Spokane7
68°
September 27, 2011 in Opinion
Editorial: Reforms restrict predatory lending
With the Little Loan Shoppe bankruptcy grabbing headlines, good news related to payday lending in Washington state might seem incongruous. But it’s true.
The Legislature’s reforms of these types of high-fee, short-term loans have proven to be successful, according to a report by the Department of Financial Institutions. The review doesn’t cover Ponzi schemes, but those are illegal no matter what type of business they’re associated with.
The Legislature interceded in 2009, when it became apparent that many Washingtonians were getting entangled in the vicious web spun by predatory lending practitioners. Back then, a customer could postdate a check for up to $700, from which the lender deducted a fee of 15 percent on the first $500 and 10 percent thereafter. That amounted to $95 in costs on a loan that had to be repaid within 45 days – and often sooner. The high fees often put people in the position of needing another loan.
Customers are usually people who can least afford such expensive terms. Spokane’s 3rd Legislative District, among the poorest in the state, accounted for 140,532 payday loans in 2007, and borrowers paid more than $6.7 million in fees. Sometimes members of the military get ensnared, which triggered a federal cap on interest rates for military personnel. But lenders got around that by charging upfront fees instead of exorbitant interest.
Nearly $1.5 billion in payday loans were made in Washington in 2007, generating $194.5 million in fees to the lenders. As former Secretary of State Ralph Munro said in 2009: “It’s the rich robbing the poor.”
Lawmakers agreed and passed much-needed reforms. The law limited the number of loans to eight per customer per year. Some desperate people had taken out hundreds of loans, starting a new one as soon as they had retired the old one. The law also automatically placed people who had reached the eight-loan limit into longer-term repayment plans. Before that change, customers had to default on several loans and then pay to qualify for lengthier terms.
As a result of these reforms, the number of payday lending businesses in the state has dropped by 30 percent, according to an article in the Vancouver Columbian. In addition, the number of loans dropped from 3 million in 2009 to 1 million in 2010.
Marcy Bowers, director of the Statewide Poverty Action Network, is celebrating these dramatically improved numbers, saying they are solid indicators that the new law is having the desired effect of breaking the lending cycle for poor people.
“The number of payday loans made in our state has been rising consistently for the past 10 years, and now the numbers are lower than they were in 2000,” Bowers told the Columbian.
Now that legislators have enacted reforms, the rest is up to consumers. There are no laws against foolish financial decisions, but there are still plenty of businesses hoping to capitalize on those desperate for credit.
To respond to this editorial online, go to www.spokesman.com and click on Opinion under the Topics menu.
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Jim9876 on September 27 at 6:34 a.m.
This is a success story. It shows that government regulation of business can have positive effects.
gmorton on September 27 at 1:09 p.m.
Editorial:
As former Secretary of State Ralph Munro said in 2009: ‘It’s the rich robbing the poor.’”
Really? Those evil loansharks forced people at gunpoint through the doors of their dens of iniquity, and threatened to kneecap them if they didn’t take the loanshark’s money?
Apparently Mr Munro doesn’t know what the term “robbery” means. Why didn’t Mr Munro simple report these robberies to the local cops and prosecute the “robbers” under existing robbery laws?
JBlim wrote,
“This is a success story. It shows that government regulation of business can have positive effects.”
Do you imagine the 2 million people who could not get loans in 2010 would consider it a success, or the effects “positive”?
But that doesn’t matter, does it? After all, Big Brother knows what’s best for them. Right?
misjustice on September 27 at 6:54 p.m.
JBlim did not comment on this thread. Perhaps you intended to quote Jim9876?
gmorton on September 27 at 7:35 p.m.
Eeeks, misj. Thanks for the correction, and apologies to JB.
tobiasg on September 27 at 10:55 p.m.
Payday loan and vehicle title loan stores are quick to recover their investments. If a customer is in default, they are swift to levy payroll through the courts and are quick to seize assets as needed to cover their investments. The return does not match the risk involved, thus making it predatory.
Making a profit from loaning someone money is fine, but charging excessive fees and interest is not, it’s called usury. Most (or all) states have laws regulating such excessive interest and fees to varying extent because they do not match the services received. Not only does this include payday or title loan stores but also include many rent-to-own stores where a customer can sometimes pay more than two times the original cost of the item.
Legalized loan sharking is all it is. I’m sure gmorton wouldn’t understand but when someone needs to borrow money and the banks are unwilling to help (either the person has too low of a credit score or perhaps their income doesn’t look good enough or perhaps they simply have no credit history to start with), going to a payday or title loan store is sometimes the only option a person might have and repaying the loan with the excessive fees and interest can be difficult.
gmorton on September 28 at 8:35 p.m.
tobiasg wrote,
“I’m sure gmorton wouldn’t understand but when someone needs to borrow money and the banks are unwilling to help (either the person has too low of a credit score or perhaps their income doesn’t look good enough or perhaps they simply have no credit history to start with), going to a payday or title loan store is sometimes the only option a person might have and repaying the loan with the excessive fees and interest can be difficult.”
Well, tobias, it will not be difficult for them now. Now 2/3 of them will be unable to get loans on any terms. I’m sure those 2 million people will appreciate your concern for their difficulties.
tobiasg on September 28 at 11:23 p.m.
If you say so. If I ran a business that makes 30% ROI, I’m still going to take it. If I ran a business that still makes 20% ROI, I’m still going to take it.
You’re saying that unless you can make 60% or better, you’d rather sit on the cash and complain about being taxed unfairly?
PattiKakes on September 29 at 6:36 a.m.
I’m someone who always pays my bills, I have never been on public assistance and I have used pay day loans as tools to make my ends meet. From my viewpoint and experience, it’s the banks that are preying on people. Ever try to get a just a five hundred dollar loan? Good luck.
It’s also worth telling you that this week AOL Money has a story about how banks enjoyed a $700 million boost to their bottom line from bounced check fees. The same story reports that banks take in $30+BILLION per quarter in NSF fees. That’s big business! Here’s a quote for Senator Munro: “90% of the fees are paid by the poorest 10% of the customers.”
USA Today reports that banks are under fire for the way they process checks. Rather than just paying checks as they’re presented they choose the ones that are mathmatically more likely to cause more bounced checks.
Banning pay day options just forces people to use the internet where shady lenders are beyond the reach of the authorities.
Just one mom’s opinion.
PattiKakes on September 29 at 6:40 a.m.
One last point that really steams my broccoli is that when the snooty media calls pay day loans “predatory”, they are implying that people like me who use must be “prey”. That’s insulting.
gmorton on September 30 at 7:23 p.m.
tobiasg wrote,
“You’re saying that unless you can make 60% or better, you’d rather sit on the cash and complain about being taxed unfairly?”
If I am lending someone money I will charge what is necessary to cover the risks involved and still return a profit. If 60% interest is what is required, then that is what I’ll charge.
And according to the article, many of those lenders have chosen to sit on their cash (actually, they will be investing it elsewhere). Those loans have fallen by 2/3 and the number of payday lenders has fallen by 30%. That means that many people who could previously get loans can no longer do so.