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GUEST COMMENTARY: Predatory payday loan industry needs reform

Monday, March 21, 2011 | 11:49 a.m. CDT; updated 9:57 p.m. CDT, Monday, March 21, 2011

There were 2.43 million payday loans made in Missouri in 2010. Under current Missouri law, short-term, small-dollar loans can be subject to an annual percentage rate of 1,950 percent. According to the Missouri Department of Finance’s annual report, the average APR is 445 percent.

During the past year and a half, the Missouri Civic Engagement Table has worked with state legislators, consumer advocates, the faith community, city officials and others to collect information on the effects of predatory payday lenders in Missouri. We helped facilitate a series of field hearings across the state to hear testimony from organizations, lawmakers and individuals.

The testimony we heard from those who took out loans was compelling, but we learned that the sometimes devastating consequences of short-term borrowing are much bigger than the individual or even their families. Municipal officials and credit counselors helped us to understand that the long-term effects on neighborhoods and communities can be much more profound.

The extraction of wealth from a community can lead to financial instability; the clustering of storefronts contributes to blight; foreclosure depresses property values and leads to the decline of neighborhoods. Each of these outcomes can begin with a payday loan.

We heard from Habitat for Humanity, economists, the Consumer’s Council, credit counselors, bankruptcy judges and attorneys, legal services, AARP, faith organizations, community development organizations, credit unions, the industry and city officials. The Better Business Bureau presented its report on payday loans in Missouri. Highlighted in that report is that more than 90 nursing homes in Missouri have payday licenses and make loans at very high rates and deduct payment from the employees’ paychecks.

Editorial pages across the state have spoken strongly for action by lawmakers. For the months we have been involved with those who are actively working for reform of this industry, it has become clear that the two-week loan is a flawed product. The current short-term loan is designed to trap people in a cycle of debt that allows the lender to profit from the borrower’s inability to pay within 14 days.

Legislators in the Missouri General Assembly have been reluctant to consider changing regulations. Real reform has a cap on APR, a longer repay period with no rollovers (Missouri law currently allows six, adding additional fees) and credit-building opportunities. Two bills, HB 656, sponsored by Rep. Ellen Brandom, R- Sikeston, and HB 132, sponsored by Rep. Mary Still, D-Columbia, have been considered in committee. This past Wednesday, the Financial Institutions Committee voted out HB 656, which caps APR at 1,564 percent, allows three rollovers and a repay period of 14-31 days. They voted down HB 132, which caps APR at 36 percent with a 90 day minimum repay period with no rollovers.

HB656 is a bill written to benefit the industry. It does nothing to reform payday loans. With a current average APR of 445 percent, a cap of 1,564 is meaningless; three rollovers just benefits the lender — they have reached the maximum on fees and want the loan paid off — and a one-day cooling-off period makes no difference for the loan trap.

It is true the industry would not make high profits with 36 percent APR, but that is not because it is 36 percent; it is because of the two-week loan. Credit unions are making small dollar, short-term loans at much lower interest rates very successfully, but the loan life is six months to a year.

While one could argue that the borrower is irresponsible in taking out a loan he may not be able to repay, the lender should not be lending irresponsibly. These companies proudly advertise that they do no credit check, and they often take heavy tolls on those who have fixed Social Security or disability income.

It is time to demand serious reform of an industry whose product can only be successful if the borrower fails. This is not a business model we should support legally, ethically or morally. HB 656 does not represent reform.

Jane Whitesides is the state director of the Missouri Civic Engagement Table, a nonpartisan coalition of organizations who seek to work collectively around a common-issue agenda.


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Comments

Allan Sharrock March 21, 2011 | 5:15 p.m.

I think the Missouri Civic Engagement Table committee should start loaning money at their suggested rate. I love competition. Of course they will likely find out that they will go broke.

(Report Comment)
Katherine Richards March 22, 2011 | 3:25 a.m.

In fact, the bill H656 has passed as the regulation of payday loans it presents is more reasonable. Have you hear that a number of people lost their jobs in Illinois as the payday lender have closed the stores in the state because of the strict measures which make the business less profitable. Of course, the APR on payday loans is rather high, but no one makes people apply for them. It is not obligatory at all. I think, it is more important to save the job places rather than push these lenders out of business.
http://cashadvancesus.com/illinois-cash-...

(Report Comment)
Ricky Gurley March 22, 2011 | 3:46 a.m.

I will start of my rant with the usual: "Some people are just ignorant"!

Payday Loan Interest Rates are usury to say the least.

The Payday Loan Business would have you believe that their customers are "Financially Savvy", which is the biggest crock that I have heard in a long time. These Payday Loan Customers are desperate people in desperate times that these Payday Loan Businesses simply take advantage of. These Payday Loan Businesses thrive off of people that miss just one payment, and they have no mercy or leniency once that happens. They simply "move in for the kill" without a second thought once a person misses a payment.

Now I'll grant you that nobody is making these people take out these loans and they choose to do it of their own volition. But there does in fact come a point where a business can take advantage of a consumer even if that consumer makes a conscious decision to use the services of that business. This is one of those cases. I know of people that are paying over 500% interest on loans that they took out from these places. That is just simply ridiculous, and anyone who thinks about that for a minute would see that it is usury and should be illegal!

The best term I can think of to describe a Payday Loan Business is: "Legal Loan Shark"!

Ricky Gurley.

(Report Comment)
Abigail Williams October 20, 2011 | 7:57 p.m.

Thanks for your informative comments Katherine. It appears that you have a broad range of interests. It is truly wonderful to hear the opinion of one who is as unbiased as yourself!

(Report Comment)

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