Advocates for Fair Lending Urge Governor to Veto Bill
St. Louis Post-Disptach, May 1, 2014
JEFFERSON CITY • Regulations passed by the Missouri Legislature Thursday to restrict payday loans don’t go far enough for some community and faith-based groups.
Supporters of the legislation said the bill provides protections for consumers while still allowing payday lenders to operate and provide emergency loans for individuals who need them. Bill sponsor Sen. Mike Cunningham, R-Rogersville, said it was a step in the right direction.
“This bill does not allow any rollovers, and that was a major thing,” Cunningham said. “By stopping rollovers it stops this cycle of debt that people are in.”
But opponents of payday loans and the legislation sent to the governor Thursday said the only real reform for the industry would be a strict cap on annual interest rates and fees at 36 percent.
Under the current law, short-term loans for between 14 and 31 days and up to $500 can be renewed or “rolled over” up to six times and interest can continue to accumulate. Critics argue that these renewals trap low-income people into a cycle of debt and end up costing them far more than the original loan in fees and interest.
Four out of five payday loans are renewed or extended, according to a March 25 report by the Consumer Financial Protection Bureau.
The bill bans the practice in which a consumer would take out a new short-term loan instead of paying off the previous one. It also requires lenders to offer “extended payment plans” to a borrower.
No additional interest or fees could be charged during the extended 60- to 120-day payment period. Borrowers would only be able to get one of these deals in a year.
But Barbara Paulus, who leads the Economic Task Force for the Metropolitan Congregations United in St. Louis, said the legislation is sham reform and does nothing to help consumers. She said the rollover ban had done little in other states and consumers would still be able to take out back-to-back loans.
“Even though they’re not calling it a rollover, if you’re taking out nine loans a year it’s basically the same thing,” Paulus said.
Few consumers utilize extended repayment plans that are required by law, according to the Center for Responsible Lending. In Washington State, only 15 percent of eligible loans were repaid under the extended plan mandated there.
During debate on the House floor, opponents of the bill pointed out that there was nothing to stop a borrower from simply walking next door to a different lender and getting another loan – even if they were using an extended payment plan or could not pay off an existing loan. Rep. Gina Mitten, D-Richmond Heights, compared it to check kiting, where bad checks from one account are used to inflate another account.
“I end up in another extended payment plan, then another payday loan with another lender, until I have six different loans from six different payday loan companies – none of whom I can pay,” Mitten said. “That’s the fundamental issue.”
Unlike other forms of lending, the lender has no obligation to check or share with other lenders how much the borrower is already in debt, opponents said. Sen. John Lamping, R-Ladue, said the possibility of multiple loans with multiple vendors was a serious concern.
“At best this is neutral,” Lamping said. “This came from within the industry itself.”
Missouri currently caps interest and fees on a loan at 75 percent of the original principal, and payday loans can last for between 14 and 31 days. That would allow a lender to charge $75 on a $100 loan over 14 days – an interest rate over 1,950 percent. The average interest rate of payday loans in Missouri was 454 percent from 2011 to 2012, according to a report by the state’s finance division.
The bill lowers that cap to $35 in interest and fees per $100 in principal. The version initially passed by the Senate removed the cap entirely, which alarmed consumer advocates.
The 35 percent cap on the period of the loan means over the course of the shortest allowable payday loan of 14 days that would be an annual rate of 912 percent. On the longest 31-day loan, it would be a 412 percent annual interest rate.
Even though the bill's cap is lower than current law allows, Paulus said it’s not enough. She said the annual interest rate should be capped at 36 percent as is required by federal law for military borrowers.
Molly Fleming-Pierre, policy director of Kansas City-based Communities Creating Opportunity, said the bill was deceptive.
“I think it is egregious for the Legislature to try to pass off something that allows payday lenders to charge 900 percent interest as reform,” Fleming-Pierre said.
Advocates who worked hard to get a 36 percent annual rate cap for short-term loans onto the ballot in 2012 faced aggressive opposition from the payday loan industry. The measure failed to gather enough signatures.
With a 36 percent annual interest rate cap, the maximum companies would be allowed to charge on a 14-day $100 loan would be less than a penny a day. Some Republican lawmakers argue this is unrealistic and would effectively end the payday loan industry in the state.
The example commonly used by supporters of the bill is that of a single mother or working parent who needs a short-term cash infusion for an emergency purchase. But a 2013 Pew Research Report showed that 58 percent of those using payday loans were borrowing to cover basic living expenses.
According to the report paying back the loan usually means doing what the consumer would’ve done if no short-term loan were available, with 41 percent of borrowers selling assets, relying on friends or relatives or taking out a different type of loan.
Mark Rhoads, an industry lobbyist, said during a House hearing that payday lenders were supportive of the changes in the bill – including the 35 percent cap over the course of the short-term loan.
“There are provisions in this bill that are going to be financially damaging to payday companies. We think it’s a fair and balanced approach,” Rhoads said. “We need to rein it in and bring it back to a more prohibitive, more strict regulatory scheme.”
Opponents said the support from the industry just proves it’s not real reform.
“In my experience, if the industry is for it it’s not something that’s going to serve consumers well,” Fleming-Pierre said.
The bill passed the House 112-39 and the Senate 26-4. It now goes to the governor’s desk for his signature or veto.
The bill is SB 694.