 58-year-old restaurant manager named Debbie Acevedo whose situation perfectly illustrates Lieu’s statement. As reported by the LA Times, Acevedo bought a 2005 Ford Taurus from a buy here pay here lot in Visalia, California. Under the terms of her deal, she’s required to drive to the lot every two weeks to make a $180 auto loan payment in person. She’s required to make this bi-weekly trip for four years—at the end of which she will have paid more than $18,000. That’s four times the Kelley Blue Book value of the vehicle at the time she purchased the car.
SB 956 is attempting to remedy situations like Acevedo’s by not only capping the auto loan interest rates that these dealerships can charge, but by also attempting to force buy here pay here dealers to obtain a California Finance Lender’s license.
Additionally, these dealerships will need to grant borrowers a grace period before repossessing vehicles, if SB 956 becomes law.
Sen. Lieu has posted a fact sheet summarizing SB 956 on his website.
It seems Congress left behind a potentially valuable (at least to small businesses and political parties) piece of legislation when it recessed in early August, according to the Washington Post.
On July 25, Sen. Mary L. Landrieu, a Democrat from Louisiana and Chair of the Senate Committee on Small Business and Entrepreneurship, introduced the SUCCESS Act of 2012.
The SUCCESS Act hopes to extend several common tax breaks used by small firms, including the elimination of capital gains taxes on investments in small business equity.
If approved, the Act would double the existing deduction of start-up costs as well as reduce the time an S-Corporation is mandated to hold onto assets following a conversion from a C-Corporation. The tax relief provisions of the SUCCESS Act are estimated to deliver $12 billion dollars in tax cuts.
The Act also aims to ease restrictions on business loans insured by the Small Business Administration (SBA), and it would offer a one year extension of a provision that allows business owners to use SBA 504 business loans to refinance their commercial mortgages. This business loan refinancing would be instrumental in freeing up capital for struggling businesses to reinvest in their operations rather than their leases.
Despite being previously introduced as an amendment to the failed Small Business Jobs and Tax Relief Act, the SUCCESS Act has remarkably found bipartisan support—which is especially rare in an election year. The previously pitched amendment received 57 votes in the Senate—some of which were cast by Republican supporters.
It is fully possible—and even likely—that both parties desire to be seen as fighting for small business constituents who are a strong pillar in the national economy.
If the SUCCESS ACT succeeds, more than just entrepreneurs and small business owners will benefit. Freed capital and resources would be available for business expansion once business loans are borrowed. These extra funds would allow small businesses to expand and grow, which means more available jobs for Americans.
Cutting back on unemployment is the long desired stimulus needed to heal the economy as well as a political rallying point that can be turned on either party in this sensitive election year.
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.