Payday lenders are persistent, as are their unfortunate customers.
The lenders are back in the face of legislators who in 2009 enacted reforms that curtailed some of the industry’s most abusive practices. Those changes, coupled with a 2007 federal law cutting off almost all payday lending to members of the military, squeezed loan volume in Washington to $331.4 million in 2013 from $1.3 billion in 2008.
But the industry, which provides small, high-cost loans to a mostly low-income clientele, wants to recover some of that lost business. And it has taken a clever approach.
One of the biggest changes made by the Legislature six years ago requires payday lenders to provide “off-ramps” to borrowers unable to pay off a loan within the typical term of up to 45 days, as well as a subsequent loan taken to pay off the first. At that point, clients had to be offered the chance to convert their short-term loans to installment loans repayable over three to six months with no extra fees.
More than 100,000 loans – just over 12.4 percent of the 872,000 loans made in 2013 – were converted into installment debt.
Loan amounts are capped at $700 or 30 percent of household income, whichever is lower. According to the Department of Financial Institutions, the average monthly household income of an industry customer is $2,934.
The maximum a borrower has to repay under the 2009 rules is $795 on a $700 loan.
Senate Bill 5899 takes the “payday” out of payday lending by converting the product to … installment loans.
But these would be more expensive loans for the many borrowers who take out a six-month loan, the only kind that would be allowed. The total cost of a $700 loan could balloon to $1,195. The cost for some of those who do not take the full six months to repay would be lower, but the bulk of the industry’s customers would still end up paying more.
Why else would the industry be in Olympia? And, at least in committee testimony, the “industry” is Moneytree, which alone testified for the bill.
SB 5899 specifically allows lenders to advertise on the Internet. That’s a door Washington should not open.
The federal Consumer Financial Protection Bureau has begun to step up enforcement against the payday perpetrators. And last week, the agency released a proposed set of rules that would bar some of the practices already suppressed in Washington.
President Barack Obama focused on industry abuses in his weekly radio address, noting that in Alabama, payday loan shops outnumber McDonald’s stores by more than 4 to 1.
In Washington, there were 174 storefronts in 2013, an indication the payday industry still meets a consumer financial need not being met by much more heavily regulated banks and credit unions that cannot compete on cost or convenience. The rules for the new installment loan industry should be keep it simple, but keep it fair.
With SB 5899, the Legislature is not yet there.