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.