The following article was written by Brian Lyman from the Montgomery Advertiser.
Hard Cap For Payday, Title Loans Sought; legislation seeks to limit massive interest rates charged by operators.
Supporters and opponents of a measure that would cap payday and title loan interest rates agree that it would drive both industries out of the state. They differ sharply on the consequences of that move.
Rep. Patricia Todd, D-Birmingham, has two bills that would place a 36 percent cap on the short-term loans given out by payday and title loan businesses — which can respectively charge up to 456 percent and 300 percent annual interest on loans require the businesses to keep track of payments and place limits on what title loan companies could do with property taken for non-payment.
“The main purpose is to regulate that interest rate so we don’t drive more people into poverty by them getting a short-term loan,” said Todd.
There were 1,070 payday loan businesses licensed under the DPSA in the state in 2011, according to a report from the Alabama Banking Department. By comparison, Chik-fil-A’s web site lists 68 locations in Alabama.
A Pew Charitable Trusts report published last year found most users of the services nationwide were white women between the ages of 25 and 44; however, the report also said African-Americans, renters, individuals who were separated or divorced, people without a four-year college degree and those making less than $40,000 a year were more likely to seek out payday loans. The report says those using the businesses take out up to eight loans per year, frequently to service earlier ones.
Alabama’s payday loan businesses are licensed under a 2003 law known as the Deferred Presentment Services Act. Under that measure, payday loans are allowed to extend loans of up to $500 and charge a “maximum fee” of up to 17.5 percent on each loan; extrapolated over a year, a two-week loan translates into an APR of 456 percent.
Title loans are regulated under the Alabama Pawn Shop Act, which allows a charge of up to 25 percent per month, or 300 percent per year, on property, like vehicles.
Besides the cap, Todd’s bills would limit the number of payday loans an individual could take out to six per year, and would forbid companies from offering additional loans to customers who owe more than $500. Her legislation would also require a central database on payday loans to allow businesses to check on the loan status of potential borrowers. A similar provision was part of the 2003 law, but removed prior to passage of the legislation.
The title loan legislation would also forbid companies from keeping all the money made from the sale of a repossessed vehicle; the company would be required to give the money back to the original title holder, minus unpaid principal and interest, late fees and the cost of repossession.
‘The debt treadmill’
Supporters say payday loans trap people, particular low-income earners, in a debt cycle with serious effects on earning power and personal finances.
“That’s never the intention going into it,” said Steve Stetson, a policy analyst on consumer issues for Alabama Arise, which supports Todd’s bill. “They call it the debt treadmill. You’re just paying and paying without ever getting out from under it.”
Todd said she saw this herself when a tenant of hers fell behind on rent and faced eviction.
“She had five payday loans,” she said. “She was chasing the first one to pay off. It originally was a $300 loan that turned into a $2500 payback by the time you rolled the payback and the other ones she had.”
Todd said she worked with the tenant to address the debt. Some of the loans came from online pay loans, which are illegal in the state.
‘It’s a risky proposition’
The industries argue they fill a need for short-term credit that other financial institutions do not, and that the high interest rates reflect the riskiness of the loans involved.
“It’s a risky proposition,” said Max Wood, president of Borrow Smart Alabama, a group representing payday loan operators and the owner of six payday loan businesses in Birmingham and Tuscaloosa. “Consequently, the rates are higher, but they’re short-term rates.”
Wood said a 36 percent interest rate was too low for payday businesses to keep their doors open, because the size of the loan and the short time period for payment require higher rates.
“We don’t have the volumes in our storefront operations that a bank does,” he said. “Where a bank might have hundreds of thousands of loans in a store, we have a hundred.”
Wood said the average APR on a payday loan in the state was 214 percent; however, he objected to the use of APR in determining interest rates, saying it was unfair to extrapolate the interest due on a short-term loan over the course of a year.
“It’s like saying you go to the Renaissance Hotel, and that room is going to cost me $36,000 because $100 a night times 360 days is $36,000,” he said.
Stetson said APR is “the universally recognized metric” for calculating interest.
“You don’t have to drive for an hour to measure your speed in miles per hour,” he said.
A broad coalition
Todd’s bills have drawn an unusual coalition of supporters, including the Southern Poverty Law Center and Federation of Republican Women, who issued a statement earlier this year calling the high interest rates a “blot” on the state.
The Alabama AARP also supports the measure. Jack Bradford, a retired UAB executive working on the issue for the AARP, said seniors on a fixed income run into particular trouble when they get caught up in pay day loans.
“We have an alarming number of senior citizens that are taken in by this stuff,” he said. “They’re slick, fast-talking people and they’ve gotten away with murder.
Federal law already prevents payday loan businesses from charging more than 36 percent on loans made to military members; Sen. Bryan Taylor, R-Prattville, has introduced legislation that would authorize the state to revoke the license of any business that violated the federal law. The measure is a part of a package of bills on military and veteran issues supported by Lt. Gov. Kay Ivey.
Other states, including Arkansas and North Carolina, have banned payday loan locations, either through negotiation or court decision. However, attempts to strengthen regulations on the practice in Alabama have been unable to get traction in recent years. Stetson, however, was hopeful about the bill’s prospects.
“A lot of our anti-poverty issues don’t have this level of bipartisan support,” he said.
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