Proposed legislation to restrict payday loans

Wednesday, December 3, 2008 | 5:29 p.m. CST; updated 7:33 p.m. CST, Wednesday, December 3, 2008

 JEFFERSON CITY — Columbia state representatives-elect Chris Kelly, Mary Still and Stephen Webber, along with Rep. Paul Quinn, D-Monroe City, have pre-filed legislation they hope will help people struggling to control debt.

The bill would increase the state’s restrictions on short-term or “payday loans.” Payday loans enable anyone with proof of personal identification, a checking account and proof of income to use a post-dated check to get quick cash against his or her next paycheck. The loans normally have a term of two weeks.

In 2007, the Missouri Division of Finance reported the average annual interest rate on a payday loan in Missouri was 422 percent.

Carrie Pierson, a certified credit counselor with the Family Financial Education Foundation, said she sees many people who have trouble with payday loans.

“It’s a high-risk loan, usually for people who can’t get a loan any other way,” she said. “A lot of people take out a payday loan thinking they’ll have enough, but it’s a vicious cycle. People end up getting a new one to pay off another.”

The bill is similar to one filed by Rep. John Burnett, D-Kansas City, in 2006.

The new proposal allows payday lenders to charge $15 per $100 for the first month of the loan and caps the interest at 3 percent per month, or an annual rate of 36 percent, if the loan extends beyond 30 days. This is the same interest cap the federal government set on loans to military personnel in a law passed in October 2006.

The bill also would prohibit renewing these loans, which can currently be renewed up to six times in the state of Missouri.

Pierson said people who have trouble with payday loans normally have deeper problems with managing their money.

“These are people who need help with budgeting,” she said. “Many people take out a payday loan, and most don’t have just one loan. It’s not the people with one loan who have the most problems; it’s people who continue to get more.”

Still, who filed the bill, said she first became involved in the issue during her time in the attorney general’s office. “People were falling prey to it and losing everything,” she said.

“When it’s unregulated, as it practically is in Missouri, many people are taken advantage of. People get into it, renew it and get charged another fee. It needs a little regulation,” Still said.

Kelly said payday loans are a problem in Missouri.

“I saw the ravages of this every week while I was a judge. I had to enforce interest rates that I did not agree with,” he said.

He said he regretted his vote to remove the state’s caps on interest rates when he previously served as a state representative. “I believed the free market was the best regulator. That did not work very well in this case.”

But some in the payday loan industry fear the proposed interest rate limit is far too low.

“Payday loans are currently the only loans (in the state of Missouri) that have interest caps,” said Randy J. Scherr, executive director of the United Payday Lenders of Missouri. “We’re kind of scratching our heads as to why that’s necessary.”

He said an across-the board cap of 36 percent would effectively ban payday lending.

“It would be totally impossible to operate under those limits,” Scherr said. “It’s about three dollars a month, or $1.50 per $100 loan, for an application fee and interest. How could you pay your employees, pay your rent and pay your utilities?”

Scherr said payday loans are intended for the short-term, so administrative fees and interest rates are reflected inappropriately as only an interest rate.

“People are using these because they are savvy borrowers,” Scherr said. “They realize they can save money by taking out a short-term loan.”

“They’re managing their money,” he said, “That’s how some people like to do it. It’s a loan of convenience.”

The effect of restricting payday lenders is difficult to predict. Many states have imposed interest caps or limited which institutions can issue these loans. Still said all of Missouri’s surrounding states restrict payday loans. In North Carolina and Georgia, the practice is effectively illegal.

A survey of North Carolina residents who held five or more payday loans found that most were happy the loans had been outlawed and thought the law improved their quality of life.

But a report by the Federal Reserve Bank of New York showed that outlawing payday lenders did not help residents in those states. Rather, Georgians and North Carolinians bounced more checks and filed for bankruptcy at higher rates after the ban.

No matter the impact of the legislation, Pierson said she would never recommend anyone take out a payday loan.

“The best thing to do would be to avoid them,” she said.


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